-----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, EK1jInwZJR/tDELeuLnahZ697hSScC2WEAORDVB/2/ir3X8iZ3VpTnjFZIWcPqE3 fr06NlDSv0CEOZTW2UoxnA== 0001032210-98-000823.txt : 19980803 0001032210-98-000823.hdr.sgml : 19980803 ACCESSION NUMBER: 0001032210-98-000823 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980730 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-Q SEC ACT: SEC FILE NUMBER: 000-15338 FILM NUMBER: 98674215 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-Q 1 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JUNE 27, 1998 Commission file No. 0-15338 ------------- ------- SEATTLE FILMWORKS, INC. ------------------------ (Exact name of registrant as specified in its charter.) WASHINGTON 91-0964899 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1260 16TH AVENUE WEST, SEATTLE, WA 98119 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 281-1390 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No ----- ----- As of July 24, 1998, there were issued and outstanding 16,768,770 shares of common stock, par value $.01 per share. Index to Exhibits at Page 14 Page 1 of 27 SEATTLE FILMWORKS, INC. INDEX ----- Page No. -------- PART I -- FINANCIAL INFORMATION Item 1 - Financial Statements 3-7 Consolidated Balance Sheets as of June 27, 1998 and September 27, 1997 3-4 Consolidated Statements of Income for the third quarter and nine months ended June 27, 1998 and June 28, 1997 5 Consolidated Statements of Cash Flows for the nine months ended June 27, 1998 and June 28, 1997 6 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-12 PART II -- OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 12 SIGNATURES 13 INDEX TO EXHIBITS 14 EXHIBITS 15-27 Page 2 of 27 PART I -- FINANCIAL INFORMATION ------------------------------- ITEM 1 - FINANCIAL STATEMENTS SEATTLE FILMWORKS, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
(UNAUDITED) (NOTE) June 27, September 27, ASSETS 1998 1997 =================================================================================================== CURRENT ASSETS Cash and cash equivalents $ 6,635 $10,252 Securities available-for-sale 6,173 5,062 Accounts receivable, net of allowance for doubtful accounts 2,237 3,680 Inventories 11,062 8,998 Capitalized promotional expenditures 302 211 Prepaid expenses and other 388 743 Deferred income taxes 385 313 ------- ------- TOTAL CURRENT ASSETS 27,182 29,259 FURNITURE, FIXTURES, AND EQUIPMENT, at cost, less accumulated depreciation 11,274 7,564 CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 16,645 13,882 DEPOSITS AND OTHER ASSETS 125 285 NON-COMPETE AGREEMENT, net of accumulated amortization 94 376 ------- ------- TOTAL ASSETS $55,320 $51,366 ======= =======
Note: The September 27, 1997 consolidated balance sheet has been derived from audited consolidated financial statements. See notes to consolidated financial statements. Page 3 of 27 SEATTLE FILMWORKS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (in thousands, except per share and share data)
(UNAUDITED) (NOTE) June 27, September 27, LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 ==================================================================================================== CURRENT LIABILITIES Accounts payable $ 4,467 $ 3,588 Current portion of capital lease obligations 171 Accrued expenses 822 1,402 Accrued compensation 1,190 1,931 Income taxes payable 1,871 2,450 ------- ------- TOTAL CURRENT LIABILITIES 8,521 9,371 LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current portion (Note B) 751 DEFERRED INCOME TAXES 5,147 4,394 ------- ------- TOTAL LIABILITIES 14,419 13,765 SHAREHOLDERS' EQUITY Preferred Stock, $.01 par value, authorized 2,000,000 shares, none issued Common Stock, $.01 par value, authorized 101,250,000 shares, issued and outstanding 16,768,770 168 164 Additional paid-in capital 779 2,459 Retained earnings 39,954 34,978 ------- ------- TOTAL SHAREHOLDERS' EQUITY 40,901 37,601 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $55,320 $51,366 ======= =======
Note: The September 27, 1997 consolidated balance sheet has been derived from audited consolidated financial statements. See notes to consolidated financial statements. Page 4 of 27 SEATTLE FILMWORKS, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share and share data)
THIRD QUARTER ENDED NINE MONTHS ENDED -------------------------- ------------------------- JUNE 27, JUNE 28, JUNE 27, JUNE 28, 1998 1997 1998 1997 ============================================================================================ Net revenues $24,928 $25,553 $68,838 $68,446 Cost of goods and services 14,293 13,977 39,673 39,721 ------- ------- ------- ------- GROSS PROFIT 10,635 11,576 29,165 28,725 Operating expenses: Customer acquisition costs 4,309 4,289 12,669 11,533 Other selling expenses 1,882 2,332 5,872 6,192 Research and development 154 143 450 525 General and administrative 1,117 701 3,216 2,821 ------- ------- ------- ------- Total operating expenses 7,462 7,465 22,207 21,071 ------- ------- ------- ------- INCOME FROM OPERATIONS 3,173 4,111 6,958 7,654 Other income (expense): Interest expense (11) (11) Interest income 152 131 541 418 Non operating income, net 102 37 90 46 ------- ------- ------- ------- Total other income 243 168 620 464 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 3,416 4,279 7,578 8,118 Provision for income taxes (1,175) (1,487) (2,602) (2,823) ------- ------- ------- ------- NET INCOME $ 2,241 $ 2,792 $ 4,976 $ 5,295 ======= ======= ======= ======= Diluted Earnings per Share $.13 $.16 $.28 $.30 ======= ======= ======= ======= Basic Earnings per Share $.13 $.17 $.30 $.33 ======= ======= ======= ======= Weighted Average Shares and Equivalents Outstanding - Diluted 17,490,000 17,728,000 17,540,000 17,771,000 =========== =========== =========== =========== Weighted Average Shares - Basic 16,669,000 16,308,000 16,591,000 16,280,000 =========== =========== =========== ===========
