-----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, DztLgdEOLO5F16x6JuCUXQ2ahCBWDDPKZhPk2AcUkN/ObG0bi4eUc4WJc5ecWZ9+ bXjXgMbVqoskz4nEgtyeGg== 0000898430-95-002732.txt : 19951229 0000898430-95-002732.hdr.sgml : 19951229 ACCESSION NUMBER: 0000898430-95-002732 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951228 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15338 FILM NUMBER: 95604833 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended SEPTEMBER 30, 1995 [ ] 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 of (I.R.S. Employer Identification No.) incorporation or organization) 1260 16th Avenue West, Seattle, WA 98119 ---------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 281-1390 -------------- 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. [ ] As of November 30, 1995, there were issued and outstanding 7,153,978 shares of Common Stock, par value $.01 per share. The aggregate market value of Common Stock held by nonaffiliates as of November 30, 1995 was $101,024,175, based on the last sale price of such stock as reported by the NASDAQ National Market System. Documents incorporated by reference: Portions of the registrant's proxy statement relating to its 1995 annual meeting of shareholders, to be held on February 13, 1996, are incorporated by reference into Part III of this Annual Report on Form 10-K. Page 1 of 80 Exhibit Index at Page 34 PART I ITEM 1 - BUSINESS Description of Business The principal business of Seattle FilmWorks, Inc. (the "Company") is the marketing of 35mm film, photofinishing services and related products on a direct-to-consumer mail order basis under the brand name Seattle FilmWorks and several other lesser known brand names. The Company offers its customers the options of having their photographs delivered as slides or prints or as digital images delivered either over the Internet using the Company's PhotoMail(TM) software, or on floppy diskettes under the Pictures On Disk(TM) brand name. To permit viewing of digital images on personal computers, the Company provides various versions of software under the titles PhotoWorks(TM) and PhotoWorks Plus(TM). The Company also provides services, products, and photofinishing supplies on a wholesale basis to a variety of other companies who offer these services and products to their customers at their own retail locations under their own brand names. The Company also provides a variety of reprint and enlargement services to its mail order and wholesale photofinishing customers. To support its direct-to-consumer business, the Company has developed comprehensive computerized models and support systems for designing, implementing, and analyzing direct response marketing programs. Demand for the Company's photofinishing services, which represent the largest portion of the Company's business, is highly seasonal, with the highest volume of photofinishing activity occurring during the summer months. This, coupled with relatively higher expenditures on marketing programs prior to the summer months, causes considerable seasonal variation in both revenues, earnings and cash flows. 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. Direct Marketing Overview The Company's key direct marketing strategy is to develop and offer to its customers innovative products and services which have been differentiated from those of its competitors. After identifying specific market niches of customers, the Company tailors its products and services to meet the specific needs of those targeted customers. This approach allows the Company to offer potential customers products and services which are unavailable elsewhere or only offered by relatively few competitors. Direct marketing by mail, print media, television, radio, telephone or other means is used to sell a wide variety of goods and services to targeted groups of consumers and businesses, bypassing the traditional distribution channel of retail outlets. 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. The Company believes the growth in the use of direct marketing is generally attributable to social and economic changes and to the relative cost-effectiveness of direct marketing techniques. 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 with less time to shop, and increased availability and use of credit cards. 2 Direct marketing, unlike general advertising, uses coded advertisements to monitor consumer response and to provide measurable results for a specific advertising program. This allows for the targeting of an advertising effort to specific market segments through selected media. Furthermore, direct marketing enables the advertiser to identify the optimum sales offer for a specific product in a specific market. The application of computer technology has enhanced the productivity of direct marketing by enabling direct marketing firms to maintain and analyze extensive data, and to segment markets using geographic, demographic, and psychographic information about potential customers. With this technology and an appropriate data base, marketing programs can be targeted to selected groups with common characteristics, rather than to an undifferentiated mass audience, an important factor in direct marketing. The Company has developed a broad range of computerized marketing systems which it has applied to the marketing of its products and services. Photofinishing Services and Related Products The Company primarily sells 35mm film and photofinishing services through direct-to-consumer mail order operations under the brand name, Seattle FilmWorks(R). The Company can process virtually all conventional 35mm color negative films, including those manufactured by Eastman Kodak Company, Fuji Photo Film Company, Konica U.S.A., Agfa Corporation and other major film producers. The Company also has the capability to produce slides or prints or both from the same roll of film using proprietary processes. The Company believes the primary reasons consumers use its film and photofinishing services include the Company's attractive introductory film offer, the availability of unique products and services such as prints, slides or digitized images from the same roll of 35mm color negative film, the convenience of mail order photofinishing, its strong commitment to customer service, and the quality of its photofinishing services. The Company believes its pricing, which includes a replacement roll of film, is competitive within the industry. The Company's past growth in its photofinishing operation has been achieved primarily through its direct marketing programs, including its customer acquisition technique of offering two rolls of film for a charge of $2.00 or less (the "Introductory Offer"). The Introductory Offer is widely advertised in package inserts, newspaper supplements, magazines, and through various other direct response media. Respondents to the Introductory Offer receive two rolls of 35mm film and postage paid mailers for returning the film to the Company for processing. The response rate to the Introductory Offer has been relatively stable over the last three years. The conversion rate, which reflects the anticipated volume of business provided by each new customer, declined in fiscal 1995 compared to fiscal 1994 after declining in fiscal 1994 compared to fiscal 1993. The Company believes the financial impact of the declines in conversion rates has been offset by decreases in the customer acquisition costs per new customer. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 below. The Company believes that customer satisfaction is important to the success of its business. Direct marketing typically involves contacts with a high volume of customers. Seattle FilmWorks has a 100% customer satisfaction guaranteed policy under which it will provide a full refund if the customer's complaint cannot otherwise be resolved. The Company processes various types of 35mm film including Eastman 35mm motion picture film manufactured by Eastman Kodak Company for professional motion picture studios and adapted by Seattle FilmWorks for 35mm still cameras. The Company has modified conventional printing equipment to accommodate 35mm motion picture film and has determined the unique color control parameters necessary to produce high quality prints from Eastman motion picture film and alternate 35mm films. Certain processing techniques used by the Company provide greater latitude to correct exposure errors common to amateur photography. 3 In fiscal 1994, the Company introduced PhotoWorks(TM), a computer software product which enables its photofinishing customers to view their photos on a personal computer. This product which is available in DOS, Windows, and Macintosh compatible versions, enables users to create slide shows and organize their library of photos in a digital format. As part of the Company's photofinishing services, customers can request their photos in a digital format as well as the traditional prints or slides. The Company's photofinishing in digital format is called Pictures On Disk(TM). A copy of a limited version of PhotoWorks(TM) is provided free of charge to all customers who order Pictures On Disk(TM) processing. An enhanced version of PhotoWorks(TM), sold as PhotoWorks Plus(TM), which includes image-enhancement capabilities, the ability to import or export images to other software, a screen saver function and other features, is available to the Company's photofinishing customers for an extra charge and is also sold through retail outlets, online services and mail order catalogs. In October 1995, the Company introduced PhotoMail(TM) service , an electronic delivery option for customers purchasing Pictures On Disk(TM). PhotoMail(TM) is offered through the Company's Worldwide Web Internet site at filmworks.com. During fiscal 1995, 1994 and 1993 the Company incurred research and development expenses of $458,000, $459,000 and $285,000, respectively, primarily in connection with development and enhancement of its PhotoWorks(TM) and Pictures On Disk(TM) products. The Company also sells a series of Photo Home Study courses authored on behalf of the Company by professional photographers. These courses each consist of two 60-minute audio cassette tapes and approximately 95 pages of four-color text. The Company markets its Photo Home Study courses through direct marketing channels. The Company pays royalties to the authors of its Photo Home Study courses in amounts that vary with the number of units sold, up to a maximum of 5% of net paid sales. The Company also sells 35mm rolled film, single use cameras, and photofinishing supplies on a wholesale basis to mini photofinishing labs, retail camera stores and commercial users of photographic film. These products are packaged by the Company and marketed under the brand, OptiColor Film & Photo(TM). Rolled film and single use cameras are also marketed on a private label basis with the customer specifying their own desired brand name. Although a small percentage of revenue, the Company also provides photofinishing services on a wholesale basis. Photofinishing related services and products as a percentage of net revenues were 96.3%, 96.6% and 95.4% for fiscal years 1995, 1994 and 1993, respectively. Competition The consumer photofinishing industry is highly competitive, with many of the competitors having substantially greater financial resources than the Company. The principal competitive factors in the consumer photofinishing industry are range of available services, product differentiation, quality of processing, price, convenience, and speed of service. Most of the larger photofinishing companies develop film on a wholesale basis for independent retail outlets and through multiple retail outlets owned by the photofinisher. The Company principally competes with wholesale/retail based photofinishing companies, and with other mail order photofinishing firms, some of which also have the capability to process Eastman motion picture films. Some of these competitors have introduced products which compete with the Company's Pictures On Disk(TM) and PhotoWorks products. The wholesale/retail photofinishing business is dominated by Qualex Inc., Konica Quality Photo and FUJI TruColor Photo. 4 The photofinishing market in general has grown slowly during the 1990s. Since the early 1980's there has been a significant change in the market shares for different methods of photofinishing distribution. Most notably, there has been an increase in the number of on-site mini photofinishing labs offering expedited service at a premium price. For example, in 1981, photofinishing by one-hour labs represented an insignificant share of the market. Recently, Photo Marketing Association International ("PMAI") estimated that mini-labs constitute approximately 26% of the current market in terms of revenue dollars. Over the same time period, PMAI has estimated that mail order film processing declined as a percentage of the total photofinishing market. The Company believes that its primary competitive strengths are its ability to differentiate its products and its direct marketing expertise. The wholesale distribution market for rolled film and photofinishing supplies is highly competitive and the Company competes with a number of firms throughout the United States. Many competing suppliers of these products manufacture what they sell and, therefore, potentially have lower costs of goods for these items than the Company. However, relatively few firms have the capability to produce small production quantities of private label rolled film. The principal competitive factors in the photo related wholesale distribution market are price, ability to provide private label products and capability to deliver small order quantities on short notice. The Company's Photo Home Study series competes with other series offered by Time-Life books, AMPHOTO'S Photography Book Club, and The New York Institute of Photography. The principal competitive factors in the home study course market are course quality, price, and convenience of use. Production Operations The Company's production operations are conducted by a staff which fluctuates seasonally, from approximately 400 to 450 employees. Currently, the Company is capable of processing up to approximately 140,000 rolls of film per week with its current facilities and equipment. The Company has initiated steps to expand its processing facility to handle the processing of up to 200,000 rolls of film per week with additional equipment and personnel. The Company packages bulk 35mm film into cassettes for 35mm still cameras. The cassettes into which bulk 35mm film is spooled are manufactured for the Company by foreign sources. Although the Company believes that several alternate sources are available, the prices at which cassettes would be available from these alternate sources may not be as favorable as those charged by the Company's current suppliers. Should the Company's current suppliers not be able to deliver sufficient quantities of cassettes, the Company's business could be adversely affected. Photographic chemicals and paper used for in-house photofinishing and resale to commercial customers are available from a number of different suppliers. The Company obtains the majority of its conventional bulk 35mm film from several large manufacturers of photographic film including AGFA Corporation and 3M Inc. The Company obtains its supply of Eastman motion picture film as surplus from motion picture studios and television production companies. While the Company does not have future supply contracts for 35mm film with all of its bulk film suppliers, it believes that alternate sources of both 35mm motion picture film and conventional films are available. The Company's computer software diskettes and Photo Home Study cassette tapes are duplicated by various outside service companies, and all product related text materials are produced through several printing suppliers. The Company believes that alternate sources are readily available for all of the materials related to its computer software products and Photo Home Study courses at competitive prices. Sales of the Company's products and services on a direct-to-consumer mail order basis are largely dependent on the United States Postal Service for receipt of orders and delivery of processed film or other products. Any significant changes in the operations or rates of the Postal Service or extended interruptions in postal deliveries could have an adverse effect on the Company's operations. 5 Proprietary Rights The Company markets its products and services under registered and common law trademarks and service marks including Seattle FilmWorks(R), OptiColor Film & Photo(TM), Pictures On Disk(TM), PhotoMail(TM), PhotoWorks(TM) and PhotoWorks Plus(TM). On December 17, 1993 and on July 28, 1994 the Company filed applications for registration of the mark "PhotoWorks" with the United States Patent and Trademark Office. The latter application was refused due to the prior (1990) registration of the mark Photo Works Visual Marketing(R). The Company subsequently purchased the rights to mark "Photo Works Visual Marketing(R)" and associated good will from the owner of that mark. Recently the Company learned of the use of the mark "PhotoWorks" in connection with a product similar to the Company's PhotoWorks(TM) product by another party which had filed for registration of that mark in the United States on July 22, 1994. The Company believes that it has priority over the other user of PhotoWorks based, in part, upon its purchase of the rights to Photo Works Visual Marketing(R) as well as the time, scope and extent of the Company's use of PhotoWorks(TM) as compared to that of the other company; but there can be no assurance that the Company would prevail if this other user of the mark were to claim that it has superior rights to PhotoWorks. Although the Company has not been the target of any actual intellectual property litigation, the software industry generally has been subject to substantial litigation regarding copyright, trademark and other intellectual property rights involving software and other products. Any such claims or litigation, with or without merit, could be costly and a diversion of management's attention, and an adverse determination in any such claims or litigation could have an adverse effect on the Company. The Company considers a large portion of its PhotoWorks(TM) software to be proprietary and relies on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights. The Company does not have any patents or patent applications pending with respect to any of its products. The Company also attempts to protect its proprietary rights in its software by including contractual restrictions on use and disclosure in its end-user licenses and by requiring its key employees to execute non-disclosure agreements. The Company's license agreement for its PhotoWorks(TM) software, which the Company distributes to its customers without charge, permits replication of the software for non- commercial use without penalty. The Company's PhotoWorks Plus(TM) product is shipped in sealed packages on which notices are prominently displayed informing the end-user that, by breaking the seal of the packaging, the end-user agrees to be bound by the license agreement contained in the package. The license agreement includes limitations on the end-user's authorized use of the product, as well as restrictions on disclosure and transferability. The legal and practical enforceability and extent of liability for violations of license agreements that purport to become effective upon opening of a sealed package are unclear. The Company seeks to protect the proprietary process it uses to produce Pictures On Disk(TM) by restricting access to the portion of its premises where this process occurs and by requiring certain employees to execute non-disclosure agreements. Employees At November 30, 1995, the Company had 478 full-time employees, of whom approximately 407 were engaged in production operations and 71 in marketing, general and administrative functions. The Company's employees are not covered by a collective bargaining agreement, and the Company believes its relations with its employees are good. Government Regulation and Other Factors The Company's direct mail operations are subject to regulation by the United States 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 6 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 if it is returned. From time to time the Company has modified its methods of doing business and marketing operations in response to inquiries and requests from regulatory authorities. To date, such changes have not had an adverse effect on the Company's business. However, there can be no assurance that future regulatory requirements or actions will not have an adverse effect on the Company's marketing programs or operations. The Company's photofinishing operations involve the use of several chemicals which are subject to handling and disposal regulations imposed by the Environmental Protection Agency and various other state and local regulatory authorities. The Company actively monitors chemical and disposal regulations and works with regulatory authorities to ensure compliance. The Company does not anticipate that it will expend material amounts during fiscal 1996 for additional chemical treatment facilities to handle and dispose of regulated waste chemicals. Directors and Executive Officers of the Registrant
