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: MARCH 29, 1997 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 April 30, 1997, there were issued and outstanding 16,280,127 shares
of common stock, par value $.01 per share.
Index to Exhibits at Page 14
Page 1 of 49
SEATTLE FILMWORKS, INC.
INDEX
-----
Page No.
--------
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Balance Sheets as of March 29, 1997
and September 28, 1996 3-4
Statements of Income for the second quarter and six months
ended March 29, 1997 and March 30, 1996 5
Statements of Cash Flows for the six months ended
March 29, 1997 and March 30, 1996 6
Notes to Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II -- OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
INDEX TO EXHIBITS 14
EXHIBITS 15
Page 2 of 49
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1 - FINANCIAL STATEMENTS
SEATTLE FILMWORKS, INC.
BALANCE SHEETS
(in thousands)
(UNAUDITED) (NOTE)
March 29, September 28,
ASSETS 1997 1996
============================================================================================================================
CURRENT ASSETS
Cash and cash equivalents $ 4,758 $ 6,135
Securities available-for-sale 5,874 4,559
Accounts receivable, net of allowance for doubtful accounts 1,650 1,980
Inventories 8,494 6,577
Capitalized promotional expenditures 41 238
Prepaid expenses and other 483 351
Deferred income taxes 439 311
------- -------
TOTAL CURRENT ASSETS 21,739 20,151
FURNITURE, FIXTURES, AND EQUIPMENT,
at cost, less accumulated depreciation 6,183 5,337
CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 13,139 11,334
DEPOSITS AND OTHER ASSETS 374 253
NON-COMPETE AGREEMENT,
net of accumulated amortization 563 751
------- -------
TOTAL ASSETS $41,998 $37,826
======= =======
Note: The September 28, 1996 balance sheet has been derived from audited
financial statements.
See notes to financial statements.
Page 3 of 49
SEATTLE FILMWORKS, INC.
BALANCE SHEETS (CONTINUED)
(in thousands, except per share and share data)
(UNAUDITED) (NOTE)
March 29, September 28,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
====================================================================================================================================
CURRENT LIABILITIES
Accounts payable $ 5,720 $ 3,490
Accrued expenses 1,090 1,086
Accrued compensation 1,517 2,001
Income taxes payable 311 972
------- -------
TOTAL CURRENT LIABILITIES 8,638 7,549
DEFERRED INCOME TAXES 4,148 3,602
------- -------
TOTAL LIABILITIES 12,786 11,151
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 16,280,127 163 162
Additional paid-in capital 1,713 1,680
Retained earnings 27,336 24,833
------- -------
TOTAL SHAREHOLDERS' EQUITY 29,212 26,675
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $41,998 $37,826
======= =======
Note: The September 28, 1996 balance sheet has been derived from audited
financial statements.
See notes to financial statements.
Page 4 of 49
SEATTLE FILMWORKS, INC.
STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share data)
Second Quarter Ended Six Months Ended
------------------------ -------------------------
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
====================================================================================================================================
Net revenues $21,657 $17,821 $42,893 $34,510
Cost of goods and services 12,762 10,510 25,744 20,907
------- ------- ------- -------
GROSS PROFIT 8,895 7,311 17,149 13,603
Operating expenses:
Customer acquisition costs 3,762 3,236 7,244 5,774
Other selling expenses 2,100 2,130 3,860 3,462
Research and development 209 274 382 521
General and administrative 1,213 1,012 2,120 1,780
------- ------- ------- -------
Total operating expenses 7,284 6,652 13,606 11,537
------- ------- ------- -------
INCOME FROM OPERATIONS 1,611 659 3,543 2,066
Other income (expense):
Interest expense (1) (1)
Interest income 141 112 287 254
Non operating income (expense), net 7 - 9 93
------- ------- ------- -------
Total other income 148 111 296 160
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,759 770 3,839 2,226
Provision for income taxes (613) (267) (1,336) (772)
------- ------- ------- -------
NET INCOME $ 1,146 $ 503 $ 2,503 $ 1,454
======= ======= ======= =======
EARNINGS PER SHARE $.06 $.03 $.14 $.08
==== ==== ==== ====
WEIGHTED AVERAGE SHARES AND
EQUIVALENTS OUTSTANDING 17,761,909 17,772,080 17,797,503 17,766,036
========== ========== ========== ==========
See notes to financial statements.