See notes to consolidated financial statements. Page 5 of 27 SEATTLE FILMWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Nine Months Ended -------------------- June 27, June 28, 1998 1997 =================================================================================== OPERATING ACTIVITIES: - --------------------- Net income $ 4,976 $ 5,295 Charges to income not affecting cash: Depreciation and amortization 2,648 2,030 Amortization of capitalized customer acquisition expenditures 11,767 10,566 Deferred income taxes 681 1,435 Net change in receivables, inventories, payables and other (1,302) (1,340) Capitalized promotional expenditures, net (91) (18) Additions to capitalized customer acquisition expenditures (14,530) (15,097) -------- -------- NET CASH FROM OPERATING ACTIVITIES 4,149 2,871 INVESTING ACTIVITIES: - --------------------- Purchase of furniture, fixtures, and equipment (4,932) (4,346) Purchases of securities available-for-sale (5,456) (7,549) Sales of securities available-for-sale 4,345 6,344 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (6,043) (5,551) FINANCING ACTIVITIES: - --------------------- Purchases of Common Stock (2,670) (824) Proceeds from issuance of Common Stock 994 681 Payment on capital lease obligations (47) -------- -------- NET CASH USED IN FINANCING ACTIVITIES (1,723) (143) -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (3,617) (2,823) Cash and cash equivalents at beginning of period 10,252 6,135 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,635 $ 3,312 ======== ========
Supplemental Information - Noncash financing and investing activity: - -------------------------------------------------------------------- During the third quarter of fiscal 1998 the Company incurred a capital lease obligation of $969,000 related to the financing of equipment purchases. See notes to consolidated financial statements. Page 6 of 27 SEATTLE FILMWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A -- BASIS OF PRESENTATION Seattle FilmWorks, Inc. (the "Company") is a leading direct-to-consumer marketer and provider of high-quality amateur photofinishing services and products. The Company offers an array of complementary services and products, primarily on a mail-order basis, under the brand name Seattle FilmWorks(R). To a lesser extent, the Company provides services, products and photofinishing supplies on a wholesale basis to a variety of commercial customers. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation of interim results have been included. The Company follows a policy of recording its interim periods and year-end on a 5 week, 4 week and 4 week basis for comparability of results and to be consistent with its internal weekly reporting. Operating results for the third quarter and nine months ended June 27, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending September 26, 1998. For further information, refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 27, 1997. NOTE B -- LEASES During the third quarter of fiscal year 1998, the Company financed the purchase of $969,000 of equipment via a five-year capital lease consisting of sixty monthly payments of $19,000 commencing April 1998. The equipment is being depreciated on a straight-line basis over five years. NOTE C -- EARNINGS PER SHARE In 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is similar to the previously reported primary earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to Statement No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
THIRD QUARTER ENDED NINE MONTHS ENDED ------------------------------- ------------------------------ JUNE 27, 1998 JUNE 28, 1997 JUNE 27, 1998 JUNE 28, 1997 ==================================================================================================================================== Numerator for basic and diluted earnings per share: Net income $ 2,241,000 $ 2,792,000 $ 4,976,000 $ 5,295,000 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share - weighted-average shares 16,669,000 16,308,000 16,591,000 16,280,000 Effect of dilutive securities: Stock options 821,000 1,420,000 949,000 1,491,000 ----------- ----------- ----------- ----------- Denominator for diluted earnings per share 17,490,000 17,728,000 17,540,000 17,771,000 =========== =========== =========== =========== Basic Earnings per Share $ .13 $ .17 $ .30 $ .33 =========== =========== =========== =========== Diluted Earnings per Share $ .13 $ .16 $ .28 $ .30 =========== =========== =========== ===========
Page 7 of 27 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Information - --------------------------- Statements in this report concerning development and introduction of new services, expected future expenses and any other statement which may be construed as a prediction of future performance or events are forward-looking statements, the occurrence of which are subject to a number of known and unknown risks and uncertainties which might cause actual results, achievements or occurrences to differ materially from those expressed or implied by such statements. These risks and uncertainties include the Company's ability to create and implement effective customer acquisition techniques; timely development, delivery and market acceptance of products and services which differentiate the Company from other photofinishers; technological changes; service and product development; production difficulties or delays due to technical difficulties, equipment failures, supply constraints or other factors; changing economic conditions; the impact of competitive products and pricing; and other risks including those described in the Company's Annual Report on Form 10-K and those described from time to time in the Company's other filings with the Securities and Exchange Commission, press releases and other communications. General - ------- Seattle FilmWorks, Inc. (the "Company") is a leading direct-to-consumer marketer and provider of high-quality amateur photofinishing services and