Name Age Position - -------------------------------------------------------------------------------- Gary R. Christophersen 49 President, CEO and Director Sam Rubinstein 78 Director Douglas A. Swerland 50 Director Craig E. Tall 49 Director Peter H. van Oppen 43 Director Michael F. Lass 41 Vice President-Operations Case H. Kuehn 43 Vice President-Finance, CFO and Treasurer Bruce A. Ericson 46 Vice President-Marketing
All directors are elected annually and hold office until the next annual meeting of the shareholders of the Company and until their successors are elected and qualified. Officers serve at the discretion of the Board of Directors. Mr. Gary R. Christophersen, the Company's President and Chief Executive Officer, joined the Company in January 1982 as Vice President-Operations and has served as a Director of the Company since 1982. In May 1983, Mr. Christophersen became a Senior Vice President of the Company and General Manager of Seattle FilmWorks. In August 1988, Mr. Christophersen became the President and Chief Executive Officer of the Company. Mr. Sam Rubinstein became a Director of the Company in March 1986. From June 1985 until 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 until December 1987, Mr. Rubinstein was the Chairman of the Board and Chief Executive Officer of Bonanza Stores, Inc., an operator of variety and drug stores. From February 1984 to January 1986 Mr. Rubinstein was the Chairman of the Board and Chief Executive Officer of Whitney-Fidalgo Seafoods, Inc., another seafood processor. Mr. Douglas A. Swerland became a Director of the Company in October 1988. Since December 1993, Mr. Swerland has been founder and President of Swerland Apparel Ventures, Inc., a clothing superstore retailer specializing in designer clothing. From 1978 to November 1993, Mr. Swerland was the President and a Director of Jay Jacobs, Inc., which operates a chain of specialty retail apparel stores in the West with its headquarters located in Seattle, Washington. Mr. Swerland had been employed with Jay Jacobs, Inc., in various capacities since 1969. Jay Jacobs, Inc. filed a voluntary petition for Chapter 11 bankruptcy protection in May 1994. 7 Mr. Craig E. Tall became a Director of the Company in October 1988. Since September, 1990, Mr. Tall has served as an Executive Vice President of Washington Mutual, Inc. In addition, from April 1987 through the present, Mr. Tall has served as an Executive Vice President of Washington Mutual Bank. Mr. Peter H. van Oppen became a Director of the Company in October 1988. Since February 1995, Mr. van Oppen has been Chairman, President and Chief Executive Officer of Interpoint Corporation, a manufacturer of proprietary and custom electronic components and data storage libraries, located in Redmond, Washington. Mr. van Oppen became Chief Executive Officer in September 1989 and was President and Chief Operating Officer of Interpoint Corporation, from March 1987 until September 1989. From 1985 until March 1987, Mr. van Oppen served as Executive Vice President for Finance and Operations of Interpoint Corporation. Mr. van Oppen has been a Director of Interpoint Corporation since 1984. Mr. Michael F. Lass has been Vice President-Operations since August 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. From 1980 to 1982, Mr. Lass was General Manager and a Director of Mountain Safety Research, Inc., a manufacturer of outdoor recreational products. Mr. Case H. Kuehn, Vice President-Finance and Treasurer, joined the Company in February 1995. From April 1994 to February 1995, Mr. Kuehn was Chief Financial Officer of Shoe Inn, Inc., doing business as Shoe Pavilion. From January 1992 to March 1994, Mr. Kuehn was General Manager of Pro Mark Technologies, Inc., a manufacturer of computer/video-based inspection equipment. From March 1990 to January 1992, Mr. Kuehn was Vice President, commercial lending, at First National Bank of Chicago. From November 1985 to February 1990, Mr. Kuehn performed business valuation consulting with Price Waterhouse. Mr. Bruce A. Ericson has been Vice President-Marketing since November 1989. Mr. Ericson joined the Company in May 1984 as Director of Publishing. From January 1988 until October 1989, Mr. Ericson served the Company as Director of Marketing. ITEM 2 - PROPERTIES The Company's headquarters are currently situated in a 48,000 square foot building located in Seattle, Washington. This facility also currently houses the Company's photofinishing and mail order operations. This building is occupied under a lease which expires in September 2000. Monthly base rent under this lease is currently $20,123. The Company also occupies a 22,000 square foot building utilized as a warehouse storage facility for excess inventory and photofinishing supplies. This building, located in Seattle, Washington, is occupied under a lease which expires in February 1996. Currently, the monthly base rent for the warehouse building is $7,472. The Company has signed a lease agreement for 70,000 square feet of warehouse space in Seattle, Washington. This lease has a term of three years commencing February 1, 1996 with options to extend the lease for two additional one year periods to January 31, 2001. This building will be primarily utilized as a warehouse storage facility, and will also contain film rolling and marketing mailing operations. The monthly base rent for this building is $18,200 throughout the first three years of the lease. The Company believes that its corporate headquarters and warehouse facilities will be adequate to support existing and anticipated levels of business for at least the next 12 months. 8 ITEM 3 - LEGAL PROCEEDINGS None. 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. 9 PART II ITEM 5 - MARKET PRICES AND DIVIDENDS ON COMMON STOCK
Period High Sale Price* Low Sale Price* - -------------------------------------------------------------------------------- October 1 - December 31, 1993 $ 6.67 $ 5.75 January 1 - March 31, 1994 $11.42 $ 6.00 April 1 - June 30, 1994 $10.50 $ 8.17 July 1 - September 30, 1994 $13.33 $ 8.67 October 1 - December 31, 1994 $12.83 $ 9.83 January 1 - March 31, 1995 $15.38 $10.92 April 1- June 30, 1995 $17.75 $13.75 July 1 - September 30, 1995 $23.75 $17.00 October 1 - November 30, 1995 $23.75 $18.75
* All prices have been retroactively adjusted to reflect a three for two stock split distributed February 26, 1993, a two for one stock split distributed March 16, 1994, and a three for two stock split distributed March 15, 1995. At November 30, 1995, the Common Stock of the Company was held by an estimated 5,400 shareholders with approximately 360 holders of record. The Company has not paid cash dividends to date and does not anticipate that it will pay any cash 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. ITEM 6 - SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's statements of income for the years ended September 30, 1995, September 24, 1994 and September 25, 1993 and the Company's balance sheets at September 30, 1995 and September 24, 1994 are derived from the audited financial statements included elsewhere in this report and should be read in conjunction with those financial statements and their related footnotes. The selected income statement data for the years ended September 26, 1992 and September 28, 1991 and selected balance sheet data at September 25, 1993, September 26, 1992 and September 28, 1991 are derived from audited financial statements which are not included in this report. 10 SEATTLE FILMWORKS, INC. SELECTED FINANCIAL DATA (In thousands, except share information)
Fiscal Years 1995 1994 1993 1992 1991 ==================================================================================================================================== Income Statement Data: - ---------------------- Net revenues $62,185 $49,753 $42,728 $38,442 $36,645 Gross profit 24,057 18,907 17,269 15,694 15,083 Operating expenses 15,729 12,709 12,284 11,660 11,666 Net income $ 5,682 $ 4,438 $ 3,570 $ 2,905 $ 2,373 ======= ======= ======= ======= ======= Income as a percent of revenues 9.1% 8.9% 8.4% 7.6% 6.5% Earnings per share* $ .73 $ .54 $ .43 $ .35 $ .29 ======= ======= ======= ======= ======= Weighted average shares* outstanding 7,821,174 8,263,118 8,238,771 8,177,364 8,120,529 ========= ========= ========= ========= ========= Balance Sheet Data: - ------------------- Working capital $ 8,491 $ 3,874 ** $ 7,410 $ 4,343 $ 1,947 Capitalized customer acquisition expenditures 7,356 4,458 3,832 3,349 3,283 Total assets 28,244 18,835 ** 19,632 15,538 11,474 Long-term obligations 0 0 0 0 0 Shareholders' equity $17,932 $11,347 ** $13,376 $ 9,553 $ 6,541 ======= ======= ======= ======= =======
See notes to financial statements. * All earnings per share data reflects a three for two stock split distributed February 26, 1993, a two for one stock split distributed March 16, 1994, and a three for two stock split distributed March 15, 1995. ** Reflects the impact of repurchasing 500,000 shares of common stock for $6,643,000 during the fourth quarter of fiscal 1994. 11 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table presents information from the Company's statements of income, expressed as a percentage of net revenues for the periods indicated.
Fiscal Years Ended September 30, September 24, September 25, 1995 1994 1993 ==================================================================================================================================== Net revenues 100.0% 100.0% 100.0% Cost of goods and services 61.3 62.0 59.6 ----- ----- ----- GROSS PROFIT 38.7 38.0 40.4 Operating expenses: Customer acquisition costs 13.8 13.1 16.6 Other selling expenses 6.5 6.9 6.7 Research and development 0.7 0.9 0.7 General and administrative 4.3 4.6 4.7 ----- ----- ----- Total operating expenses 25.3 25.5 28.7 ----- ----- ----- INCOME FROM OPERATIONS 13.4 12.5 11.7 Total other income 0.4 0.3 0.7 ----- ----- ----- INCOME BEFORE INCOME TAXES 13.8 12.8 12.4 Provision for income taxes (Note F) 4.7 3.9 4.0 ----- ----- ----- NET INCOME 9.1% 8.9% 8.4% ===== ===== =====
The Company's net revenue increased 25.0% from $49,753,000 in fiscal 1994 to $62,185,000 in fiscal 1995. Net revenues in fiscal 1994 increased 16.4% to $49,753,000 from $42,728,000 in fiscal 1993. The increases were primarily due to expanded investment in customer acquisition and other selling activities during fiscal 1993, 1994 and 1995 which increased the number of new customers and photofinishing orders processed in fiscal 1994 and 1995. In addition, increased distribution of rolled film and photo related products on a wholesale basis during fiscal 1994 and 1995, including sales generated as a result of the acquisition of selected assets of Private Label Film in 1994, favorably affected net revenues. The Company also believes that its core photofinishing business benefited from the Company's entry into the home computer market with its PhotoWorks(TM) and Pictures On Disk(TM) products, which were first introduced in January 1994. The increased revenues in fiscal 1995 were also favorably affected by an additional one week reporting period in the 1995 fiscal year as compared to the 1994 and 1993 fiscal years. 12 The Company has experienced an increase in revenues from its photofinishing operations in each year since inception except for fiscal 1988. The Company believes this growth is attributable principally to its direct marketing programs, including its customer acquisition technique of offering two rolls of film for a charge of $2.00 or less (the "Introductory Offer"). The Introductory Offer has been nationally advertised in package inserts, newspaper supplements, magazines and through various other direct response media. Recipients of the Introductory Offer receive two rolls of 35mm film and postage paid mailers for returning the film to the Company for processing. The direct costs of customer acquistion, including cost of film and printed materials, but excluding advertising costs, have been deferred and amortized over a period of up to three years as part of customer acquisition costs. These expenditures have been capitalized as assets on the Company's balance sheet. The Company establishes a rate of amortization based on historical customer conversion rates and periodically revises the rate of amortization, if appropriate, based on actual customer processing volumes. The Company substantially expanded its customer acquisition programs during fiscal 1995 compared to fiscal 1994 and 1993 and believes the expansion is the primary reason for the increase in photofinishing revenues. Customer acquisition costs as a percentage of net revenues increased to 13.8% of net revenues in fiscal 1995 as compared to 13.1% of net revenues in fiscal 1994, but have decreased from 16.6% of net revenue in fiscal 1993. Management believes this decrease is due primarily to more efficient customer acquisition programs. Capitalized customer acquisition costs for the period ending September 30, 1995, increased to $7,356,000 as compared to $4,458,000 for the period ending September 24, 1994, primarily as a result of customer acquisition programs initiated during fiscal 1995. Each year the Company prepares detailed plans for its various marketing activities, including the mix between customer acquisition expenditures and other selling expenses. However, the Company occasionally changes both the mix and total marketing expenditures between periods to take advantage of marketing opportunities as they become available. Future periods may reflect increased acquisition costs due to the amortization of capitalized expenditures or to the development and initiation of additional marketing programs. For tax purposes, customer acquisition expenditures are expensed as incurred, thereby reducing current federal income tax liabilities and increasing deferred federal income tax liabilities. The cost per response, which reflects all advertising related expenditures, has declined during each of the last three years. In addition the direct costs associated with providing each respondent with the Introductory Offer have also declined over the last three years. These reductions in cost have resulted in lower customer acquisition expenses per new customer. The conversion rate, which reflects the anticipated future volume of business provided by each new customer, declined in fiscal 1995 compared to fiscal 1994 after declining in fiscal 1994 compared to 1993. This change has had a downward impact on expected revenue per new customer which negatively affects net income. The combination of the decline in the direct costs of the Introductory Offer and the decline in conversion rate has had a slightly favorable impact on both fiscal 1995 and fiscal 1994 net income. In the event the conversion rate declines in the future or the cost per response increases in the future, net income of future periods may be affected. Gross profit as a percent of net revenues for fiscal 1995, 1994 and 1993 was 38.7%, 38.0% and 40.4%, respectively. The increase in gross profit percentage in fiscal 1995 compared to fiscal 1994 was primarily due to a sales mix containing a higher proportion of photofinishing services, which have a higher gross profit margin than the Company's wholesale film and photo related supplies business. Gross profit as a percentage of net revenue in fiscal 1994 was lower than fiscal 1993. This resulted from a planned change in customer acquisition promotional activities, including free film offers, which resulted in a decrease in revenues received in conjunction with certain promotional offers. Also, fiscal 1994 net revenues included a higher proportion of sales of lower margin wholesale film and photo related supplies compared to fiscal 1993. Future changes in the Company's sales mix and promotional activities may affect the gross profit as a percentage of revenues in future periods. 13 Total operating expenses as a percent of net revenue for fiscal 1995, 1994, and 1993 were 25.3%, 25.5%, and 28.7%, respectively. Although total operating expenses increased in actual dollars in both fiscal 1995 and 1994 over the prior year, total operating expenses decreased as a percent of net revenue in both fiscal 1995 and 1994 primarily due to increases in net revenue in each of those years which were greater than the planned increases in operating expenses. The decrease in fiscal 1995 and 1994 as compared to fiscal 1993 as a percentage of net revenue is also attributable to more cost effective advertising programs. Customer acquisition expenses consist of costs incurred to acquire new customers which are primarily advertising for the Introductory Offer, and amortization of capitalized customer acquisition expenditures. Other selling expenses are primarily general marketing expenses, advertising to existing customers, testing of new marketing strategies and, in 1994 and 1995, amortization of noncompete agreements associated with the January 1994 acquisition of certain assets of Private Label Film Inc. See Note B in Notes to the financial statements. Research and development expenses consist of costs incurred in researching new computerized digital imaging concepts, developing computer software products and creating equipment necessary to provide customers with new computer related photographic products and services. General and administrative expenses consist of costs related to computer operations, human resource functions, finance, accounting, investor relations and general corporate activities. Each year the Company prepares detailed plans for its various marketing activities, including the mix between customer acquisition expenditures and other selling expenses. However, the Company occasionally changes the mix between periods to take advantage of unique or cost effective marketing opportunities as they become available. Customer acquisition expenses as a percent of net revenues were 13.8% in fiscal 1995, up from 13.1% in 1994 and down from 16.6% in 1993. The increase in fiscal 1995 was primarily due to increased expenditures related to the Company's customer acquisition programs targeted at the home computer market. The decrease in fiscal 1994 from fiscal 1993 was primarily due to planned changes in customer acquisition promotional activities which allowed the Company to maintain the response rate to the Introductory Offer while reducing advertising expenses associated with attracting new customers. Other selling expenses increased to $4,035,000 in fiscal 1995 compared to $3,458,000 in fiscal 1994 and $2,868,000 in fiscal 1993. The increases in fiscal 1995 and 1994 were primarily due to increased expenditures for selling activities promoting the sale of rolled film, other photographic related products and increased marketing to existing customers. Expressed as a percentage of net revenues, other selling expenses decreased to 6.5% in fiscal 1995, compared to 6.9% in 1994 and 6.7% in 1993. General and administrative expense increased to $2,657,000 in fiscal 1995 compared to $2,276,000 in 1994. The increase in fiscal 1995 was primarily due to increased expenditures relating to recruitment, consulting and additional labor costs due to increased volumes. Expressed as a percentage of net revenues, general and administrative expenses declined to 4.3% in fiscal 1995, compared to 4.6% in 1994 and 4.7% in 1993. During fiscal 1995, 1994 and 1993 the Company incurred research and development expenses of $458,000, $459,000 and $285,000, respectively, primarily in connection with development of its new PhotoWorks(TM) and Pictures On Disk(TM) products. Prior to fiscal 1993, research and development expenses, which primarily related to photofinishing and film spooling equipment, were not material and, accordingly were included in general and administrative expense or cost of goods sold. Total other income in fiscal 1995 was $252,000 compared to $187,000 in fiscal 1994 and $290,000 in fiscal 1993. In fiscal 1993 the Company received refunds of sales taxes previously paid. The decrease in total other income in 1994 compared to 1993 is attributable to the absence of sales tax refunds in 1994 and slightly higher interest expense. The increase in total other income in fiscal 1995 over 1994 was primarily due to interest income from short term investments due to the availability of cash reserves generated from operations during fiscal 1995. Net income increased to $.73 per share in fiscal 1995 compared to $.54 per share in fiscal 1994 and $.43 per share in fiscal 1993. The increases resulted primarily from higher net revenue and increased income from operations. Earnings per share for both fiscal 1995 and 1994 were also favorably affected by the repurchase of 500,000 shares of Common Stock by the Company during the fourth quarter of fiscal 1994. The earnings per share reflects a three for two stock split distributed on February 26, 1993, a two for one stock split distributed on March 16, 1994 and a three for two stock split distributed on March 15, 1995. 