Page 5 of 49
SEATTLE FILMWORKS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended
-----------------------
March 29, March 30,
1997 1996
====================================================================================================================================
OPERATING ACTIVITIES:
- ---------------------
Net income $ 2,503 $ 1,454
Charges to income not affecting cash:
Depreciation and amortization 1,393 1,111
Amortization of capitalized customer
acquisition expenditures 6,594 5,124
Deferred income taxes 418 861
Loss on disposal of equipment 88
Net change in receivables, inventories, payables and other (630) (2,066)
Capitalized promotional expenditures, net 197 115
Additions to capitalized customer acquisition expenditures (8,399) (7,413)
------- -------
NET CASH FROM (USED IN) OPERATING ACTIVITIES 2,076 (726)
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, fixtures, and equipment (2,172) (2,320)
Purchases of securities available-for-sale (6,257) (2,350)
Sales of securities available-for-sale 4,942 3,195
Proceeds from sale of equipment 2
------- -------
NET CASH USED IN INVESTING ACTIVITIES (3,487) (1,473)
FINANCING ACTIVITIES:
- ---------------------
Proceeds from issuance of Common Stock 214 253
Payment on purchase of Common Stock (180)
------- -------
NET CASH FROM FINANCING ACTIVITIES 34 253
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (1,377) (1,946)
Cash and cash equivalents at beginning of period 6,135 8,560
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 4,758 $ 6,614
======= =======
See notes to financial statements.
Page 6 of 49
SEATTLE FILMWORKS, INC.
NOTES TO 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 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 second quarter and six months ended March
29, 1997 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 27, 1997. For further information, refer to the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended September 28, 1996.
NOTE B -- STOCK SPLIT
On March 17, 1997 the Company effected a three-for-two stock split by
declaring a stock dividend of one share for every two shares outstanding. All
share data, per share data and related accounts in the accompanying financial
statements have been retroactively adjusted for this stock split.
NOTE C -- CHANGE IN ESTIMATES
Effective as of the beginning of the second quarter of fiscal 1996, the
Company changed from twelve months to six months the period over which it
amortizes certain capitalized customer acquisition expenditures related to
groups of existing customers. This change in accounting estimate was made to
more accurately match incremental revenues and expenses. At that time the
Company also changed the estimated life of the benefit of a non-compete
agreement from ten years to five years.
NOTE D -- EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which shall be effective for financial statements
for both interim and annual periods ending after December 15, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the second quarter and six months ended March
29, 1997, and the six-months ended March 30, 1996, of $.01 per share. The impact
of Statement No. 128 on the calculation of fully diluted earnings per share for
these same periods is not expected to be material.
Page 7 of 49
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Information
- ---------------------------
Statements in this report concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company or industry trends to differ
materially from those expressed or implied by such forward-looking statements.
Relevant risks and uncertainties include, among others, those described below,
those stated in the Company's Annual Report on Form 10-K and those identified by
the Company from time to time in 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 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. Management believes
that these steps are the primary reasons for the growth of net revenues and net
income during fiscal 1995, 1996 and the first six months of fiscal 1997. In
addition, management believes its core photofinishing business has benefited
from the introduction of new products, such as the January 1994 introduction of
Pictures On Disk[TM] and PhotoWorks(R).
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. These direct costs per recipient of the
Introductory Offer have also declined during each of the last three fiscal
years.
The direct costs of customer acquisition are capitalized as an asset on the
Company's 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.
Customer acquisition costs as a percentage of net revenues have increased
to 16.9% in the first six months of fiscal 1997 as compared to 16.7% in the
first six months of fiscal 1996. 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. 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.
Page 8 of 49
Net income as a percentage of net revenues increased to 5.8% for the first
six months of fiscal 1997 as compared to 4.2% for the same period of fiscal 1996
primarily due to the relationship between changes in costs of goods sold,
customer acquisition costs and other selling 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 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 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 statements of
income, expressed as a percentage of net revenues for the periods indicated.