products. The Company offers an array of complementary services and products primarily on a mail-order basis under the brand name Seattle FilmWorks(R). The Company has experienced an increase in net revenues in each fiscal year since 1990. Management believes this growth is attributable principally to its direct- marketing programs, including the customer acquisition technique of offering two rolls of film for $2.00 or less (the "Introductory Offer"). The Introductory Offer has been nationally advertised in package inserts, newspaper supplements and magazines and through various other direct-response media. Beginning in fiscal 1995, the Company shifted the focus of, and substantially expanded, its customer acquisition programs. This shift in focus included the targeted marketing of users of personal computers. Management believes that these steps are the primary reasons for the growth of net revenues during fiscal years 1996 and 1997. In addition, management believes its core photofinishing business has benefited from the introduction of digital imaging services and products, such as the January 1994 introduction of Pictures On Disk(TM) and the October 1995 introduction of PhotoMail(TM) Internet delivery. Customer acquisition costs are comprised of the costs of generating a lead and the amortization of direct costs associated with the Company's promotional offers sent to prospective and existing customers. The costs of generating a lead include all direct-response media, advertising and other costs associated with developing target customer lists. These costs per lead have declined during each of the last three fiscal years. The direct costs of customer acquisition include film, postage and printed material costs associated with mailings to prospective and existing customers. The direct costs of customer acquisition are capitalized as an asset on the Company's consolidated balance sheet as "capitalized customer acquisition expenditures." Capitalized customer acquisition expenditures relating to prospective customers are amortized over three years, and capitalized customer acquisition expenditures relating to certain marketing activities to groups of existing customers are amortized over six months. These amortization rates are based on estimates of the timing of future roll processing volumes per customer. The proportion of capitalized customer acquisition expenditures to be amortized over three years relative to those to be amortized over six months will vary from period to period based on the timing and mix of promotional activities. Rates of amortization are compared from time to time with the actual timing of roll processing volumes in order to assess whether the amortization rates appropriately match the direct costs of customer acquisition with the related revenues. If the Company were to experience a material change in the timing of roll processing volumes, it could be required to accelerate the rate of amortization of capitalized customer acquisition expenditures, which could have a material adverse effect on the Company's business, financial condition and operating results. Page 8 of 27 Customer acquisition costs as a percentage of net revenues increased to 18.4% in the first nine months of fiscal 1998 as compared to 16.9% in the first nine months of fiscal 1997. Management believes this increase in customer acquisition costs as a percentage of net revenues was due primarily to expansion of the Company's customer acquisition programs and a decrease in the rate of growth in fiscal year-to-date net revenues. Future periods may reflect increased customer acquisition costs due to timing of the amortization of capitalized expenditures or the development and initiation of additional marketing programs. For tax purposes, customer acquisition expenditures are expensed as incurred, thereby reducing current federal income tax liabilities and increasing deferred federal income tax liabilities. Net income as a percentage of net revenues decreased to 7.2% for the first nine months of fiscal 1998 as compared to 7.7% for the same period of fiscal 1997 primarily due to the relationship between changes in costs of goods sold, customer acquisition costs, other selling expenses and other operating expenses which in turn are primarily driven by changes in sales mix and the Company's customer acquisition strategy. Operating results will fluctuate in the future due to changes in the mix of sales, intensity and effectiveness of promotional activities, price increases by suppliers, introductions of new products, research and development requirements, actions by competitors, foreign currency exchange rates, conditions in the direct-to-consumer market and the photofinishing industry in general, national and global economic conditions and other factors. Demand for the Company's photo-related services and products is highly seasonal, with the highest volume of photofinishing activity typically occurring during the summer months. However, seasonality of demand may be offset by the introduction of new services and products, changes in the level of effectiveness of customer acquisition programs, activities by competitors, production difficulties and other factors. This seasonality, when combined with the general growth of the Company's photofinishing business, has produced greater photofinishing net revenues during the last half of the Company's fiscal year (April through September), with a peak occurring in the fourth fiscal quarter. Net income is affected by the seasonality of the Company's net revenues due to the fixed nature of a portion of the Company's operating expenses, seasonal variation in sales mix and the Company's practice of relatively higher expenditures on marketing programs prior to the summer months. RESULTS OF OPERATIONS The following table presents information from the Company's consolidated statements of income, expressed as a percentage of net revenues for the periods indicated.