14 Liquidity and Capital Resources As of November 30, 1995, the Company's principal sources of liquidity included $8,969,000 in cash and short term investments together with an unused operating line of credit of $5,000,000. The ratio of current assets to current liabilities for the Company was 2.0 to 1 at the end of fiscal 1995, which reflects an increase from the current ratio of 1.6 to 1 at the end of fiscal 1994 (after reclassifications relating to customer acquisition costs and deferred income taxes). The increase in the current ratio at the end of fiscal 1995 compared to fiscal 1994 was primarily due to increased cash and short term investments generated by operations. The lower cash balance at the end of fiscal 1994 was due in part to expenditures related to the July 1994 repurchase of 500,000 shares of Common Stock and the January 1994 acquisition of certain assets of Private Label Film Inc. The Company has financed its business principally through cash generated by operations and borrowings. Capital expenditures during fiscal 1995 totaled $1,633,000 including equipment for new photofinishing services and for expanding capacity of existing photofinishing operations. In fiscal 1994, the Company made capital expenditures of $1,414,000 relating to photofinishing equipment and leasehold improvements. The Company has a commitment to purchase equipment related to its Pictures On Disk(TM) product in the amount of $470,000. In addition, the Company has plans to expend approximately $3,500,000 in fiscal 1996 for additional photofinishing and data processing equipment, and for leasehold improvements, although at this time it has no binding commitments to do so. The Company currently anticipates that existing funds together with anticipated cash flow from operations and the Company's available line of credit of $5,000,000 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. Inflation The results of the Company's operations have not been significantly affected by inflation during any of the last three fiscal years. Although the Company has incurred moderately increased costs for labor, materials, postage and overhead, it has been able to somewhat offset the impact of such increases through enhanced operating efficiencies and, to a lesser extent, price increases. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See pages 16 through 27. 15 REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS Shareholders and Board of Directors SEATTLE FILMWORKS, INC. We have audited the accompanying balance sheets of SEATTLE FILMWORKS, INC. as of September 30, 1995 and September 24, 1994, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1995. We have also audited 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 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 financial statements referred to above present fairly, in all material respects, the financial position of SEATTLE FILMWORKS, INC. at September 30, 1995 and September 24, 1994, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1995, 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 8, 1995 16 SEATTLE FILMWORKS, INC. BALANCE SHEETS (in thousands)
September 30, September 24, ASSETS 1995 1994 ================================================================================ CURRENT ASSETS Cash and cash equivalents $ 8,560 $ 2,711 Securities available for sale 1,345 1,330 Accounts receivable, net of allowance for doubtful accounts of $546 and $461 in 1995 and 1994, respectively 1,242 1,369 Inventories 4,626 3,659 Capitalized promotional expenditures 158 388 Prepaid expenses and other 164 191 Deferred income taxes 398 316 ------- ------- TOTAL CURRENT ASSETS 16,493 9,964 FURNITURE, FIXTURES, AND EQUIPMENT, at cost, less accumulated depreciation (Note C) 3,200 2,986 CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 7,356 4,458 DEPOSITS AND OTHER ASSETS 68 95 NONCOMPETE AGREEMENTS (Note B) 1,127 1,332 ------- ------- TOTAL ASSETS $28,244 $18,835 ======= =======
17 SEATTLE FILMWORKS, INC. BALANCE SHEETS (continued) (in thousands, except share information)
September 30, September 24, LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 ================================================================================ CURRENT LIABILITIES Accounts payable $ 4,782 $ 2,958 Accrued expenses 2,364 1,991 Income taxes payable 856 1,141 ------- ------- TOTAL CURRENT LIABILITIES 8,002 6,090 DEFERRED INCOME TAXES 2,310 1,398 ------- ------- TOTAL LIABILITIES 10,312 7,488 SHAREHOLDERS' EQUITY (Notes G and H) Preferred Stock, $.01 par value, authorized 2,000,000 shares, non issued Common Stock, $.01 par value, authorized 45,000,000 shares, issued and outstanding 7,143,714 and 7,007,039 in 1995 and 1994, respectively 71 70 Additional paid-in capital 955 53 Retained earnings 16,906 11,224 ------- ------- TOTAL SHAREHOLDERS'S EQUITY 17,932 11,347 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,244 $18,835 ======= =======
See notes to financial statements. 18 SEATTLE FILMWORKS, INC. STATEMENTS OF INCOME (in thousands, except share information)
Fiscal Years Ended September 30, September 24, September 25, 1995 1994 1993 ================================================================================ Net revenues $62,185 $49,753 $42,728 Cost of goods and services 38,128 30,846 25,459 ------- ------- ------- GROSS PROFIT 24,057 18,907 17,269 Operating expenses: Customer acquisition costs 8,579 6,516 7,115 Other selling expenses 4,035 3,458 2,868 Research and development 458 459 285 General and administrative 2,657 2,276 2,016 ------- ------- ------- Total operating expenses 15,729 12,709 12,284 ------- ------- ------- INCOME FROM OPERATIONS 8,328 6,198 4,985 Other income (expense): Interest expense (4) (25) (10) Interest income 276 222 201 Nonoperating income (expense), net (20) (10) 99 ------- ------- ------- Total other income 252 187 290 ------- ------- ------- INCOME BEFORE INCOME TAXES 8,580 6,385 5,275 Provision for income taxes (Note F) 2,898 1,947 1,705 ------- ------- ------- NET INCOME $ 5,682 $ 4,438 $ 3,570 ======= ======= ======= EARNINGS PER SHARE $ .73 $ .54 $ .43 ======= ======= ======= WEIGHTED AVERAGE SHARES AND EQUIVALENTS OUTSTANDING 7,821,174 8,263,118 8,238,771 ========= ========= =========
See notes to financial statements. 19 SEATTLE FILMWORKS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share information)
Common Stock Shares Par Paid-In Retained Outstanding Value Capital Earnings Total ============================================================================================================== BALANCE AS OF SEPTEMBER 26, 1992 7,424,028 $74 $154 $9,325 $9,553 Stock options exercised 344,889 3 11 14 Income tax benefit of stock options 571 571 Purchase and retirement of Common Stock (67,854) (164) (168) (332) Net income 3,570 3,570 --------- --- ---- ------ ------- BALANCE AS OF SEPTEMBER 25, 1993 7,701,063 77 572 12,727 13,376 Stock options exercised 38,252 1 32 33 Income tax benefit of stock options 50 50 Employee stock purchase plan 17,724 93 93 Purchase and retirement of Common Stock (750,000) (8) (694) (5,941) (6,643) Net income 4,438 4,438 --------- --- ---- ------ ------ BALANCE AS OF SEPTEMBER 24, 1994 7,007,039 70 53 11,224 11,347 Stock options exercised 77,300 1 274 275 Income tax benefit of stock options 333 333 Employee stock purchase plan 63,075 349 349 Purchase and retirement of Common Stock (3,700) (54) (54) Net income 5,682 5,682 --------- --- ---- ------- ------- BALANCE AS OF SEPTEMBER 30, 1995 7,143,714 $ 71 $955 $16,906 $17,932 ========= === ==== ======= =======
See notes to financial statements. 20 SEATTLE FILMWORKS, INC. STATEMENTS OF CASH FLOWS (in thousands)
Fiscal Years Ended September 30, September 24, September 25, 1995 1994 1993 ===================================================================================================== OPERATING ACTIVITIES: - --------------------- Net income $ 5,682 $ 4,438 $ 3,570 Charges to income not affecting cash: Depreciation and amortization 1,608 1,320 887 Amortization of capitalized customer acquisition expenditures 6,289 4,684 3,542 Deferred income taxes 830 (89) (20) Loss on disposal of equipment 24 5 16 Net change in receivables, inventories, payables, and other 1,432 (672) 209 Capitalized promotional expenditures, net 230 (46) 150 Additions to capitalized customer acquisition expenditures (9,187) (5,310) (4,025) ------- ------- ------- NET CASH FROM OPERATING ACTIVITIES 6,908 4,330 4,329 INVESTING ACTIVITIES: - --------------------- Purchase of furniture, fixtures, and equipment (1,633) (1,414) (1,091) Purchases of securities available for sale (1,356) (3,060) (4,450) Sales of securities available for sale 1,341 5,280 900 Proceeds from sale of equipment 19 22 Purchase of assets from Private Label Film, Inc. (1,637) ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES (1,629) (809) (4,641) FINANCING ACTIVITIES: - --------------------- Proceeds from issuance of Common Stock 624 126 12 Payment on purchase of Common Stock (54) (6,643) (330) ------- ------- ------- NET CASH FROM (USED IN) FINANCING ACTIVITIES 570 (6,517) (318) ------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,849 (2,996) (630) Cash and cash equivalents at beginning of year 2,711 5,707 6,337 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,560 $ 2,711 $ 5,707 ======= ======= =======
See notes to financial statements. 21 SEATTLE FILMWORKS, INC. NOTES TO FINANCIAL STATEMENTS NOTE A -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SEATTLE FILMWORKS, INC. (the "Company") principally markets 35mm photographic film, photofinishing services, and related photographic products on a direct-to-consumer mail order basis under the brand name of Seattle FilmWorks(R). The Company also markets 35mm photographic film on a wholesale basis to mini photofinishing labs under the brand name of OptiColor Film & Photo(TM). CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand and highly liquid short-term investments with an original maturity of less than three months. 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. Company policy limits the amount of credit exposure with any one financial institution. The fiscal year 1995 balance of $1,345,000 consisted of bankers' acceptances with maturity dates within six months of the fiscal year-end. The fiscal year 1994 balance of $1,330,000 consisted of $550,000 in bankers' acceptances and $780,000 in government securities. 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. An allowance for doubtful accounts is established for an estimate of bad debts. The provision for bad debts was $639,000, $481,000, and $333,000 for the years ended 1995, 1994, and 1993, respectively. INVENTORIES: Inventories are stated at the lower of cost (determined 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 expenses these costs as promotional and advertising expenditures and expenses them the first time the promotion is run. Advertising expense was $1,882,000, $1,944,000, and $1,652,000 in fiscal 1995, 1994, and 1993 respectively. DEPRECIATION AND AMORTIZATION: Depreciation is provided using the straight- line and accelerated methods based on estimated useful asset lives ranging from three to seven years. Expenditures for major remodeling and improvements are capitalized as leasehold improvements. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the asset. Noncompete agreements are amortized as other selling expenses on an accelerated basis over the ten-year life of the agreements. CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES: The Company's method of obtaining film processing customers is to provide rolls of film at a low cost or for free. These capitalized customer acquisition expenditures are capitalized (exclusive of promotional expenditures) and are amortized over succeeding periods, pro rata, based on estimated future rolls to be received from customers. Recent customer processing statistics are the principal factors used in estimating future processing. Based on the historical pattern of customer orders processed and the estimate of orders to be processed in the future, future amortization of capitalized customer acquisition expenditures as of September 30, 1995 will be $4,914,802, $1,879,138, and $562,080 in 1996, 1997, and 1998, respectively. 22 NOTE A -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INCOME TAXES: The provision for federal income taxes is computed based on pretax income reported in the 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. The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in the first quarter of fiscal year 1994. The adoption of this new Standard did not have a significant impact on operating results because the Company had previously adopted Statement of Financial Accounting Standards No. 96 in the first quarter of fiscal 1988. 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. NEW ACCOUNTING PRONOUNCEMENTS: In May 1993, the FASB issued SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company adopted this new Standard in the first quarter of fiscal year 1995. This Statement implements more restrictive criteria for recording debt securities at cost. Upon adoption, the Company's investments were classified as available for sale and stated at fair value. This adoption does not significantly impact the September 30, 1995 financial statements, as the amortized cost of the Company's investments approximate their fair values due to their high credit ratings and short-term maturities within six months of the Company's fiscal year-end. In December 1993, the American Institute of Certified Public Accountants issued Statement of Position 93-7, "Reporting on Advertising Costs." The Company adopted this Standard in the first quarter of fiscal 1995. The adoption of the new Standard does not impact the Company's accounting practices except that all capitalized customer acquisition expenditures have been classified as noncurrent. Previously, capitalized customer acquisition expenditures amortizable within one year were recorded as current assets. This change has the effect of reducing the Company's current ratio and working capital. RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform with the 1995 financial statements, primarily related to the reclassification of all capitalized customer acquisition expenditures and deferred tax liabilities to long term. NOTE B -- 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 noncompete agreements which includes capitalized legal and accounting expenses. 23 NOTE C -- FURNITURE, FIXTURES, AND EQUIPMENT Furniture, fixtures, and equipment consist of the following:
(in thousands) September 30, September 24, 1995 1994 ================================================================================ Furniture, fixtures, and equipment $ 9,673 $ 9,168 Leasehold improvements 1,610 1,610 -------- -------- 11,283 10,778 Less accumulated depreciation and amortization (8,083) (7,792) -------- -------- $ 3,200 $ 2,986 ======== ========
NOTE D -- CREDIT AGREEMENTS AND ACCRUED EXPENSES At September 30, 1995, the Company has a $5,000,000 available line of credit, with interest at the lending bank's prime rate. Amounts borrowed on the line of credit would be secured by receivables and inventories of the Company. There were no borrowings outstanding at the end of 1995 or 1994 under the line of credit. 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. Accrued expenses at the end of 1995 and 1994 include accrued compensation of $1,537,000 and $1,197,000, respectively. NOTE E -- PROPERTY AND LEASES The Company's primary lease relates to its main operating facility. This lease expires in September 2000. During fiscal year 1995, the Company entered into a lease agreement for additional warehouse and limited production space. This lease begins in February 1996 and expires in January 1999. The Company has an option to extend this lease for two one-year periods. At September 30, 1995, future minimum payments under noncancelable operating leases for the years 1996 through 2000 are $443,000, $460,000, $460,000, $314,000, and $242,000, respectively. Rental expense relating to operating leases for 1995, 1994, and 1993 was $353,000, $335,000, and $314,000, respectively. 24 NOTE F -- INCOME TAXES The provision for income taxes is as follows:
(in thousands) 1995 1994 1993 ======================================================================================================================== Provisions (benefits) for income taxes Current $2,068 $2,036 $1,725 Deferred 830 (89) (20) ------ ------ ------ $2,898 $1,947 $1,705 ====== ====== ======
A reconciliation of the federal statutory tax rates to the effective tax rates is as follows:
1995 1994 1993 ======================================================================================================================== Statutory tax rate 34.0% 34.0% 34.0% Research and development tax credits (.4) (.5) (.9) Other, net .2 (3.0) (.8) ---- ---- ---- 33.8% 30.5% 32.3% ==== ==== ====
Principal items comprising the cumulative deferred income taxes are as follows:
1995 1994 ======================================================================================================================== Deferred tax liabilities: Customer acquisition expenditures $ 2,501 $ 1,517 Other liabilities 175 196 ------- ------- Total deferred tax liabilities 2,676 1,713 Deferred tax assets: Accrued expenses 573 512 Depreciation and amortization 191 119 ------- ------- Total deferred tax assets 764 631 ------- ------- Net deferred tax liability $ 1,912 $ 1,082 ======= =======
Taxes paid in 1995, 1994, and 1993 were $2,020,000, $1,520,000, and $1,070,000, respectively. NOTE G -- SHAREHOLDERS' EQUITY Stock Options Pursuant to the Company's Stock Option Plans adopted in 1982 and 1987, options may be granted to purchase up to 2,868,750 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 ten years after the date of grant. Shares of Common Stock reserved for issuance under these stock option plans totaled 1,071,095 at September 30, 1995, of which 128,051 were available for options to be granted in the future. 25 NOTE G -- SHAREHOLDERS' EQUITY (continued) The following schedule summarizes stock option activity for fiscal years 1993, 1994, and 1995.