Second Quarter Ended Six Months Ended
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
====================================================================================================================================
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods and services 58.9 59.0 60.0 60.6
----- ----- ----- -----
GROSS PROFIT 41.1 41.0 40.0 39.4
Operating expenses:
Customer acquisition costs 17.4 18.2 16.9 16.7
Other selling expenses 9.7 11.9 9.0 10.0
Research and development 1.0 1.5 0.9 1.5
General and administrative 5.6 5.7 4.9 5.2
----- ----- ----- -----
Total operating expenses 33.7 37.3 31.7 33.4
----- ----- ----- -----
INCOME FROM OPERATIONS 7.4 3.7 8.3 6.0
Total other income 0.7 0.6 0.6 0.4
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 8.1 4.3 8.9 6.4
Provision for income taxes 2.8 1.5 3.1 2.2
----- ----- ----- -----
NET INCOME 5.3% 2.8% 5.8% 4.2%
===== ===== ===== =====
Net revenues for the second quarter of fiscal 1997 increased 21.5% to
$21,657,000 as compared to net revenues of $17,821,000 in the second quarter of
fiscal 1996. For the six months ended March 29, 1997, net revenues increased
24.3% to $42,893,000 compared to $34,510,000 for the same period of fiscal 1996.
The increased net revenues in fiscal 1997 were primarily due to expanded
customer acquisition activities and marketing to existing customers during
fiscal year 1996 and the first six months of fiscal year 1997 which have
resulted in increased net revenues from photofinishing services and products.
Management believes that its Seattle FilmWorks(R) branded business has benefited
from the Company's entry into
Page 9 of 49
the personal computer market with its PhotoWorks(R) and Pictures On Disk[TM]
products, which were first introduced in January 1994.
Cost of goods and services consist of labor, postage and supplies related
to the Company's services and products. Gross profit in the second quarter of
fiscal 1997 increased to 41.1% of net revenues compared to 41.0% in the second
quarter of fiscal 1996. For the first six months of fiscal 1997, gross profit
increased to 40.0% compared to 39.4% for the same period of fiscal 1996. The
increase in fiscal 1997 periods was due primarily to 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. Gross profit was favorably impacted in the second quarter of fiscal
1996 by the reversal of $227,000 of state tax reserves upon the resolution of
uncertainties related to a state tax examination. Fluctuations in gross profit
will occur in future periods due to the seasonal nature of revenues, mix of
product sales, intensity of promotional activities and other factors.
Total operating expenses in the second quarter of fiscal 1997 decreased to
33.7% of net revenues compared to 37.3% in the second quarter of fiscal 1996.
For the first six months of fiscal 1997 total operating expenses decreased to
31.7% of net revenues compared to 33.4% for the same period of fiscal 1996. The
decreases, as a percent of net revenues, were due primarily to a decrease in
customer acquisition and other selling expenses. Effective as of the beginning
of the second quarter of fiscal 1996 the Company reduced from twelve to six
months the amortization period for certain marketing activities to specific
groups of existing customers. This change in accounting estimate resulted in
incremental amortization of $414,000 of previously deferred customer acquisition
costs in the second quarter of fiscal 1996. 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 $8,399,000 of customer acquisition
expenditures in the first two quarters of fiscal 1997 compared to $7,413,000 for
the first two quarters of fiscal 1996 while amortization of these costs was
$6,594,000 and $5,124,000 during these two same periods, respectively.
Capitalized customer acquisition expenditures as of March 29, 1997, increased to
$13,139,000 compared to $11,334,000 as of September 28, 1996. Management
believes this increased investment in customer acquisition combined with new
service and product introductions are the primary reasons for the increase in
photofinishing-related revenues. 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 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 second quarter of fiscal 1997 decreased to 9.7% of
net revenues compared to 11.9% of net revenues for the second quarter of fiscal
1996. For the first six months of fiscal 1997, other selling expenses decreased
to 9.0% of net revenues compared to 10.0% of net revenues for the first six
months of fiscal 1996. The second quarter of fiscal 1996 included approximately
$43,000 resulting from an increase in amortization of a non-compete agreement
due to a change in the estimated life from ten years to five years and $126,000
in expenses related to securing rights to the PhotoWorks(R) mark claimed by a
third party.