Third Quarter Ended Nine Months Ended --------------------- -------------------- June 27, June 28, June 27, June 28, 1998 1997 1998 1997 ================================================================================ Net revenues 100.0% 100.0% 100.0% 100.0% Cost of goods and services 57.3 54.7 57.6 58.0 ----- ----- ----- ----- GROSS PROFIT 42.7 45.3 42.4 42.0 Operating expenses: Customer acquisition costs 17.3 16.8 18.4 16.9 Other selling expenses 7.5 9.1 8.5 9.0 Research and development 0.6 0.6 0.7 0.8 General and administrative 4.5 2.7 4.7 4.1 ----- ----- ----- ----- Total operating expenses 29.9 29.2 32.3 30.8 ----- ----- ----- ----- INCOME FROM OPERATIONS 12.8 16.1 10.1 11.2 Total other income 0.9 0.6 0.9 0.6 ----- ----- ----- ----- INCOME BEFORE INCOME TAXES 13.7 16.7 11.0 11.8 Provision for income taxes 4.7 5.8 3.8 4.1 ----- ----- ----- ----- NET INCOME 9.0% 10.9% 7.2% 7.7% ===== ===== ===== =====
Page 9 of 27 Net revenues for the third quarter of fiscal 1998 decreased 2.4% to $24,928,000 as compared to net revenues of $25,553,000 in the third quarter of fiscal 1997. For the nine months ended June 27, 1998, net revenues increased 0.6% to $68,838,000 compared to $68,446,000 for the same period of fiscal 1997. Net revenues for the third quarter and for the first nine months in fiscal 1998 were affected by lower-than-expected photofinishing volumes and a decline in net revenues from ancillary businesses. Photofinishing revenues were weaker in the latter part of June and this pattern has continued into the month of July. While increased competition and other factors may be contributing to reduced photofinishing volumes, management's statistical analysis of marketing programs indicates photofinishing volumes continue to be negatively affected by extended delivery times experienced by customers during last summer. Production problems associated with implementing certain new equipment during the third quarter of fiscal 1997 resulted in shipping delays during the third and fourth quarters of fiscal 1997. Management believes the Company lost a significant number of customers due to the extended delivery times. During the third quarter of fiscal 1997 delayed customer orders resulted in the recording of $600,000 in deferred revenues. Also, net revenues in future quarters will be affected by the Company's decision in June 1998 to discontinue wholesale film sales in certain markets in Asia. During the fourth quarter of fiscal 1997 international wholesale film orders produced $2,300,000 in net revenues. Cost of goods and services consist of labor, postage and supplies related to the Company's services and products. Gross profit in the third quarter of fiscal 1998 decreased to 42.7% of net revenues compared to 45.3% in the third quarter of fiscal 1997. For the first nine months of fiscal 1998, gross profit increased to 42.4% compared to 42.0% for the same period of fiscal 1997. Gross profit in the third quarter of fiscal 1998 was negatively affected by higher production labor costs and equipment costs incurred to ensure timely delivery of the level of photofinishing volumes that had been planned for earlier in the year. The fiscal year-to-date increase in gross profit was due primarily to a decrease in certain materials costs and a product mix containing a higher percentage of the Company's Seattle FilmWorks(R) branded products, which carry a higher gross profit margin than the Company's other services and products. Fluctuations in gross profit may occur in future periods due to fluctuations in revenues, mix of product sales, intensity of promotional activities, changes in materials costs and other factors. Total operating expenses in the third quarter of fiscal 1998 increased to 29.9% of net revenues compared to 29.2% in the third quarter of fiscal 1997. The increase was primarily due to increased legal expenses related to the defense of an action filed by Fuji Photo Film Co., Ltd. with the International Trade Organization against a number of importers, including the Company's OptiColor, Inc. subsidiary, regarding the import and sale of recycled cameras. Operating expenses also include higher costs related to information systems to enhance and support the marketing and production systems. For the first nine months of fiscal 1998 total operating expenses increased to 32.3% of net revenues compared to 30.8% for the same period of fiscal 1997. The increase, as a percent of net revenues, was due primarily to an increase in customer acquisition expenses partially offset by a decrease in other selling expenses. These expenses affect revenues in current and future periods. The Company's principal technique for acquiring new customers is its Introductory Offer of two rolls of 35 mm film for $2.00 or less. The Company capitalized $14,530,000 of customer acquisition expenditures in the first three quarters of fiscal 1998 compared to $15,097,000 for the first three quarters of fiscal 1997 while amortization of these costs was $11,767,000 and $10,566,000 during these two same periods, respectively. Capitalized customer acquisition expenditures as of June 27, 1998 increased to $16,645,000 compared to $13,882,000 as of September 27, 1997. The increase reflects higher levels of customer acquisition activity undertaken to expand the customer base and to replace customers management believes were lost in fiscal 1997 due to summer processing delays. Each year the Company prepares detailed plans for its various marketing activities, including the mix between customer acquisition expenditures and other selling expenses. However, the Company occasionally changes both the mix and total marketing expenditures between periods to take advantage of marketing