Option Price Number of Shares Per Share ================================================================================ Outstanding at September 26, 1992 (675,174 shares exercisable) 935,388 $.08 - $3.95 Granted during 1993 281,400 $4.67 - $5.67 Canceled during 1993 (2,250) $1.23 - $4.67 Exercised during 1993 (380,880) $.08 - $1.50 Outstanding at September 25, 1993 (574,647 shares exercisable) 833,658 $.18 - $5.25 Granted during 1994 72,600 $6.00 - $12.17 Canceled during 1994 (12,450) $1.95 - $7.00 Exercised during 1994 (38,252) $.18 - $4.67 Outstanding at September 24, 1994 (639,819 shares exercisable) 855,556 $.39 - $9.67 Granted during 1995 101,550 $10.75 - $21.25 Canceled during 1995 (14,063) $4.67 - $11.17 Exercised during 1995 (77,300) $.39 - $9.83 Outstanding at September 25, 1995 (669,880 shares exercisable) 865,743 $.42 - $13.67 =======
Employee Stock Purchase Plan Effective September 22, 1993, the Company adopted an Employee Stock Purchase Plan under which options may be granted to purchase up to 225,000 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 lower of the fair market value on the first day of the two-year offering period or the last day of each six-month purchase period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during the purchase period. During 1995, shares totaling 63,075 were issued under the Plan at prices ranging from $5.2417 to $12.325 per share. At September 30, 1995, 144,201 shares were reserved for future issuance. In May 1995, the Employee Stock Purchase Plan was amended to change the purchase price under which shares may be purchased to 85% of the lower of the fair market value on the first day of the six-month purchase period or the last day of the six-month purchase period. This change is effective for purchases after October 1, 1995. Stock Splits A three-for-two stock split was distributed February 26, 1993, a two-for- one stock split was distributed March 16, 1994, and a three-for-two stock split was distributed March 15, 1995. All share data, per share data, and related accounts in the accompanying financial statements and footnotes have been restated to retroactively reflect the stock splits. 26 NOTE G -- SHAREHOLDERS' EQUITY (continued) Purchase and Retirement of Common Stock On July 20, 1994, the Company repurchased 500,000 shares, or approximately 10% of its outstanding Common Stock, from Mr. Sam Rubinstein, a Director and the largest shareholder of the Company, in a private transaction for $13.00 per share plus legal and brokerage fees. NOTE H -- 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 voluntary employee contributions and discretionary profit sharing contributions determined by the Board of Directors. The Company's contributions were $366,000, $285,000, and $237,000 for 1995, 1994, and 1993, respectively. NOTE I -- SELECTED QUARTERLY FINANCIAL DATA (Unaudited) The following table sets forth summary financial data for the Company by quarter for the fiscal years 1995 and 1994 (in thousands, except per share data).
Quarters First Second Third Fourth - -------------------------------------------------------------------- Fiscal 1995 ----------- Net Revenue $12,270 $12,293 $15,791 $21,831 Gross Profit 4,590 4,152 6,136 9,179 Net Income 655 339 1,513 3,175 Earnings Per Share .09 .04 .19 .40 Fiscal 1994 ----------- Net Revenue $10,600 $10,672 $12,872 $15,609 Gross Profit 3,968 3,803 4,776 6,360 Net Income 543 279 1,176 2,440 Earnings Per Share .06 .03 .14 .31
The sum of quarterly earnings per share will not necessarily equal the earnings per share reported for the year since the weighted average shares outstanding used in the earnings per share computation changes throughout the year. All earnings per share data presented above has been adjusted to reflect the three-for-two stock split distributed March 15, 1995. See Note G. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See "Directors and Executive Officers of the Registrant" under Item 1 - Part 1 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 13, 1996, which information appears under the caption "Compliance with Section 16(a) of the Exchange Act." Such Proxy Statement will be filed within 120 days of the Company's last fiscal year-end, September 30, 1995. 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 13, 1996 and is incorporated herein by reference. The information appears in the Proxy Statement under the captions "Remuneration of Executive Officers and Directors," "Voting Securities and Principal Holders," and "Certain Transactions." Such Proxy Statement will be filed within 120 days of the Company's last fiscal year-end, September 30, 1995. PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a. Index to Financial Statements and Financial Statement Schedules --------------------------------------------------------------- (1) Financial Statements Page -------------------- ---- Report of Ernst & Young, Independent Auditors 16 Balance Sheets as of September 30, 1995 and September 24, 1994 17-18 Statements of Income for the years ended September 30, 1995, September 24, 1994, and September 25, 1993 19 Statements of Shareholders' Equity for the years ended September 30, 1995, September 24, 1994, and September 25, 1993 20 Statements of Cash Flows for the years ended September 30, 1995, September 24 1994, and September 25, 1993 21 Notes to Financial Statements 22-27
Supplemental Financial Statement Schedule. The following additional information should be read in conjunction with the Financial Statements of the Company included in Part II, Item 8. 28
(2) Schedule Page -------- ---- II - Valuation and Qualifying Accounts 32
All other schedules have been omitted because the required information is included in the 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 November 23, 1992. See Exhibit 10.36 (2) The Company's 1987 Stock Option Plan, as amended and restated as of November 23, 1992. See Exhibit 10.38 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 September 15, 1988. (Incorporated by reference to Exhibit 3.2 filed with the Company's Annual Report on Form 10-K for the year ended September 24, 1988.) 3.3 Articles of Amendment to Articles of Incorporation dated July 1, 1993. (Incorporated by reference to Exhibit 3.3 filed with the Company's Annual Report on Form 10-K for the year ended September 25, 1993.) 3.4 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.) 3.5 Articles of Amendment to Articles of Incorporation dated February 16, 1995. (Incorporated by reference to Exhibit 3 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1995.) 29 10.2 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.) 10.36 Incentive Stock Option Plan, as amended and restated as of November 23, 1992. (Incorporated by reference to Exhibit 10.36 filed with the Company's Annual Report on Form 10-K for the year ended September 25, 1993.) 10.37 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.) 10.38 1987 Stock Option Plan, as amended and restated as of November 23, 1992. (Incorporated by reference to Exhibit 10.38 filed with the Company's Annual Report on Form 10-K for the year ended September 25, 1993.) 10.39 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.) 10.48 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.) 10.56 Sales Contract dated September 9, 1992 between the Company and Agfa Division of Miles Inc. with respect to the purchase of certain products. (Incorporated by reference to Exhibit 10.56 filed with the Company's Annual Report on Form 10-K for the year ended September 26, 1992.) 10.58 1993 Employee Stock Purchase Plan as amended and restated as of May 31, 1995. 10.59 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.) 10.60 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.) 10.61 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.) 10.62 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 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1995.) 10.63 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. 30 10.64* Sales contract dated August 18, 1995 between the Company and Agfa Division of Miles, Inc. with respect to the purchase of certain products. 11 Computation of Per Share Earnings. 23 Consent of Independent Auditors * Exhibit for which confidential treatment has been requested. 31 SEATTLE FILMWORKS, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions --------- Balance Charged to Charged to Balance Beginning Costs and Other at End Description of Year Expenses Accounts Deductions of Period ===================================================================================================== FOR THE YEAR ENDED SEPTEMBER 25, 1993 Allowance for doubtful accounts $350 $333 $0 $356 $327 Allowance for returns $ 59 $401 $0 $357 $103 FOR THE YEAR ENDED SEPTEMBER 24, 1994 Allowance for doubtful accounts $327 $481 $0 $347 $461 Allowance for returns $103 $281 $0 $279 $105 FOR THE YEAR ENDED SEPTEMBER 30, 1995 Allowance for doubtful accounts $461 $639 $0 $554 $546 Allowance for returns $105 $272 $0 $280 $ 97
____________________________ 32 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, 1995 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, 1995 -------------------------- Chief Executive Officer Gary R. Christophersen Director (Principal Executive Officer) By:/s/ Sam Rubenstein Director December 20, 1995 -------------------------- Sam Rubenstein By:/s/ Douglas A. Swerland Director December 20, 1995 -------------------------- Douglas A. Swerland By:/s/ Craig E. Tall Director December 20, 1995 -------------------------- Craig E. Tall By:/s/ Peter H. van Oppen Director December 20, 1995 -------------------------- Peter H. van Oppen By:/s/ Case H. Kuehn Vice President-Finance -------------------------- Chief Financial Officer Case H. Kuehn (Principal Financial and Accounting Officer)
33 EXHIBIT INDEX ------------- Annual Report on Form 10-K For The Year Ended September 30, 1995
Exhibit Page Number Exhibit Description Number - ------- ------------------- ------ 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 September 15, 1988. (Incorporated by reference to Exhibit 3.2 filed with the Company's Annual Report on Form 10-K for the year ended September 24, 1988.) 3.3 Articles of Amendment to Articles of Incorporation dated July 1, 1993. (Incorporated by reference to Exhibit 3.3 filed with the Company's Annual Report on Form 10-K for the year ended September 25, 1993.) 3.4 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.) 3.5 Articles of Amendment to Articles of Incorporation dated February 16, 1995. (Incorporated by reference to Exhibit 3 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1995.) 10.2 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.) 10.36 Incentive Stock Option Plan, as amended and restated as of November 23, 1992. (Incorporated by reference to Exhibit 10.36 filed with the Company's Annual Report on Form 10-K for the year ended September 25, 1993.) 10.37 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.) 10.38 1987 Stock Option Plan, as amended and restated as of November 23, 1992. (Incorporated by reference to Exhibit 10.38 filed with the Company's Annual Report on Form 10-K for the year ended September 25, 1993.) 10.39 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.) 10.48 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.)
