Mail Stop 04-07
March 7, 2005
Ms. Loran Cashmore Bond
Chief Accounting Officer
Photoworks, Inc.
1260 Sixteenth Avenue West,
Seattle, WA 98119
RE: Photoworks, Inc.
Form 10-K for the fiscal year ended September 25, 2004
Filed December 27, 2004
Form 10-Q for the quarter ended December 25, 2004
File No. 000-15338
Dear Ms. Cashmore:
We have reviewed your filings and have the following
comments.
We have limited our review to only your financial statements and
related disclosures and will make no further review of your
documents. As such, all persons who are responsible for the
adequacy
and accuracy of the disclosure are urged to be certain that they
have
included all information required pursuant to the Securities
Exchange
Act of 1934. Please address the following comments in future
filings. If you disagree, we will consider your explanation as to
why our comment is inapplicable or a revision is unnecessary.
Please
be as detailed as necessary in your explanation. In some of our
comments, we may ask you to provide us with supplemental
information
so we may better understand your disclosure. After reviewing this
information, we may or may not raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for the fiscal year ended September 25, 2004
Item 7 - Management`s Discussion and Analysis of Financial
Condition
and Results of Operations, page 15
1. Refer to the tables on page 40, which disclose that your
quarterly
gross profit percentage ranged from 15.7% to 34.4% and that your
net
revenues ranged from $4.6 million to $8.4 million. Explain to us
why
your net revenues and gross profit percentages are so volatile on
a
quarterly basis. Supplementally, explain to us, quarter by
quarter,
why each: net revenue and gross profit percentage, changed. See
Interpretive Response to Question 1 of SAB Topic 13B.
Supplementally
address and expand future discussions of results of operations to
discuss the following:
* Shipments of product at the end of a reporting period that
significantly reduce customer backlog and that reasonably might be
expected to result in lower shipments and revenue in the next
period,
* Changing trends in shipments into, and sales from, a sales
channel
or separate class of customer that could be expected to have a
significant effect on future sales or sales returns,
* An increasing trend toward sales to a different class of
customer
with different gross profit margins,
* Seasonal trends or variations in sales.
Financial Statements
Report of Independent Registered Public Accounting Firm, page
23
2. Refer to the fourth paragraph of page 23, which addresses
uncertainties concerning your continued existence as a going
concern.
In future filings, include a more detailed description of
management`s specific viable plans that are intended to mitigate
the
effect of such conditions. Give management`s assessment of the
likelihood that such plans can be effectively implemented. Clearly
identify and discuss those elements of the plans that are
particularly significant or critical to overcoming your present
financial difficulties. Include a reasonably detailed discussion
of
your ability or inability to generate sufficient cash to support
your
operations during the twelve-month period following the date of
the
most recent balance sheet presented. Include your viable plan
description in Management`s Discussion and Analysis of liquidity
and
in the footnotes to the financial statements. Update this
discussion
quarterly as necessary. Refer to Financial Reporting Codification
607.02.
Consolidated Balance Sheet, page 24
3. Refer to the fifth paragraph of page 18, which indicates that
your
deferred revenues relate primarily to prepaid print credits. What
are the other deferred revenues due to? Give us an analysis of
these
balances at the end of each period and explain to us why your
"deferred revenues" line item would not be more properly
characterized as customer deposits payable.
Note A - Operations and Summary of Significant Accounting Policies
Revenue Recognition, page 30
4. Refer to the second paragraph of page 30, which discloses that
you
provide your customers with a "100% satisfaction guarantee" and
that
your customers can request a refund. Refer also to the fifth
paragraph of page 18, which discusses enhanced print credits.
Supplementally describe for us, in reasonable detail, the terms of
these customer sales. Explain to us how and when your sales meet
the
revenue recognition criteria of SAB Topic 13A3b. Please address
the
following:
* Acceptance provisions in your sales arrangements that purport to
be
for trial or evaluation purposes,
* Acceptance provisions that grant a right of return or exchange
on
the basis of subjective matters,
* Acceptance provisions based on seller-specified objective
criteria,
and
* Acceptance provisions based on customer-specified objective
criteria.
The staff generally believes that the seller should not recognize
revenue until customer acceptance occurs or the acceptance
provisions
lapse.
Controls and Procedures, page 16
5. In future filings, revise your disclosure regarding changes to
internal controls and procedures over financial reporting to
identify
"any changes," not just "significant" changes, that have
materially
affected, or are reasonably likely to materially affect, your
internal controls and procedures over financial reporting. See
Item
308(c) of Regulation S-K.
6. You state that your management evaluated the effectiveness of
your
disclosure controls and procedures and concluded that your
disclosure
controls and procedures were effective to "timely alert them" to
any
material information relating to the Company that must be included
in
the Company`s periodic SEC filings. In future filings, also
state,
if true, whether the same officers concluded the controls and
procedures were effective in "recording, processing, summarizing
and
reporting, on a timely basis, information required to be disclosed
by
the Company in the reports that it files or submits under the
Exchange Act." See Exchange Act Rule 13a-15(e).
7. You disclose that you evaluated the effectiveness of the design
and operation of your disclosure controls and procedures pursuant
to
Exchange Act Rule 13a-14 and 15d-14. Disclosure controls and
procedures are now defined in Rules 13a-15(e) and 15d-15(e).
Please
revise your Control and Procedures disclosure in future filings to
reference the appropriate Rules of the Exchange Act.
Form 10-Q for the quarter ended December 25, 2004
General
8. We note from your form 8-K filed on March 3, 2005 that on
February
28, 2005 you engaged Williams & Webster as your new accounting
firm.
Amend your form 10-Q for the quarterly period ended December 25,
2004
to reflect your auditor`s review of this filing.
* * * *
Please respond to these comments within 10 business days or
tell us when you will provide us with a response. Please furnish
a
letter that keys your responses to our comments and provides any
requested supplemental information. Please file your response
letter
on EDGAR. Please understand that we may have additional comments
after reviewing your responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that
* the company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filings; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filings or
in
response to our comments on your filings.
You may contact Kenya Wright, Staff Accountant, at (202)
824-
5446 or Joseph M. Kempf, Reviewer, at (202) 942-1979 if you have
questions regarding comments on the financial statements and
related
matters. Please contact me at (202) 942-1990 with any other
questions.
Sincerely,
Larry M. Spirgel
Assistant Director
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Ms. Loran Cashmore Bond
Photoworks, Inc.
March 7, 2005
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