opportunities as they become available. Future periods may reflect increased customer acquisition costs due to the timing of the amortization of capitalized expenditures or the development and initiation of additional marketing programs. Other selling expenses include marketing costs associated with ancillary marketing activities building brand awareness, testing of new marketing strategies and marketing to existing customers, as well as certain costs associated with acquiring new customers. Other selling expenses in the third quarter of fiscal 1998 decreased to 7.5% of net revenues compared to 9.1% of net revenues for the third quarter of fiscal 1997. For the first nine months of fiscal 1998, other selling expenses were 8.5% of net revenues compared to 9.0% of net revenues for the first nine months of fiscal 1997. The decrease was due mainly to a decrease in marketing activities directed at both new and existing customers which the Company expenses when the activities occur. Page 10 of 27 Research and development expenses increased to $154,000 in the third quarter of fiscal 1998 as compared to $143,000 for the third quarter of fiscal 1997. Research and development expenses for the first nine months of fiscal 1998 decreased to $450,000 as compared to $525,000 for the first nine months of fiscal 1997 as a result of lower contract services and equipment costs. Research and development expenses consist primarily of costs incurred in researching new computerized digital imaging concepts, developing computer software products and creating equipment necessary to provide customers with new computer-related photographic services and products. General and administrative expenses increased to $1,117,000 for the third quarter of fiscal 1998 as compared to $701,000 for the third quarter of fiscal 1997. General and administrative costs increased to $3,216,000 for the first nine months of fiscal 1998 as compared to $2,821,000 for the first nine months of fiscal 1997. The increases were due primarily to legal expenses associated with the defense of an action filed by Fuji Photo Film Co., Ltd. with the International Trade Commission. Fuji alleges that a number of companies, including the Company's OptiColor subsidiary, violates patents on single use cameras by bringing recycled single use cameras into the United States for resale. The Company anticipates increased legal expenses to continue into the future periods. General and administrative expenses also contain higher costs related to information systems to enhance and support the marketing and production systems. General and administrative expenses consist of costs related to computer operations, human resource functions, finance, accounting, legal, investor relations and general corporate activities. Total other income for the third quarter of fiscal 1998 increased to $243,000 as compared to $168,000 for the third quarter of fiscal 1997. For the first nine months of fiscal 1998, total other income was $620,000 as compared to $464,000 for the same period of fiscal 1997. The increases in the fiscal 1998 periods resulted from higher interest income and cash discounts from materials purchases. The federal income tax rate for the first nine months of fiscal 1998 was 34.3% as compared to 34.8% in the first nine months of fiscal 1997. The decrease was due primarily to a higher balance of tax exempt investments. Net income in the third quarter of fiscal 1998 was $2,241,000, or $.13 diluted earnings per share, compared to $2,792,000 or $.16 diluted earnings per share for the third quarter of fiscal 1997. Net income for the first nine months of fiscal 1998 was $4,976,000 or $.28 diluted earnings per share as compared to $5,295,000 or $.30 diluted earnings per share for the same period of fiscal 1997. The decreases in net income were primarily attributable to lower net revenues and gross profit and increases in operating expenses. LIQUIDITY AND CAPITAL RESOURCES As of July 24, 1998, the Company's principal sources of liquidity included cash and short-term investments of $14,230,000 and an unused revolving line of credit of $6,000,000. The ratio of current assets to current liabilities for the Company was 3.2 to 1 at the end of the third quarter of fiscal 1998, compared to a current ratio of 3.1 to 1 at September 27, 1997. The Company increased inventory levels by $2,064,000 to accommodate expanded marketing plans while accounts receivable decreased by $1,443,000 primarily due to payments received for wholesale film orders shipped in the fourth quarter of fiscal 1997. Accrued compensation and accrued expenses decreased by $1,321,000 primarily as a result of payment of fiscal year 1997 liabilities. Federal income taxes payable were favorably affected by the increase in capitalized customer acquisition expenditures which are expensed as incurred for federal income tax purposes, thereby having the effect of reducing current federal income tax liabilities and increasing deferred federal income tax liabilities. On January 22, 1997, the Company announced that it may repurchase shares of its Common Stock, either through open market purchases at prevailing market prices, through block purchases or in privately negotiated transactions. Repurchases may be commenced or discontinued by the Company at any time subject to certain conditions established by the Company's Board of Directors. Although the number of shares to be repurchased is uncertain, any repurchased shares will to some degree offset the dilutive effect on earnings per share of shares of Common Stock issued under the Company's stock option and stock purchase plans. During the first nine months of fiscal 1998 the Company repurchased 270,767 shares of common