34 c. Exhibits (continued) 10.56 Sales Contract dated September 9, 1992 between the Company and Agfa Division of Miles Inc. with respect to the purchase of certain products. (Incorporated by reference to Exhibit 10.56 filed with the Company's Annual Report on Form 10-K for the year ended September 26, 1992.) 10.58 1993 Employee Stock Purchase Plan as amended and restated as of May 31, 1995. 36 10.59 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.) 10.60 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.) 10.61 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.) 10.62 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 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1995.) 10.63 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. 52 10.64* Sales contract dated August 18, 1995 between 60 the Company and Agfa Divison of Miles, Inc. with respect to the purchase of certain products. 11 Computation of Per Share Earnings. 79 23 Consent of Independent Auditors 80
* Exhibit for which confidential treatment has been requested. 35 EX-10.58 2 1993 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.58 1 SEATTLE FILMWORKS, INC. (PRIVATE) 1993 EMPLOYEE STOCK PURCHASE PLAN AMENDED AND RESTATED AS OF MAY 31, 1995 1. Purpose of the Plan. This 1993 Employee Stock Purchase Plan (the ------------------- "Plan") is intended to encourage stock ownership by all eligible employees of Seattle FilmWorks, Inc., a Washington corporation (the "Company"), and participating subsidiaries so that they may share in the fortunes of the Company by acquiring or increasing their proprietary interest in the Company. It is intended that the Plan shall constitute an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the provisions of the Plan shall be construed to ensure that participation is consistent with the requirements of the Code. 2. Definitions ----------- 2.1 "Account" shall mean an account to which amounts deducted from a participant's paycheck for the purpose of purchasing stock under the Plan are credited. Amounts credited to an employee's account shall remain the property of the respective participant at all times but may be commingled with Company funds and used, in the interim, for any proper corporate purpose. 2.2 "Common Stock" shall mean shares of common stock of the Company, $.01 par value. 2.3 "Compensation" shall mean all earnings required to be reported on an employee's Form W-2 plus any amounts not included on Form W-2 by reason of deferral into a tax-qualified employee benefit plan of the Company (such as 401(k) or cafeteria plan salary deferrals) but excluding income associated with the exercise of any stock options of the Company. 2.4 "Enrollment Date" shall mean the first day of each Offering Period. A different date may be set by resolution of the Plan Administrator. 2.5 "Exercise Date" shall mean the last Trading Date of each Offering Period. 2.6 "Fair Market Value" shall mean the value of the Company's common stock (the "Common Stock"), as of any date, determined as follows: (a) If the Common Stock is listed on the National Market System ("NMS") of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value shall be the closing sales price (or the average of the closing bid and asked prices, if no sales were reported) on the date of determination, as reported in The Wall 2 Street Journal or such other source as the Plan Administrator deems reliable; (b) If the Common Stock is quoted on the NASDAQ System (but not on the NMS) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value shall be the average of the closing bid and asked prices, as reported in The Wall Street Journal or such other source as the Plan Administrator deems reliable; or (c) By any other reasonable method as the Plan Administrator may determine. 2.7 "Offering Period" shall mean the six (6) month periods commencing on October 1 and April 1 of each year. The Board shall have the power to change the duration of any Offering Period (including the commencement date thereof) without shareholder approval if such change is announced at least twenty (20) days before the Enrollment Date of the Offering Period to be affected. 2.8 "Participating Subsidiary" shall mean any subsidiary of the Company which is designated by the Board to participate in the Plan. The Board shall have the power to make such designation before or after the Plan is approved by the shareholders. 2.9 "Plan Administrator" shall mean the Board of Directors of the Company or a committee designated by the Board to administer the Plan pursuant to Section 19 of the Plan. 2.10 "Purchase Price" shall mean an amount equal to eighty-five percent (85%) of the Fair Market Value of the Common Stock on the Enrollment Date (or, if the Enrollment Date is not a Trading Day, the first Trading Day thereafter) or the Exercise Date, whichever is lower. 2.11 "Trading Day" shall mean a day on which NASDAQ (or such national stock exchange as the Company's Common Stock may be listed for trading) is open for trading. 3. Eligible Employee. Subject to any express limitations contained ----------------- herein or otherwise imposed by law, any individual who has been a full or part-time regular employee of the Company for purposes of tax withholding under the Code for at least ninety (90) consecutive days, and whose customary employment with the Company or any Participating Subsidiary is not less than twenty (20) hours per week is eligible to receive options under the Plan, provided, however, that no person shall be granted an option under the Plan -------- ------- if, immediately after the grant, such person would own shares and/or options to purchase shares (including all shares which may be attributed to such person under the rules of Code Section 424(d)) representing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or of its parent or subsidiary corporations. For purposes of the Plan, an employee on sick leave or other leave of absence approved by the 3 Company shall retain eligibility for the Plan for a period of ninety (90) days, or such longer period as may be guaranteed by statute or contract. 4. Offering Periods. Until the Plan is terminated pursuant to Section ---------------- 20 of the Plan, options shall be offered under the Plan during each Offering Period. 5. Participation. ------------- 5.1 An eligible employee may participate in an Offering Period under the Plan by completing, signing, and filing a Subscription Agreement in the form of Exhibit A to the Plan at least fifteen (15) business days prior to --------- the applicable Enrollment Date, unless a longer or shorter period is prescribed by the Plan Administrator. 5.2 Payroll deductions for a participant shall commence on the Enrollment Date and shall end on the termination date of such Offering Period unless earlier terminated by the participant as provided in Section 14 of the Plan or unless automatically transferred to a new Offering Period pursuant to Section 15 of the Plan. 5.3 Participation in one offering under the Plan shall neither limit, nor require, participation in any other offering; provided, however, -------- ------- that unless participants submit a Withdrawal Notice as provided in Section 14 of the Plan prior to the end of the Offering Period in which they are participating, such participants shall be automatically re-enrolled in the next succeeding Offering Period. 6. Payroll Deductions. ------------------ 6.1 At the time a participant files his or her Subscription Agreement, he or she shall elect to have deductions made from his or her pay on each payday during the Offering Period at a rate of between one percent (1%) and ten percent (10%) of his or her Compensation (in whole percentages only). 6.2 All payroll deductions made for a participant shall be credited to his or her Account. A participant may not make any separate cash payment into such Account nor may payment for shares be made other than by payroll deduction. 6.3 A participant may decrease, but not increase, the rate of his or her payroll deductions at any time during an Offering Period by submitting to the Company a revised Subscription Agreement indicating the desired rate at least five (5) business days before the beginning of the applicable pay period. A participant may only increase his or her deduction rate for the next succeeding Offering Period, by delivering a revised Subscription Agreement to the Company at least fifteen (15) business days prior to the beginning of such Offering Period. The Plan Administrator may limit the number of rate changes during any Offering Period. 4 6.4 Notwithstanding the foregoing, a participant's payroll deductions may be reduced during any Offering Period to the extent necessary to comply with Code Section 423(b)(8) and Section 7 of the Plan. Payroll deductions shall resume at the beginning of the first Offering Period scheduled to end in the following calendar year at the rate indicated in such participant's Subscription Agreement, unless terminated or modified by the participant as provided above. 7. Granting of Option. ------------------ 7.1 On the Enrollment Date of each Offering Period, the Company shall grant to each participant an option to purchase, on each Exercise Date during the applicable Offering Period, that number of full shares of Common Stock equal to the amount in the participant's Account as of the Exercise Date divided by the applicable Purchase Price, provided, however, that such -------- ------- participant remains eligible to participate in the Plan at all times during the Offering Period up to and including the applicable Exercise Date; and provided, further, that no participant shall be granted an option to purchase -------- ------- during any single Offering Period more than that number of shares determined by dividing twelve thousand five hundred dollars ($12,500) by the Fair Market Value of one share of Common Stock on the Enrollment Date. 7.2 Notwithstanding the foregoing, no participant shall be granted an option which permits his or her rights to purchase Common Stock under the Plan and any similar employee stock purchase plans of the Company or any parent or subsidiary corporation to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of Fair Market Value of such stock (determined at the time such option is granted) for each calendar year during which any such option is outstanding at any time. The purpose of the limitation in the preceding sentence is to comply with Code Section 423(b)(8), and it does not limit the amount of stock which an employee may purchase pursuant to any plan other than an employee stock purchase plan under Code Section 423. 7.3 If the total number of shares for which options are to be granted on any date in accordance with Paragraph 7.1 exceeds the number of shares then available under the Plan as provided in Section 17 of the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares remaining available in as nearly a uniform manner as shall be practical and as the Plan Administrator shall determine to be equitable. 8. Exercise of Option. ------------------ 8.1 The option of each eligible participant on an applicable Exercise Date shall be exercised on such Exercise Date, and the maximum number of full shares subject to such option shall be purchased for such participant with the accumulated payroll deductions in his or her Account (subject to the maximum number of shares allowable under Section 7 of the Plan). No fractional shares will be purchased, and any accumulated funds not sufficient 5 to purchase a full share shall remain in the participant's Account for the subsequent Offering Period, subject to withdrawal by the participant pursuant to Section 14 of the Plan. 8.2 Participants who are subject to the reporting requirements and "short-swing" liability provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and rules thereunder (generally including officers, directors and holders of more than ten percent (10%) of any class of equity security of the Company) must hold stock acquired pursuant to the Plan for at least six (6) months from the date of acquisition, provided, however, that no such holding period is required if the participant -------- ------- has submitted to the Company an Irrevocable Waiver in the form of Exhibit B to --------- the Plan, waiving his or her rights to withdraw from the Plan or change the rate of his or her payroll deductions under the Plan for a period of at least six (6) months prior to the purchase of such shares under the Plan. 9. Tax Withholding. The Company shall not be obligated to issue, --------------- transfer or deliver a certificate of Common Stock to any participant, or to his personal representative, until adequate provision has been made by the participant for satisfaction of any federal, state or local tax withholding obligations associated with such exercise. The Company may, but is not obligated to, withhold from the participant's Compensation any amount necessary for the Company to meet such withholding obligations, including any withholding required to qualify the Company for any tax deductions or benefits attributable to the sale or early disposition of the stock by the participant. 10. Stock Certificates and Stock Accounts. No certificates for stock ------------------------------------- issued to participants will be delivered to participants unless the Company receives a written request for a stock certificate from a participant, at which time, a stock certificate shall be delivered to such participant as soon as practicable. Until a request for a certificate has been made, stock issued to each participant shall be maintained in an account in each participant's name with the Company's transfer agent and statements showing the amount of stock in each participant's account shall be delivered by the transfer agent as soon as practicable after the Exercise Date. Shares to be issued to a participant under the Plan will be registered in the name of the participant, or, if the participant so directs, by written notice to the Company prior to the termination date of the pertinent offering, in the names of the participant and his or her spouse, as joint tenants with right of survivorship or as community property, to the extent and in the manner permitted by applicable law. 11. Participant's Rights as a Shareholder. No participant shall have ------------------------------------- any right as a shareholder with respect to any shares under the Plan until the shares have been purchased in accordance with Section 8 of the Plan. 12. Rights Not Transferable. No participant shall be permitted to sell, ----------------------- assign, transfer, pledge, or otherwise dispose of or encumber either the payroll deductions credited to his or her account or any rights with regard to the exercise of an option or to receive shares under the Plan other than by 6 will or by the laws of descent and distribution. Further, such right and interest shall not be liable for, or subject to, the debts, contracts, or liabilities of the participant. If any such action is taken by the participant, or any claim is asserted by any other party in respect of such right and interest whether by garnishment, levy, attachment or otherwise, such action or claim will be treated as an election to withdraw funds in accordance with Section 14 of the Plan. 13. Interest. No interest will be paid or allowed on any money in the -------- Accounts of participants. 14. Withdrawal. ---------- 14.1 A participant may withdraw from the Plan, in whole but not in part, at any time prior to the last business day of each Offering Period by delivering a Withdrawal Notice in the form of Exhibit C to this Plan to the --------- Company, in which event the Company will refund the entire balance of his or her Account as soon as practicable thereafter. 14.2 A participant who has withdrawn may re-enter the Plan by filing a new Subscription Agreement in accordance with Section 5 of the Plan; provided, however, that participants may not re-enter the Plan prior to the -------- ------- beginning of the next Offering Period; and provided, further, that -------- ------- participants subject to Section 16 of the Exchange Act who withdraw from the Plan may not begin making contributions under the Plan again for at least six (6) months after such withdrawal, unless such participants have executed and ------ delivered the Irrevocable Waiver described in Section 8.2 of the Plan. 14.3 A participant may elect to discontinue his or her payroll deductions during the course of a particular Offering Period, at any time prior to the last business day preceding the final payday during such Offering Period by delivering to the Company a revised Subscription Agreement indicating a deduction rate of zero percent (0%). Such election shall not constitute a withdrawal for the purposes of this Section 14 of the Plan, and the participant shall remain a participant in such offering and shall be entitled to purchase from the Company such number of full shares of Common Stock as set forth in and in accordance with Section 8 of the Plan; provided, -------- however, that participants subject to Section 16 of the Exchange Act who cease ------- making contributions under the Plan may not begin making contributions under the Plan again for at least six (6) months after such cessation, unless such participants have executed and delivered the Irrevocable Waiver described in Section 8.2 of the Plan. 15. Automatic Transfer to Low Offering Period. To the extent permitted ----------------------------------------- by Rule 16b-3 under the Exchange Act ("Rule 16b-3"), if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be withdrawn immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period. 7 16. Termination of Participant's Rights. A participant's rights under ----------------------------------- the Plan shall terminate when he or she ceases to be a participant because of resignation, retirement, lay-off, discharge, or change of status. The Company shall treat the date a participant's employment ceases as a withdrawal date, and all payroll deductions not used will be refunded. If a participant's employment shall be terminated by reason of death or disability prior to the end of an Offering Period in which he or she is participating, he or she (his or her designated beneficiary, in the event of his or her death, or if none, his or her legal representative) shall have the right, within ninety (90) days thereafter, to elect to have the balance in his or her account either paid to him or her in cash or applied at the end of such Offering Period toward the purchase of Common Stock. 17. Stock Subject to the Plan. Subject to changes in the Company's ------------------------- capitalization as provided in Section 18 of the Plan, the maximum number of shares which may be issued pursuant to the Plan in the aggregate shall be seventy-five thousand (75,000). The stock subject to the options shall be shares of the Company's authorized but unissued Common Stock or shares of Common Stock reacquired by the Company, including shares purchased in the open market. 18. Changes in Capital Structure. Except as expressly provided herein, ---------------------------- no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect the number or price of shares of Common Stock subject to the Plan. 18.1 If the outstanding shares of Common Stock of the Company are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Plan Administrator in the number and kind of shares as to which an option granted under this Plan shall be exercisable, to the end that the participant's proportionate interest shall be maintained as before the occurrence of such event. Any such adjustment made by the Plan Administrator shall be conclusive. 18.2 If the Company is not the survivor or resulting corporation in any reorganization, merger, consolidation or recapitalization, each outstanding option shall be assumed by the surviving or resulting corporation and shall continue in full force and effect, and each option shall apply to the same number and class of securities of the surviving corporation as a holder of the number of shares of Common Stock subject to the option would be entitled to under the terms of the reorganization, merger, consolidation or capitalization. 