stock for a total of $2,670,000. Page 11 of 27 The Company currently expects to spend approximately $750,000 for capital expenditures during the remainder of fiscal 1998, principally for photofinishing equipment, data processing equipment to support its digital and Internet-related imaging services and for leasehold improvements. During the third quarter of fiscal 1998 approximately $969,000 of capital purchases was financed through a capital leasing transaction consisting of sixty monthly payments of $19,000 commencing April 1998. The Company is currently evaluating its computer systems to identify potential problems relating to the Year 2000 date change but has not yet determined whether it has material Year 2000 issues. The Company does not expect the cost to modify its computer systems to address Year 2000 issues will be material to its financial condition or results of operations, and does not anticipate any material disruption in its operations as a result of Year 2000 issues. The Company is also contacting its suppliers to get information regarding the potential impact of Year 2000 issues. In the event that the Company or any of the Company's significant suppliers or customers does not successfully and timely address Year 2000 issues, the Company's business or operations could be adversely affected. The Company currently anticipates that existing funds together with anticipated cash flow from operations and the Company's available line of credit of $6,000,000 will be sufficient to finance its operations and planned capital expenditures and to service its indebtedness for the foreseeable future. However, if the Company does not generate sufficient cash from operations to satisfy its ongoing expenses, the Company will be required to seek external sources of financing or to refinance its obligations. Possible sources of financing include the sale of equity securities or additional bank borrowings. There can be no assurance that the Company will be able to obtain adequate financing in the future. PART II -- OTHER INFORMATION ---------------------------- ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. --------- 10.1 First Amendment to Credit Agreement with Wells Fargo Bank, National Association as of February 24, 1998 27.1 Financial Data Schedule 1998 27.2 Financial Data Schedule Restated 1997 (b) REPORTS ON FORM 8-K. -------------------- None Page 12 of 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEATTLE FILMWORKS, INC. DATED: July 30, 1998 /s/ Gary R. Christophersen -------------------------------------------- Gary R. Christophersen President/Chief Executive Officer (Principal Executive Officer) /s/ Case H. Kuehn -------------------------------------------- Case H. Kuehn Vice President-Finance/Treasurer (Principal Financial and Chief Accounting Officer) Page 13 of 27 INDEX TO EXHIBITS SEATTLE FILMWORKS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 27, 1998
Exhibit Description Page No. - --------- ------------------------------------------------------------------- -------- 10.1 First Amendment to Credit Agreement with Wells Fargo Bank, National 15 Association as of February 24, 1998 27.1 Financial Data Schedule 1998 27 27.2 Financial Data Schedule Restated 1997
Page 14 of 27 EX-10.1 2 FIRST AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.1 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of February 24, 1998, by and between SEATTLE FILMWORKS, INC., a Washington corporation, OPTICOLOR, INC., a Washington corporation, and SEATTLE FILMWORKS MANUFACTURING COMPANY, a Washington corporation (collectively, "Borrowers," and each individually, a "Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS -------- WHEREAS, Borrowers are currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrowers and Bank dated as of March 1, 1997, as amended from time to time ("Credit Agreement"). WHEREAS, Bank and Borrowers have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows: 1. Section 1.1.(a) is hereby amended by deleting "March 31, 1998" as the last day on which Bank will make advances under the Line of Credit, and by substituting for said date "March 31, 1999," with such change to be effective upon the execution and delivery to Bank of a promissory note substantially in the form of Exhibit A attached hereto (which promissory note shall replace and be deemed the Line of Credit Note defined in and made pursuant to the Credit Agreement) and all other contracts, instruments and documents required by Bank to evidence such change. 2. Section 1.1.(d) is hereby deleted in its entirety, and the following substituted therefor: "(d) Conversion of Line of Credit. Subject to the terms and conditions hereof, the principal balance of the Line of Credit outstanding on March 31, 1999, which is not in excess of $3,000,000.00, shall automatically be converted to a term loan (the "Converted Term Loan"). Any amount of principal balance in excess of $3,000,000.00 shall be due and payable on such date in accordance with the terms of the Line of Credit Note. The obligation of Borrowers to repay the Converted Term Loan shall be evidenced by a promissory note substantially in the form of Exhibit B attached hereto ("Converted Term Loan Note"), all terms of which are incorporated herein by this reference. Principal and interest on the Converted Term Loan shall be repaid in accordance with the provisions of the Converted Term Loan Note. Borrowers may prepay principal on the Converted Term Loan solely in accordance with the provisions of the Converted Term Loan Note." Exhibit B attached hereto shall replace Exhibit B to the Credit Agreement and be deemed the Converted Term Loan Note defined in and made pursuant to the Credit Agreement. The parties acknowledge and agree that no conversion of the Line of Credit balance has occurred under Section 1.1(d). 