19. Administration of the Plan. The Plan shall be administered by the -------------------------- Board of Directors of the Corporation (the "Board") or by a committee designated by the Board composed of one or more members of the Board and such 8 other persons as the Board shall designate. Any such committee shall have the powers and authority vested in the Board hereunder as the Board shall designate. The members of any such committee shall serve at the pleasure of the Board. A majority of the members of the committee shall constitute a quorum, and all actions of such committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members of such committee and any action so taken shall be fully as effective as if it had been taken at a meeting. The Board, or any committee thereof appointed to administer the Plan, is referred to herein as the "Plan Administrator." Subject to the provisions of the Plan or any limitations imposed on it by the Board, the Plan Administrator shall have sole authority, in its absolute discretion, (a) to construe and interpret the Plan; (b) to define the terms used herein; (c) to prescribe, amend, and rescind rules and regulations relating to the Plan; (d) to determine all of the other terms and conditions of Options granted under the Plan; and (e) to make all other determinations necessary or advisable for the administration of the Plan and do everything necessary or appropriate to administer the Plan. All decisions, determinations, and interpretations made by the Plan Administrator shall be binding and conclusive on all participants in the Plan and on their legal representatives, heirs, and beneficiaries. 20. Termination and Amendments to Plan. The Board or the Plan ---------------------------------- Administrator may terminate the Plan at any time. If not terminated by act of the Board or the Plan Administrator, the Plan will terminate on the earlier of (a) the date on which all or substantially all of the unissued shares of Common Stock reserved for the purpose of the Plan have been purchased, or (b) ten (10) years from the date the Plan is adopted by the Board of Directors. Upon such termination or any other termination of the Plan, all payroll deductions not used to purchase stock will be refunded. The Plan Administrator may amend the Plan from time to time in any respect; provided, however, that any amendment for which shareholder approval -------- ------- is required by Rule 16b-3 or under Code Section 423 (or any successor rule or provision or any other applicable law or regulation), shall be subject to approval of the shareholders. 21. Conditions Upon Issuance of Shares. Shares shall not be issued with ---------------------------------- respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Exchange Act, the Securities Act of 1993, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which Company stock may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require a participant to represent and warrant at the time of exercise that the shares are being purchased only for investment and without any present intention to 9 sell or distribute such shares if, in the option of counsel for the Company, such a representation is required by any applicable law. 22. Reports. Statements of individual accounts, setting forth the ------- amounts of payroll deductions, the number of shares purchased and the Purchase Price will be delivered to participants at least annually. 23. Approval of Shareholders. This Plan is being implemented by action ------------------------ of the Board of Directors with the understanding that approval of the Plan by the shareholders of the Company will be sought. Options granted hereunder prior to the date of the first meeting of the shareholders of the Company duly convened following the effective date of this Plan shall be granted subject to ratification of this Plan by the shareholders of the Company at such duly convened meeting, and if shareholder ratification is not obtained at such meeting, each and every option granted under this Plan shall be null and void and shall convey no rights to the holder thereof and all payroll deductions will be refunded promptly, without interest. Approved by the Corporation's Board of Directors in its original form as of September 22, 1993. Approved by the Corporation's Shareholders as of February 16, 1994. Amended and Restated by the Compensation Committee and full Board of Directors of the Corporation as of May 31, 1995. Seattle FilmWorks, Inc. By //s// Gary R. Christophersen 8-7-95 ---------------------------- ------ Gary R. Christophersen, President 10 EXHIBIT A --------- SEATTLE FILMWORKS, INC. 1993 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT ______ Original Application Enrollment Date: __________ ______ Change in Payroll Deduction Rate ______ Change of Beneficiary(ies) (a) ______________________________ hereby elects to participate in the Seattle FilmWorks, Inc. 1993 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. (b) I hereby authorize payroll deductions from each paycheck in the amount of _____% of my Compensation on each payday during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) (c) I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. (d) I have received a copy of the complete memorandum to participants summarizing the "Amended and Restated Seattle FilmWorks, Inc. 1993 Employee Stock Purchase Plan." I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. (e) Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only): ________________________________ ___________________________________________________________. (f) I understand that if I dispose of any shares received by me pursuant to the Plan within two years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the Fair Market Value of the shares at the time such shares were delivered to me over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days -------------------------------------------------------------- after the date of any disposition of my shares ---------------------------------------------- 11 and I will make adequate provision for Federal, state or other tax ------------------------------------------------------------------ withholding obligations, if any, which arise upon the disposition of the ------------------------------------------------------------------------ Common Stock. The Company may, but will not be obligated to, withhold ------------ from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. (g) I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. (h) In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME[S]: (Please print; attach additional sheets if necessary) 1. ____________________________________________________________ (First) (Middle) (Last) ____________________________________________________________ Relationship ______________________________ (Address) 2. ____________________________________________________________ (First) (Middle) (Last) ____________________________________________________________ Relationship ______________________________ (Address) 3. ____________________________________________________________ (First) (Middle) (Last) ____________________________________________________________ Relationship ______________________________ (Address) Employee's Social Security Number: ______________________________ 12 I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated: ______________________ ______________________________ Signature of Employee ______________________________ Spouse's Signature (If beneficiary is other than spouse) 13 EXHIBIT B --------- SEATTLE FILMWORKS, INC. 1993 EMPLOYEE STOCK PURCHASE PLAN IRREVOCABLE WAIVER Recitals -------- 1. The undersigned participant understands that, pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, officers, directors and owners of more than ten percent (10%) of Seattle FilmWorks, Inc. common stock who participate in the Plan are subject to a six-month holding period under Section 16(b) with respect to shares acquired under the Plan. 2. The Securities and Exchange Commission has stated that a participant in a Section 423 stock purchase plan may use Rule 16b-3(d)(1) to exempt the acquisition of stock under the plan by making an irrevocable election at least six (6) months prior to the transaction date concerning the decision to purchase shares and the decision to withhold a specific dollar amount or percentage of pay. 3. The undersigned participant understands that if the requirements of Rule 16b-3(d)(1) are satisfied, an acquisition of stock under the Plan would not be considered a "purchase" for purposes of Section 16(b), and if the participant has not otherwise purchased any shares of Seattle FilmWorks, Inc. common stock during the prior six (6) months, such participant would be permitted to sell stock acquired under the Plan within six (6) months after such acquisition. 4. For the purpose of exempting the acquisition of shares under the Plan pursuant to Rule 16b-3(d)(1), the undersigned participant wishes to execute and deliver this irrevocable waiver on the terms and conditions set forth below. Irrevocable Waiver ------------------ As a participant in the Seattle FilmWorks, Inc. 1993 Employee Stock Purchase Plan (the "Plan"), I hereby irrevocably waive my rights under the Plan to: (a) Withdraw from the Plan, as provided in Section 14.1 of the Plan; (b) Discontinue my payroll deductions under the Plan, as provided in Section 14.2 of the Plan; or (c) Decrease or increase the rate of my payroll deductions under the Plan, as provided in Section 6.3 of the Plan. 14 This waiver shall be effective for a period of not less than six (6) months, beginning on the date of the Company's receipt of this waiver. I understand that this waiver shall not take effect for purposes of Section 16 of the Securities Exchange Act of 1934 with respect to the purchase of shares on any Exercise Date (as that term is defined in the Plan) occurring less than six (6) months after the Company's receipt of this waiver notice. I also understand that I may terminate this waiver by notifying the Controller of the Company in writing, but that such termination shall not take effect with respect to the purchase of shares on any Exercise Date occurring less than six (6) months after the Company's receipt of my written notice. I also understand that this waiver shall remain in effect throughout successive purchase periods under the Plan unless terminated by me. Dated: ______________________ ______________________________ Signature of Employee ______________________________ Name (printed or typed) ______________________________ Spouse's Signature (If beneficiary is other than spouse) 15 EXHIBIT C --------- SEATTLE FILMWORKS, INC. 1993 EMPLOYEE STOCK PURCHASE PLAN WITHDRAWAL NOTICE The undersigned participant in the Seattle FilmWorks, Inc. 1993 Employee Stock Purchase Plan (the "Plan") hereby notifies the Company that he or she hereby withdraws from the Plan. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account under the Plan. The undersigned understands and agrees that his or her option for the current Offering Period under the Plan will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement in accordance with the terms of the Plan. Name and Address of Participant: ___________________________________ ___________________________________ ___________________________________ Signature: ___________________________________ Date: ____________________________ EX-10.63 3 LEASE AGREEMENT DATED SEPTEMBER 22, 1995 EXHIBIT 10.63 U.S. GOVERNMENT LEASE OF REAL PROPERTY 1. THIS LEASE entered into by and between the United States of America, hereinafter called Lessor, and Seattle FilmWorks, Inc., hereafter called the Lessee, whose address is, 1260-16th Ave. West, Seattle, WA 98119, to use and occupy the property hereinafter described under the terms and subject to the conditions contained herein. 2. WITNESSETH: The Lessor hereby leases to the Lessee the following described premises: Approximately 70,000 square feet of enclosed warehouse space, including the related outside loading dock on the northwest and west portion of subject space, together with the use of truck maneuvering areas and common areas with ingress and egress to the subject space, located in the northern most portion of the 1202 Warehouse, at approximate column markers C46 south to G36, G36 west to G47 north to C47 inclusive, Federal Center South, 4735 E. Marginal Way South, Seattle, WA 98134. Approximately 75 parking stalls available, located in the east parking lot of GSA owned property, across the street from the 1201 Administration Building, 4735 E. Marginal Way South.. To be used exclusively for the following purpose(s): warehousing and light production of film/film related products; no film processing permitted 3. TO HAVE AND TO HOLD the premises with their appurtenances under the following term: (Check and complete one of the following paragraphs) A. MONTH-TO-MONTH: This is a month-to-month tenancy for an indefinite period beginning , 19, and may be terminated at any time by either party giving to the other a thirty days' written notice. X B. FIXED TERM: To have and to hold said premises with their appurtenances, beginning February 1, 1996, and ending January 31, 1999,. This agreement may be renewed, at the option of the Lessee, providing that thirty (30) days written notice is given before the end of the fixed term, for two one year terms, at a negotiated market rate, set at the beginning of each one year term . 4. The Lessee shall pay the Lessor an annual rental of $218,400 (Two hundred eighteen thousand four hundred dollars and no/100), payable at the rate of $18,200, per month in advance. Rents for part of a month shall be prorated. All payments shall be made payable to the General Services Administration, and shall contain the following lease number for identification purposes GS-10PES- OL-5-42. All payments are to be paid by check or money order and mailed or delivered to the OFFICE OF FINANCE, GENERAL SERVICES ADMINISTRATION, P. O. Box 70697, Chicago, IL 60673 on or before the first day of each month. 5. The Lessor shall furnish the Lessee under the terms of this lease services and utilities as follows: Utilities as currently in place and operable; janitorial and maintenance services, with related supplies. Utilities for normal business are provided for an eleven (11) hour day, five (5) days a week. Regularly scheduled overtime usage that extends beyond the eleven hours, on weekends, or federal holidays, shall be paid for by the Lessee on an hourly rate, negotiated between the GSA Puget Sound Property Management Center and the Lessee. If heat or air conditioning services are provided under this lease, the Lessor agrees to maintain temperatures in the demised premises in accordance with current Lessor standards for its buildings. In the event of a fuel shortage, where the Lessor is required to cut back or curtail fuel consumption the Lessee agrees to accept heating or air conditioning at whatever level is available. 6. The following paragraphs were deleted before execution of this lease: Paragraph 3a 7. The following paragraphs or documents were incorporated before execution of this lease: Exhibit A 8. Space offered is accepted "as is". Permission is granted to build offices/install roll-up doors, at the sole expense of the Lessee, with prior approval of plans and approval of acceptance by the Puget Sound PMC, to ensure building standards are met. Lessee shall provide automatic sprinkler protection of any office built, to conform to requirements of NFPA 13. The existing system may be extended to provide the coverage. GSA will assume ownership of said offices at the termination of this lease. 9. Federal Regulations apply: The Lessee shall be subject to all Federal Property Regulations and Rules of Occupancy that apply to Federal tenants. Such rules and regulations shall be administered by the Puget Sound PMC. 10. The Lessor/Lessee may terminate this lease at any time by giving at least 120 days notice, in writing to the Lessee/Lessor, and no rental shall accrue after the effective date of termination. Said notice shall be computed commencing with the date of mailing by either the Lessor/Lessee. Termination on behalf of GSA shall occur in case of nationally declared emergency, in which case the premises must be vacated in accordance with such statutes governing federal property. 11. Unless otherwise specified herein, Lessee shall, without expense to the Lessor and to the satisfaction of the Lessor, obtain and carry public liability insurance coverage for third party bodily injury liability, with limits of liability of $1,000,000 per occurrence, and third party property damage liability of $1,000,000 per occurrence. A certification of insurance shall be furnished the Lessor within fifteen (15) days from the date of execution of this lease. This policy for general third party liability shall include an endorsement naming the United States of America, as an additional insured as respects liability assumed in Paragraph E of this lease and arising out of the use and occupancy for leased premises by Lessee. The policy shall include the following endorsement: "It is a condition of this policy that the insurance company shall furnish written notice to the General Services Administration, Contracting Officer, in writing, thirty (30) days in advance of the effective date of any reduction to or cancellation of this policy." 12. Lessee shall have the right to install and maintain a business identification sign of approximately 5' x 7', located on the northwest portion of the building. 13. Lessor shall provide keys to warehouse space and magnetic key cards for warehouse gate access on a twenty-four (24) basis, seven (7) days a week. All keys shall be returned to GSA upon termination of the outlease. 14. Any racking installed shall meet the specifications of applicable local codes and if this requires installation of floor bolts, upon termination of the outlease, the bolts shall be cut off at the surface and ground to be level with the concrete floor, to the satisfaction of the GSA Puget Sound PMC representative. Installation of fencing for security purposes is permitted. A rolling access gate shall be included to allow passage during normal business hours in the fire lanes. 15. Lessee shall have first right of refusal for rental of adjacent square footage, in parcels of no less than 10,000 square feet, exclusive of government assignment. Lessee is placed on notice that use/occupancy of non- leased/unassigned space, shall be grounds for assessment of non-negotiable rental charges, equal to the existing square footage market rate, for each day the space is occupied. GSA will require payment within thirty (30) days of notification of said charge. 16. Warehouse access by semi trucks is prohibited due to excessive fumes generated. All loading/unloading shall take place outside the enclosed warehouse area. General delivery by van, United Parcel, U. S. Mail/or express mail truck is permitted within the enclosed warehouse area, with restricted access to drop off in the fire lanes only. 17. All common use areas., i.e. restrooms, conference room scheduling, cafeteria and fitness center are permitted for tenants of the complex. All federal restrictions to such areas are applicable. Fire lanes shall remain open during normal business hours. TERMS AND CONDITIONS A. Lessee has inspected and knows the condition of the leased premises and agrees to accept same in its "as is" condition. It is further understood that the leased premises are hereby leased without any additions, improvements or alterations thereto. B. Lessee shall not make any additions, improvements, repairs, or alterations to the leased premises without the prior written consent of Lessor in each and every instance. C. The Lessee shall, except as otherwise specified herein and except for damages resulting from the act or negligence of the Lessor, his agents, employees, maintain in good repair and tenantable condition the demised premises, including the building and any and all equipment, fixtures, and appurtenances, whether severable or nonseverable, furnished by the Lessor under this lease. D. Lessee shall use reasonable care in the occupation and use of the leased premises. Upon the expiration or termination of this lease, Lessee shall vacate the leased premises, remove his property therefrom and forthwith yield and place Lessor in peaceful possession of the leased premises, free and clear of any liens, claims, or encumbrances and in as good condition as the leased premises existed at the commencement of this lease, ordinary wear and tear excepted. E. Lessor shall not be responsible for damage to property or injuries to persons, which may arise from or be incident to the use and occupation of the leased premises, nor for damages to the property or injuries to the person of Lessee or of others who may be on said premises at Lessee's invitation and Lessee shall hold Lessor harmless from any and all claims for such damages or injuries. F. Lessee shall comply with all applicable Municipal and State Laws, ordinances and regulations; and obtain and pay for all licenses and permits as may be required. G. Lessee agrees not to use the leased premises in any way which, in the judgment of the Lessor poses a hazard to the Lessor, the leased premises, other Lessees, or the building in part or whole, nor shall Lessee use the leased premises so as to cause damage, annoyance, nuisance or inconvenience to the building occupants or others. H. Lessee, Lessee's agency, employees, invitees or visitors, shall comply fully with all Rules and Regulations Governing Public Buildings and Grounds as now posted or subsequently amended. I. The Lessor reserves the right to enter the leased premises at all reasonable hours to inspect it, exhibit same or to make such repairs, additions or alterations as Lessor considers necessary for the safety, improvement or preservation of the Lessee's premises or any part thereof. J. Unless otherwise specified herein, Lessee shall, without expenses to the Lessor and to the satisfaction of the Lessor, obtain and carry public liability insurance coverage for third party bodily injury liability with limits of liability for bodily injury and third party property damage liability in the amounts specified by the General Services Administration Contracting Officer. A certified true copy of the policy with endorsement, manually countersigned, shall be furnished the Lessor within 15 days from the date of execution of this lease. The policy for general third party liability shall include an endorsement naming the United States of America, as an additional insured. The policy shall include the following endorsement: "It is a condition of this policy that the insurance company shall furnish written notice to the General Services Administration Contracting Officer, in writing thirty (30) days in advance of the effective date of any reduction to or cancellation of this policy." K. If the Lessee shall fail to pay the rent herein provided or shall abandon the leased premises or shall fail to observe or perform any other conditions, covenants or agreement as herein stated, then the Lessor may, at its option: (a) declare this lease ended and terminated and may reenter the leased premises and remove all persons or things therefrom, and the Lessee hereby expressly waives all service of any demand or notice prescribed by any statue whatever, and (b) on authority hereby granted the Lessor by the Lessee to dispose of such personal property left in the premises as deemed in the best interest of the United States of America and Lessee shall be liable for such damages as the Lessor may incur. L. In the event that a sate or local tax is imposed upon the occupancy, use, valuable possession, or valuable leasehold interest of or in the real property hereby leased, the obligation for the payment of the tax will be wholly that of the Lessee. M. No member of or delegate to Congress, or resident Commissioner shall be admitted to any share or part of this lease agreement, or to any benefit that may arise therefrom; but this provision shall not be construed to extend to any corporation or company if the agreement be for the general benefit of such corporation or company. N. The Lessee's name and location may be placed on the building directory, floor directory and/or door plate, if the building is so equipped. No signs of the Lessee shall otherwise be placed inside or outside of the demised premises unless specifically authorized by the Lessor in writing. O. The Lessee warrants that no person or selling agency has been employed or retained to solicit or secure this lease upon an agreement or understanding for a commission, percentage, brokerage, or contingent fee except bona fide employees or bona fide established commercial or selling agencies maintained by the Lessee for the purpose of securing business. For breach or violation of this warranty, the Lessor shall have the right to annul this lease without liability, or in its discretion, to require Lessee to pay in addition to the contract price or consideration, the full amount of such commission, percentage, brokerage, or contingent fee. P. The failure of Lessor to insist in any one or more instances upon performance of any of the terms, covenants, or conditions of this lease shall not be construed as a waiver or relinquishment of the future performance of any such term, covenant, or condition, but Lessee's obligation with respect to such future performances shall continue in full force and effect. Q. Any notice or advice to or demand upon Lessee shall be in writing and shall be deemed to have been given or made on the day when it is sent by certified mail to the Lessee's address indicated in paragraph 1, or at such other address as Lessee may hereafter from time to time specify in writing for such purpose. Any notice or advice to or demand upon Lessor shall be in writing and shall be deemed to have been given or made on the day when it is sent by certified mail to the Lessor's Contracting Officer address indicated on the signature page herein, or at such other address as Lessor's Contracting Officer may hereafter from time to time specify in writing for such purpose. The Contracting Officer is the Lessor's representative and is the only person who has authority to sign or amend the terms or conditions of this lease. R. The Lessee agrees that he will no discriminate by segregation or otherwise against any person or persons because of race, color, creed, sex or national origin in furnishing, or by refusing to furnish to, such person or persons the use of any facility, including any and all services, privileges, accommodations, and activities provided therein. S. Except with the prior written consent of Lessor, Lessee shall neither transfer nor assign this lease or any of his rights hereunder, nor sublet the leased premises or any part thereof or any property thereon nor grant any interest, privileges or license whatsoever in connection with this lease. T. Lessee acknowledges that he acquires no right by virtue of execution of this lease to claim any benefits under the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, Public Law 91-646. U. If the property leased is located in a State requiring the recording of leases, the Lessee shall comply with all such statutory requirements at Lessee's expense. IN WITNESS WHEREOF, the parties hereto have signed and sealed their presents on the date indicated below. Executed this 22nd day of September , 1995 IN PRESENCE OF: LESSEE By: /s/ Cornelia Michiko Kele --------------------------------------- (Witness Signature) LESSEE By: /s/ Mickey Lass ---------------------------------------- (Signature) Accepted on behalf of the UNITED STATES OF AMERICA this 22nd day of September, 1995 Contract No. GS-10PES-OL-5-42 ------------------------------ GENERAL SERVICES ADMINISTRATION By: /s/ Brenda Dang ---------------------------------------- Title: Contracting Officer GSA, 400 15th St. SW (10PE) Auburn, WA 98001 (Address) EX-10.64 4 SALES CONTRACT DATED AUGUST 18, 1995 EXHIBIT 10.64 1 SALES CONTRACT (PRIVATE) SOLD TO: SEATTLE FILMWORKS 1260 16th Avenue West Seattle, WA 98119-3401 CONTRACT PERIOD: October 1, 1995 - September 30, 1998 PRODUCTS: Agfa Color Negative Paper Agfa Color Negative Film Agfa Chemistry Agfa Equipment ATTACHMENTS: A, B, C, D This Agreement or order is subject to the terms and conditions set forth on the front and back hereof. All orders received shall be subject to credit approval. Likewise, all Agreements or orders shall not be considered binding or valid until accepted by a Vice President of Agfa Division, Bayer Corporation (hereinafter "Agfa") at its principle office in New Jersey. All accounts will be reviewed after six months. If Buyer's purchases are not at the level forecasted herein, pricing will revert to the appropriate price group, and Agfa Division, Bayer Corporation will issue corrected invoices reflecting the appropriate pricing. Accepted Agfa Division of Bayer Corporation Dated: August 18, 1995 By: /s/ Hans R. Thieme ---------------------- ------------------------ Signature By: /s/ Case H. Kuehn Title: Sr. Vice President ------------------------- --------------------- Signature By:/s/ Hans G. Kuhlmann -------------------------- Signature Title:V.P. Treasurer & C.F.O. Title: V.P. Sales ----------------------- --------------------- TERMS AND CONDITIONS General ------- 1. Prices are exclusive of taxes which, if applicable, will be shown separately on the invoice. 2. The minimum acceptable order is $___ at net billing prices and only items contained herein may be used to meet the $___ minimum order 2 requirement. Seller may change the minimum acceptable order at any time during the term of this Agreement. 3. All orders received shall be subject to credit approval. Likewise, all agreements or orders shall not be considered binding or valid until accepted by a vice president of Agfa Division, Bayer Corporation (hereinafter "Agfa") at its principle office in New Jersey. 4. No drop shipments will be made. 5. It is agreed that any trademarks, trade names, trade dress and original packaging of Agfa Division, Bayer Corporation, and/or the affiliates shall not be used improperly. 6. In the event of any clerical or mathematical error, Agfa is hereby authorized to and reserves the right to correct such errors. 7. Agfa reserves the right to add late charges on any past due amount equivalent to the greater of ___ percent or the maximum allowed by local statutes. 8. No deductions or setoffs may be made from any statement or invoice for any reason without prior written authorization from Agfa. Any unauthorized deduction shall be of no effect and shall be null and void. 9. The resale of Agfa product to a reseller not owned by Buyer is prohibited in this agreement. Transportation -------------- All shipments will be made F.O.B. _________________. Transportation charges will be prepaid on each order totaling $___ or more, except where indicated, at net billing prices shown in current catalogs, provided such order calls for a single shipment to one destination. If an order totals less than $___, transportation charges will be added to the invoice. All shipments will be made by surface transportation by carriers of Agfa's choice in accordance with Agfa's standard transportation policy. If shipment is made by other means, in accordance with the instructions of the customer, transportation charges will be added to the invoice with no freight allowance, regardless of the amount of the order. Seller may change this transportation minimum at any time during the term of this agreement. Transportation for Equipment Only --------------------------------- All shipments will be made F.O.B. _________________ with transportation charges to be billed to customer in accordance with Conditions of Sale on the Agfa lab equipment purchase order. Damages, Shortages and Errors ----------------------------- 3 Inasmuch as all shipments are receipted by the delivering carrier as being in good order, all shipments must be checked immediately on arrival for damage and carton count. If outside damage and/or shortage of carton count, note on Bill of Lading before signing carrier receipt and file claim at once with delivering carrier. If concealed (inside) damage, file claim with delivering carrier within 15 working days of receipt of merchandise. Request inspection by delivering carrier and obtain inspection report. If shortages (inside carton) and/or error in shipment, notify Agfa Division, Bayer Corporation within 48 hours of day merchandise was received. Returns ------- No returns will be accepted without a prior written authorization form from Agfa Division, Bayer Corporation which will set forth the terms of such returns. Prepaid returns may be required in cases where Agfa Division, Bayer Corporation is free from fault. It is recommended that parcel post shipments be insured. Returns for Equipment shall be in accordance with Conditions of Sale on the --------------------- Agfa lab equipment purchase order. Terms of Payment ---------------- Subject to Credit Department approval and unless otherwise specified, terms of payment shall be __% __ days ___, net __ days ___. No cash discount will be allowed where an account is past due. All remittances should be made to Agfa Division, Bayer Corporation at the address shown on the monthly statement. Terms of Payment for Equipment shall be in accordance with the Conditions of ------------------------------ Sale on the Agfa lab equipment purchase order. Force Majeure ------------- The nonperformance of Agfa Division, Bayer Corporation of its obligations to deliver any merchandise ordered hereunder shall be excused if such nonperformance is occasioned by any strike or any other labor trouble, flood, fire, accident or any other casualty, act of God, war, governmental restrictions, shortage or inability to obtain raw materials, damage by the elements, failure of equipment or other cause of like or unlike nature beyond the control of Agfa Division, Bayer Corporation. Agfa Division, Bayer Corporation may, in the exercise of reasonable discretion, discontinue shipments to any account, revoke or modify any provisions in this agreement or allocate distribution of any of its products. Warranty -------- 4 All sales are without warranty of any kind, express or implied including, but not limited to, any warranty of merchantability or fitness for a particular purpose. Agfa's liability is limited to the replacement of products defective in manufacture, labeling, or packaging. In no event shall Agfa Division, Bayer Corporation or its parent, subsidiary or affiliated companies be liable for special or indirect, or consequential damages arising out of any sale or subsequent handling of any product, even where such damages are caused by negligence of Agfa Division, Bayer Corporation or that of its parent, subsidiary or affiliated companies. Warranty for photofinishing equipment shall be in accordance with Conditions of Sale on the Agfa Division, Bayer Corporation lab equipment purchase order. Assurances ---------- Whenever, in the reasonable judgment of Seller, there exists the possibility that Buyer is unwilling or unable to perform fully its obligations under this agreement, the Seller shall be entitled to demand of Buyer further assurances of due performance as Seller shall reasonably deem proper. If Buyer fails to provide reasonable assurances under this paragraph, Seller may ship goods C.O.D. or terminate this agreement without further liability to Buyer. Security Interest ----------------- Agfa Division, Bayer Corporation shall retain and the Buyer hereby grants Agfa a purchase money security interest in all equipment and good and their proceeds until all moneys due hereunder are paid in full. Customer shall perform all acts necessary to protect Agfa's security interest. Agfa may file this Agreement or a copy of its as a financing statement. Strict Compliance ----------------- The waiver of strict compliance or performance of any of the terms of this Agreement or of any breach thereof on the part of Seller shall not be held or deemed to be a waiver of any subsequent failure to comply strictly with, or perform the same or any other term or condition of this Agreement, or of any breach thereof. Applicable Law -------------- The interpretation, instruction, performance, and/or enforcement of this document shall be governed by the laws of the State of New Jersey. Should any provision herein be held invalid or unenforceable as written by court of competent jurisdiction, said provision, along with the remainder of the Agreement, shall nonetheless be enforceable to the extent allowable under applicable law. Entire Agreement ---------------- 5 All previous understanding and commitments, oral or written, made between the parties hereto are merged in this Agreement, which represents the entire Agreement between the parties hereto relating to the subject matter hereof. Except as otherwise stated herein, no amendment or change hereof shall be effective or binding upon the parties hereto unless reduced to writing and signed by both Seller and Buyer. In the event of any conflict between the terms of this Agreement and the terms of any purchase order, the terms hereof shall prevail. Equipment --------- All purchases and leases of equipment must be accompanied by an Agfa lab equipment purchase order. Termination ----------- The Seller reserves the right, among other remedies, to either cancel this contract or suspend further deliveries under it in the event Buyer fails to pay for any one shipment when same becomes due. Should Buyer's financial responsibility become unsatisfactory to Seller, cash payments or satisfactory security may be required by Seller. Prices ------ This contract is firm and not renegotiable during its term. Prices, as stated on the front hereof, shall remain in effect for the period of the contract unless: 1. There is a significant change in the Seller's cost beyond Seller's control. 2. The price in the market increases by three percent or more. In either event, prices are guaranteed for a minimum of 90 days from the date of this contract. Thirty days written notice must be provided before a price change becomes effective. Confidentiality --------------- It is understood that the terms of this Agreement shall be kept confidential between the parties herein and shall be disclosed only as required to lenders, counsel, auditors or others having legitimate business interest in the contents hereof. Buyer shall not, without Seller's permission, reveal any confidential information or trade secrets regarding Seller's products, business or methods of operation learned by Buyer during the term of this Agreement. Effective April 1995. 6 Seattle FilmWorks Sales Contract Addendum ----------------------------------------- 1. Period: October 1, 1995 to September 30, 1998. ------ 2. Products/Pricing: ---------------- # Paper: ------ - Invoice Price $____/ft/2/ - Projected min. __________/ft/2/ or 100% of SFW's requirements # Film: ----- - Projected min. __________ running meters ISO 100 135 invoice price $_____/RM _________ RM est. ISO 200 135 invoice price $_____/RM _________ RM est. ISO 400 135 invoice price $_____/RM _________ RM est. - Projected min. __________ 135-20 rolls in bulk: ISO 200 invoice price $____/ea. _________ rolls est. ISO 400 invoice price $____/ea. _________ rolls est. # Chemistry: ---------- - ___% of SFW's requirements - Invoice Price see Attachment A # Equipment: ---------- - SFW will be entitled to purchase ___ (_) MSP ______ and ___ (_) Labomater__ as specified in the enclosed price quotes - Attachments B and C. # Prices: ------- - The above prices are valid through 9/30/96. # Free Goods: ----------- - SFW will be entitled to ________ sq. ft of free color negative paper based on ________ sq. ft purchased during the contract period. This equals _____% to be released on a quarterly basis based on the number of sq. ft purchased during the previous quarter. SFW will determine the sizes and surfaces of such free goods. 3. Pricing Review: Both parties agree to a pricing review upon each -------------- anniversary date of this agreement. In view of the constant, rapidly rising costs of pulp, plastics and other raw material costs for producing paper, film and chemistry, Agfa will seek an annual price increase of at least ___% to compensate for such inflationary costs. The adjustment could, however, be more depending on general price increases in the marketplace. Agfa will propose a proper raw material indexing system as a basis for future price adjustments. 7 Should both parties not come to terms upon the price adjustments by the anniversary date, either SFW or Agfa can cancel the contract for either paper, film or chemistry or all with __ days notice. In such an event, Agfa agrees to ship product at the original price in reasonable quantities for __ days from date of cancellation. Price re-negotiations can also occur should SFW deviate significantly from the projected volumes. In case of extraordinary circumstances, such as rampant inflation of related costs beyond seller's control, seller can require renegotiations at any time and the aforementioned exit clause will also apply. 4. Terms of Payment: Net ___ days ___. ---------------- 5. Terms and Conditions: See Attachment D. -------------------- 6. This contract supersides any previous agreement, understandings or commitments. 8