3. Sections 4.8.(b) and (c) are hereby deleted in their entireties, and the following substituted therefor: "(b) Net Worth measured quarterly at the end of each fiscal quarter, not less than $30,000,000.00, with "Net Worth" defined as total stockholders' equity. (c) Total Liabilities divided by Net Worth not greater than 1.5 to 1.0, measured quarterly at the end of each fiscal quarter, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities, and with "Net Worth" as defined above." 4. Section 5.2(b) is hereby deleted in its entirety, and the following substituted therefor: "CAPITAL EXPENDITURES. Make any additional investment in fixed or capital assets in any fiscal year, which, when combined with (a) all other investments in fixed or capital assets made by Borrowers in such fiscal year as of the date such proposed additional investment, and (b) the Aggregate Consideration (as such term is defined in Section 5.4 hereof) paid by Borrowers in Permitted Acquisitions (as such term is -2- defined in Section 5.4) in such fiscal year as of such date, exceeds the greater of (i) $7,000,000.00, less outstanding bank debt, or (ii) Borrowers' consolidated cash and marketable securities, less outstanding bank debt, in either case as reported by Parent Company in its most recent report filed with the SEC on Form 10-Q or 10-K. Notwithstanding the foregoing, no additional investment in fixed or capital assets shall be made if Parent Company is then delinquent in filing its annual or quarterly report on Form 10-Q or Form 10-K with the SEC." 5. Borrowers shall pay to Bank a non-refundable commitment fee for the Line of Credit equal to $7,500.00, which fee shall be due and payable in full upon the execution of this Amendment. 6. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 7. Borrowers hereby remake all representations and warranties contained in the Credit Agreement and reaffirm all covenants set forth therein. Borrowers further certify that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. 8. References in the Credit Agreement to Seattle Filmworks Manufacturing Company, Inc. are hereby deemed to read "Seattle Filmworks Manufacturing Company." ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. -3- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. WELLS FARGO BANK, SEATTLE FILMWORKS, INC. NATIONAL ASSOCIATION By: /s/ Case H. Kuehn By: /s/ Donald Ralston Donald Ralston Title: Vice President Vice President OPTICOLOR, INC. By: /s/ Case H. Kuehn Title: Vice President SEATTLE FILMWORKS MANUFACTURING COMPANY By: /s/ Case H. Kuehn Title: Vice President -4- "EXHIBIT A" REVOLVING LINE OF CREDIT NOTE $6,000,000.00 Seattle, Washington February 24, 1998 FOR VALUE RECEIVED, the undersigned SEATTLE FILMWORKS, INC., OPTICOLOR, INC., and SEATTLE FILMWORKS MANUFACTURING COMPANY (collectively, "Borrowers," individually a "Borrower"), promise to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at Puget Sound RCBO, 999 Third Avenue, 11th Floor, Seattle, Washington, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Six Million Dollars ($6,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined: (a) "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in Washington are authorized or required by law to close. (b) "Fixed Rate Term" means a period commencing on a Business Day and continuing for one (1), two (2) or three (3) months, as designated by any Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than Five Hundred Thousand Dollars ($500,000.00); and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day. (c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula: LIBOR = Base LIBOR ------------------------------- 100% - LIBOR Reserve Percentage (i) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Each Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market. (ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. (d) "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. INTEREST: (a) Interest. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 365-day year, actual days elapsed) either (i) at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be three quarters of a percent (.75%) above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. (b) Selection of Interest Rate Options. At any time any portion of this Note bears interest determined in relation to LIBOR, it may be continued by any Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate -2- or to LIBOR for a new Fixed Rate Term designated by any Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, any Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by any Borrower. At such time as any Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, the applicable Borrower shall give Bank notice specifying: (i) the interest rate option selected by the Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone so long as, with respect to each LIBOR selection, (A) Bank receives written confirmation from not later than three (3) Business Days after such telephone notice is given, and (B) such notice is given to Bank prior to 10:00 a.m., California time, on the first day of the Fixed Rate Term. For each LIBOR option requested hereunder, Bank will quote the applicable fixed rate to the applicable Borrower at approximately 10:00 a.m., California time, on the first day of the Fixed Rate Term. If the applicable Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by the applicable Borrower shall be subject to a redetermination by Bank of the applicable fixed rate; provided however, that if the applicable Borrower fails to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Bank