ATTACHMENT A ==================================================================================================================================== (PRIVATE) SEATTLE FILM WORKS - ------------------------------------------------------------------------------------------------------------------------------------ New Chemical Pricing - ------------------------------------------------------------------------------------------------------------------------------------ Product Invoice Code Product Name Description Size Makes Price B3C12 94 CDS RA-4 DEVELOPER STARTER CONC. 1 GAL. 33 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B1FJD 94 CDJ PT. A RA-4 DEVELOPER REGENERATOR PT. A 60 L. 1,371 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B20TQ 94 CDJ PT. B RA-4 DEVELOPER REGENERATOR PT. B 60 L. 1,371 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B1GAK 94 CDJ PT. C RA-4 DEVELOPER REGENERATOR PT. C 60 L. 619 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B3S54 94 CDLR PT. A RA-4 DEVELOPER REPLENISHER PT. A 75 GAL. 75 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B3S66 94 CDLR PT. B RA-4 DEVELOPER REPLENISHER PT. B 75 GAL. 75 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B3S78 94 CDLR PT. C RA-4 DEVELOPER REPLENISHER PT. C 75 GAL. 75 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B3TSJ 94 CDLR PTS. A-C RA-4 DEVELOPER REPLENISHER 25 GAL. 25 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B3S8B 94 BXMR PTS. A&C RA-4 BLEACH FIX REPLENISHER 25 GAL. 25 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B3S9D 94 BXMR PTS. B RA-4 BLEACH FIX REPLENISHER 25 GAL. 25 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B28E6 94 LIGHT BLJ RA-4 LIGHT BLEACH REGENERATOR 300 L. 97 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B28F8 94 LIGHT BLJ RA-4 LIGHT BLEACH REGENERATOR 1,000 L. 322 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ S9YMY SC94 SBR SOLID PAPER STABILIZER 100 L. 26.4 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ BQDBT 70 CDLR PT.A C-41 DEVELOPER LOW REPLENISHER 300 L. 79.3 GAL. $____
9
==================================================================================================================================== (PRIVATE) SEATTLE FILM WORKS - ------------------------------------------------------------------------------------------------------------------------------------ New Chemical Pricing - ------------------------------------------------------------------------------------------------------------------------------------ Product Invoice Code Product Name Description Size Makes Price - ------------------------------------------------------------------------------------------------------------------------------------ BQDCV 70 CDLR PT. B&C C-41 DEVELOPER LOW REPLENISHER 300 L. 79.3 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ BRE5V 70 BL CONC. C-41 BLEACH CONCENTRATE 15 GAL. 267 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B3ZXK 70 LIGHT BLJ C-41 LIGHT BLEACH REGENERATOR 210 L. 1,003 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ BRE94 FX UNIV. UNIVERSAL FIXER CONCENTRATE 15 GAL. VAR. $____ - ------------------------------------------------------------------------------------------------------------------------------------ BIY14 70 FI C-41 FINAL BATH REPLENISHER 75 GAL. 75 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ BWA8S 44 FDR-AR E-6 FIRST DEVELOPER REPLENISHER 5 GAL. 25 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ BWA9U 44 RE-AR E-6 REVERSAL BATH REPLENISHER 5 GAL. 100 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ BWBAY 44 CDR-AR PT. A E-6 COLOR DEVELOPER REPL. PT. A 5 GAL. 25 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ BWBB1 44 CDR-AR PT. B E-6 COLOR DEVELOPER REPL. PT. B 5 GAL. 25 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ BWBC3 44 BC-AR E-6 BLEACH CONDITIONER REPLENISHER 5 GAL. 25 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ BWB9Y 44 BLR-AR E-6 BLEACH REPLENISHER 5 GAL. 5 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ B12YD 44 FI-AR E-6 FINAL BATH REPLENISHER 5 GAL. 500 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ BZXVG 73 CDR CN-16Q DEVELOPER REPLENISHER 40 L. 10.6 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ BZXWJ 73 BLR CN-16Q BLEACH REPLENISHER 8 L. 2.1 GAL. $____ - ------------------------------------------------------------------------------------------------------------------------------------ BZXXL 73 FXR CN-16Q FIXER REPLENISHER 24 L. 6.3 GAL. $____
10
==================================================================================================================================== (PRIVATE) SEATTLE FILM WORKS - ------------------------------------------------------------------------------------------------------------------------------------ New Chemical Pricing - ------------------------------------------------------------------------------------------------------------------------------------ Product Invoice Code Product Name Description Size Makes Price - ------------------------------------------------------------------------------------------------------------------------------------ BZZSJ 73 SBR CN-16Q STABILIZER REPLENISHER 40 L. 10.6 GAL. $____ ====================================================================================================================================
11 ATTACHMENT B MSP AUTOMATIC PRINTER ------------------------------ $________ each Shipping and handling $_____ (FOB ________) Terms: Net ___ days ___ This quote is valid for 30 days. Subject to credit approval. PRODUCT SPECIFICATIONS - AS STATED IN MSP PRODUCT LITERATURE INCLUDES: --------
OPTIONAL ACCESSORIES: - -------------------- PAPER MAGAZINES $ _____ 110, 126 FILM GUIDES _____ MIRROR BOX _____ * MSP-URS CONVERSION KIT _____ URS DECKS _____ URS SOFT MIRROR BOX _____ * GREETING CARDS _____ EXTENDED DX & FNS _____ * INK JET BACK PRINTER _____ * TRI PRINT _____ AUTOMATIC 1/2 FRAME _____FACTORY INSTALLED MANUAL 1/2 FRAME _____ * WALLET PRINTS FOR REPRINT _____ BORDER PRINTS _____ * BLACK & WHITE _____ * PANORAMIC KIT (3.5" x 10") _____ * DUAL FILM TAKE UP (USE CORES) _____ DUAL PAPER SYSTEM _____FACTORY INSTALLED
Note: * Panoramic Kit: The 10" paper deck can not make a 3.5" paper advance such as 3.5" x 3.5" 126 or manual half frame 5" x 3.5". * Installation additional on conversion kits. B-1 ATTACHMENT C LABOMATOR 4" PAPER PROCESSING - --------------------------------------- - --------- -------------- ---------- $_______ each INCLUDES: - -------- Shipping and handling $_____ (FOB ________) Terms: Net __ days ___ This quote is valid for 30 days. SUBJECT TO CREDIT APPROVAL. PRODUCT SPECIFICATIONS - AS STATED IN LAB H PRODUCT LITERATURE C-1 ATTACHMENT D TERMS AND CONDITIONS -------------------- General - ------- D-1 1. Prices are exclusive of taxes which, if applicable, will be shown separately on the invoice. 2. The minimum acceptable order is $___ at net billing prices and only items contained herein may be used to meet the $___ minimum order requirement. Seller may change the minimum acceptable order at any time during the term of this Agreement. 3. All orders received shall be subject to credit approval. Likewise, all agreements or orders shall not be considered binding or valid until accepted by a vice president of Agfa Division, Bayer Corporation (hereinafter "Agfa") at its principle office in New Jersey. 4. No drop shipments will be made. 5. It is agreed that any trademarks, trade names, trade dress and original packaging of Agfa Division, Bayer Corporation, and/or the affiliates shall not be used improperly. 6. In the event of any clerical or mathematical error, Agfa is hereby authorized to and reserves the right to correct such errors. 7. Agfa reserves the right to add late charges on any past due amount equivalent to the greater of ___ percent or the maximum allowed by local statutes. 8. No deductions or setoffs may be made from any statement or invoice for any reason without prior written authorization from Agfa. Any unauthorized deduction shall be of no effect and shall be null and void. 9. The resale of Agfa product to a reseller not owned by Buyer is prohibited in this agreement. Transportation - -------------- All shipments will be made F.O.B. _________________. Transportation charges will be prepaid on each order totaling $____ or more, except where indicated, at net billing prices shown in current catalogs, provided such order calls for a single shipment to one destination. If an order totals less than $____, transportation charges will be added to the invoice. All shipments will be made by surface transportation by carriers of Agfa's choice in accordance with Agfa's standard transportation policy. If shipment is made by other means, in accordance with the instructions of the customer, transportation charges will be added to the invoice with no freight allowance, regardless of the amount of the order. Seller may change this transportation minimum at any time during the term of this agreement. Transportation for Equipment Only - --------------------------------- All shipments will be made F.O.B. _________________ with transportation charges to be billed to customer in accordance with Conditions of Sale on the Agfa lab equipment purchase order. Damages, Shortages and Errors - ----------------------------- Inasmuch as all shipments are receipted by the delivering carrier as being in good order, all shipments must be checked immediately on arrival for damage and carton count. If outside damage and/or shortage of carton count, note on Bill of Lading before signing carrier receipt and file claim at once with delivering carrier. If concealed (inside) damage, file claim with delivering carrier within 15 working days of receipt of merchandise. Request inspection by delivering carrier and obtain inspection report. If shortages (inside carton) and/or error in shipment, notify Agfa Division, Bayer Corporation within 48 hours of day merchandise was received. Returns - ------- No returns will be accepted without a prior written authorization form from Agfa Division, Bayer Corporation which will set forth the terms of such returns. Prepaid returns may be required in cases where Agfa Division, Bayer Corporation is free from fault. It is recommended that parcel post shipments be insured. Returns for Equipment shall be in accordance with Conditions of Sale on the Agfa - --------------------- lab equipment purchase order. Terms of Payment - ---------------- Subject to Credit Department approval and unless otherwise specified, terms of payment shall be __% __ days ___, net __ days ___. No cash discount will be allowed where an account is past due. All remittances should be made to Agfa Division, Bayer Corporation at the address shown on the monthly statement. Terms of Payment for Equipment shall be in accordance with the Conditions of - ------------------------------ Sale on the Agfa lab equipment purchase order. Force Majeure - ------------- The nonperformance of Agfa Division, Bayer Corporation of its obligations to deliver any merchandise ordered hereunder shall be excused if such nonperformance is occasioned by any strike or any other labor trouble, flood, fire, accident or any other casualty, act of God, war, governmental restrictions, shortage or inability to obtain raw materials, damage by the elements, failure of equipment or other cause of like or unlike nature beyond the control of Agfa Division, Bayer Corporation. Agfa Division, Bayer Corporation may, in the exercise of reasonable discretion, discontinue shipments to any account, revoke or modify any provisions in this agreement or allocate distribution of any of its products. Warranty - -------- All sales are without warranty of any kind, express or implied including, but not limited to, any warranty of merchantability or fitness for a particular purpose. Agfa's liability is limited to the replacement of products defective in manufacture, labeling, or packaging. In no event shall Agfa Division, Bayer Corporation or its parent, subsidiary or affiliated companies be liable for special or indirect, or consequential damages arising out of any sale or subsequent handling of any product, even where such damages are caused by negligence of Agfa Division, Bayer Corporation or that of its parent, subsidiary or affiliated companies. Warranty for photofinishing equipment shall be in accordance with Conditions of Sale on the Agfa Division, Bayer Corporation lab equipment purchase order. Assurances - ---------- Whenever, in the reasonable judgment of Seller, there exists the possibility that Buyer is unwilling or unable to perform fully its obligations under this agreement, the Seller shall be entitled to demand of Buyer further assurances of due performance as Seller shall reasonably deem proper. If Buyer fails to provide reasonable assurances under this paragraph, Seller may ship goods C.O.D. or terminate this agreement without further liability to Buyer. Security Interest - ----------------- Agfa Division, Bayer Corporation shall retain and the Buyer hereby grants Agfa a purchase money security interest in all equipment and good and their proceeds until all moneys due hereunder are paid in full. Customer shall perform all acts necessary to protect Agfa's security interest. Agfa may file this Agreement or a copy of its as a financing statement. Strict Compliance - ----------------- D-40 The waiver of strict compliance or performance of any of the terms of this Agreement or of any breach thereof on the part of Seller shall not be held or deemed to be a waiver of any subsequent failure to comply strictly with, or perform the same or any other term or condition of this Agreement, or of any breach thereof. Applicable Law - -------------- The interpretation, instruction, performance, and/or enforcement of this document shall be governed by the laws of the State of New Jersey. Should any provision herein be held invalid or unenforceable as written by court of competent jurisdiction, said provision, along with the remainder of the Agreement, shall nonetheless be enforceable to the extent allowable under applicable law. Entire Agreement - ---------------- All previous understanding and commitments, oral or written, made between the parties hereto are merged in this Agreement, which represents the entire Agreement between the parties hereto relating to the subject matter hereof. Except as otherwise stated herein, no amendment or change hereof shall be effective or binding upon the parties hereto unless reduced to writing and signed by both Seller and Buyer. In the event of any conflict between the terms of this Agreement and the terms of any purchase order, the terms hereof shall prevail. Equipment - --------- All purchases and leases of equipment must be accompanied by an Agfa lab equipment purchase order. Termination - ----------- The Seller reserves the right, among other remedies, to either cancel this contract or suspend further deliveries under it in the event Buyer fails to pay for any one shipment when same becomes due. Should Buyer's financial responsibility become unsatisfactory to Seller, cash payments or satisfactory security may be required by Seller. D-41 Prices - ------ This contract is firm and not renegotiable during its term. Prices, as stated on the front hereof, shall remain in effect for the period of the contract unless: 1. There is a significant change in the Seller's cost beyond Seller's control. 2. The price in the market increases by three percent or more. In either event, prices are guaranteed for a minimum of 90 days from the date of this contract. Thirty days written notice must be provided before a price change becomes effective. Confidentiality --------------- It is understood that the terms of this Agreement shall be kept confidential between the parties herein and shall be disclosed only as required to lenders, counsel, auditors or others having legitimate business interest in the contents hereof. Buyer shall not, without Seller's permission, reveal any confidential information or trade secrets regarding Seller's products, business or methods of operation learned by Buyer during the term of this Agreement. Effective April 1995. EX-11 5 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 SEATTLE FILMWORKS, INC. COMPUTATION OF EARNINGS PER SHARE
Fiscal Years Ended September 30, September 24, September 25, 1995 1994 1993 =========================================================================================================== COMPUTATION OF PRIMARY EARNINGS PER SHARE: - ------------------------------------------- Weighted average shares outstanding 7,067,446 7,585,005 7,593,504 Net effect of dilutive stock options based on the treasury stock method using average market price 688,145 604,040 591,240 ------- ------- ------- Total shares and equivalents 7,755,591 8,189,045 8,184,744 ========== ========= ========== Net income $5,682,000 $4,438,000 $3,570,000 ========== ========== ========== PRIMARY EARNINGS PER SHARE $.73 $.54 $.43 ==== ==== ====
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE: ------------------------------------------------
Weighted average shares outstanding 7,067,446 7,585,005 7,593,504 Net effect of dilutive stock options based on the treasury stock method using the higher of year-end market price or average market price 753,728 678,113 645,267 Total shares and equivalents 7,821,174 8,263,118 8,238,771 ========= ========= ========= Net income $5,682,000 $4,438,000 $3,570,000 ========== ========= ========== FULLY DILUTED EARNINGS PER SHARE $.73 $.54 $.43 ==== ==== ====
EX-23 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF 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 Statement (Form S-8 Number 33-81332) pertaining to the Seattle FilmWorks, Inc. Amended and Restricted Incentive Stock Option Plan and the Amended and Restated 1987 Stock Option Plan of our report dated November 8, 1995, with respect to the financial statements and schedules of Seattle FilmWorks, Inc. included in the Annual Report (Form 10-K) for the year ended September 30, 1995. //s// Ernst & Young LLP Seattle, Washington December 22, 1995 EX-27 7 ARTICLE 5, FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEATTLE FILMWORKS, INC. 1995 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1995 SEP-25-1994 SEP-30-1995 9,905 0 1,242 0 4,626 16,493 3,200 0 28,244 8,002 0 71 0 0 17,861 28,244 0 62,185 38,128 15,729 (256) 0 4 8,580 2,898 0 0 0 0 5,682 .73 .73 ASSET VALUES REPRESENT NET AMOUNTS
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