shall have no obligation to permit a LIBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, the applicable Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied. (c) Additional LIBOR Provisions. (i) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly give notice thereof to the applicable Borrower. If such notice is given and until such notice has been withdrawn by Bank, then (A) no new LIBOR option may be selected by any Borrower, and (B) any portion of the outstanding principal balance hereof which bears interest determined in relation to LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate. (ii) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank (A) to make LIBOR options available hereunder, or (B) to maintain interest rates based on -3- LIBOR, then in the former event, any obligation of Bank to make available such unlawful LIBOR options shall immediately be canceled, and in the latter event, any such unlawful LIBOR-based interest rates then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any LIBOR-based interest rates to remain in effect until the expiration of the Fixed Rate Term applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing events, Borrowers shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any LIBOR options made available to Borrowers hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrowers. (iii) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (A) subject Bank to any tax, duty or other charge with respect to any LIBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or (B) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of Bank; or (C) impose on Bank any other condition; and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any LIBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrowers shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such LIBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR options made available to Borrowers hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrowers. (d) Payment of Interest. Interest accrued on this Note on -4- any portion of the outstanding principal balance of this Note that bears interest determined in relation to the Prime Rate shall be payable on the last day of each month, commencing March 31, 1998, and at the earliest of (i) repayment of the applicable borrowing, or (ii) the conversion of the borrowing to a LIBOR borrowing hereunder. Interest accrued on this Note on any portion of the outstanding principal balance of this Note that bears interest determined in relation to LIBOR shall be payable on the last day of the relevant Fixed Rate Term. Notwithstanding anything contained herein to the contrary, all accrued and unpaid interest under this Note shall be fully due and payable on the maturity date of this Note. (e) Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note. BORROWING AND REPAYMENT: (a) Borrowing and Repayment. Borrowers may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on March 31, 1999. (b) Advances. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (i) Gary R. Christophersen or Case H. Kuehn or Loran Cashmore Bond, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance -5- is or has been authorized by any Borrower. (c) Application of payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first. PREPAYMENT: (a) Prime Rate. Borrowers may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. (b) LIBOR. Borrowers may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of One Hundred Thousand Dollars ($100,000.00); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrowers, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrowers shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month: (i) Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto. (ii) Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above. Each Borrower acknowledges that prepayment of such amount may -6- result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Each Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrowers fail to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum four percent (4%) above the Prime Rate in effect from time to time (computed on the basis of a 365-day year, actual days elapsed). Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrowers and Bank dated as of March 1, 1997, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. (b) Obligations Joint and Several. Should more than one -7- person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several, as further provided in the Credit Agreement. (c) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of Washington. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. SEATTLE FILMWORKS, INC. By: /s/ Case H. Kuehn Title: Vice President OPTICOLOR, INC. By: /s/ Case H. Kuehn Title: Vice President SEATTLE FILMWORKS MANUFACTURING COMPANY By: /s/ Case H. Kuehn Title: /s/ Vice President -8- EX-27.1 3 FINANCIAL DATA SCHEDULE 1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEATTLE FILMWORKS THIRD QUARTER 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS SEP-26-1998 SEP-28-1997 JUN-27-1998 12,808 0 2,237 0 11,062 27,182 11,274 0 55,320 8,521 0 0 0 168 40,733 55,320 0 68,838 39,673 22,207 (631) 0 11 7,578 2,602 0 0 0 0 4,976 .30 .28 ASSET VALUES REPRESENT NET AMOUNTS
EX-27.2 4 FINANCIAL DATA SCHEDULE RESTATED 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEATTLE FILMWORKS, INC. THIRD QUARTER 10-Q - 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS SEP-27-1997 SEP-29-1996 JUN-28-1997 9,076 0 2,578 0 9,536 22,545 7,564 0 47,067 10,148 0 0 0 164 31,663 47,067 0 68,446 39,721 21,071 (464) 0 0 8,118 2,823 0 0 0 0 5,295 .33 .30 ASSET VALUES REPRESENT NET AMOUNTS
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