Research and development expenses decreased to $209,000 in the second
quarter of fiscal 1997 as compared to $274,000 for the second quarter of fiscal
1996. Research and development expenses for the first six months of fiscal 1997
decreased to $382,000 as compared to $521,000 for the first six months of fiscal
1996. The decreases resulted primarily from lower contract service costs for the
first and second quarters of fiscal 1997. 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 $1,213,000 for the second
quarter of fiscal 1997 as compared to $1,012,000 for the second quarter of
fiscal 1996. General and administrative costs increased to $2,120,000 for the
first six months of fiscal 1997 as compared to $1,780,000 for the first six
months of fiscal 1996. The increases were due to increased compensation expenses
based on the Company's profitability, increased costs related to the Company's
management information systems and increased legal and accounting costs. General
and administrative expenses as a percent of net
Page 10 of 49
revenues decreased to 4.9% for first six months of fiscal 1997 as compared to
5.2% for the same period of fiscal 1996. General and administrative expenses
consist of costs related to computer operations, human resource functions,
finance, accounting, investor relations and general corporate activities.
Total other income for the second quarter of fiscal 1997 increased to
$148,000 as compared to $111,000 for the second quarter of fiscal 1996. For the
first six months of fiscal 1997, total other income was $296,000 as compared to
$160,000 for the same period of fiscal 1996. The increases in the fiscal 1997
periods resulted from higher interest income and a $90,000 loss on equipment
disposals during the first quarter of fiscal 1996.
The federal income tax rate for the first six months of fiscal 1997 as
compared to the first six months of fiscal 1996 increased to 34.8% from 34.7%.
The increase in the effective tax rate was due primarily to an increase in the
marginal federal corporate tax rate due to expected income levels.
Net income in the second quarter of fiscal 1997 was $1,146,000, or $.06 per
share, compared to $503,000 or $.03 per share for the second quarter of fiscal
1996. Net income for the first six months of fiscal 1997 was $2,503,000 or $.14
per share as compared to $1,454,000 or $.08 per share for the same period of
fiscal 1996. The increases in net income were primarily attributable to the
increase in net revenues and gross profit and decreases in operating expenses,
as a percent of net revenues, as compared to fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of May 2, 1997, the Company's principal sources of liquidity included
cash and short-term investments of $11,536,535 and an unused revolving line of
credit of $6,000,000. The ratio of current assets to current liabilities for
the Company was 2.5 to 1 at the end of the second quarter of fiscal 1997, down
slightly from the current ratio of 2.7 to 1 at September 28, 1996. During the
second quarter of fiscal 1997 the Company increased its investment in securities
available-for-sale by $1,315,000 which was the primary reason for the decrease
in cash and cash equivalents. The Company also increased inventory levels by
$1,917,000 to accommodate expanded marketing plans, achieve faster turnaround of
customer orders, and support increased photofinishing volume. This increase in
inventory was the principal reason for the $2,230,000 increase in accounts
payable at the end of the second quarter. 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.
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.
On March 4, 1997 the Company signed a lease agreement for office and
warehouse space in Seattle, Washington, which will be primarily utilized as
office space and certain photofinishing and mail order operations. This lease
commenced on April 1, 1997, for a term of forty-two months and includes 46,317
of total square feet including 7,700 square feet of mezzanine office space. The
monthly base rent for this building is $18,766 throughout the lease.
Although the Company does not currently have any fixed material commitments
with regard to capital expenditures, it currently expects to spend approximately
$2,500,000 during the remainder of fiscal 1997, principally for photofinishing
equipment and for leasehold improvements.
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.
Page 11 of 49
PART II -- OTHER INFORMATION
----------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On February 12, 1997, the Company held its annual meeting of shareholders.
The meeting was reconvened on March 5, 1997. The shareholders acted on the
following matters at the annual meeting.
1. An amendment to the Company's Restated Articles of Incorporation to
establish a classified Board of Directors and to provide for removal of
directors only for cause was approved. The number of votes cast for the
proposal, the number of votes against the proposal, the number of votes
withheld, and the number of broker non-votes are listed.
For Against Abstain Non-votes
--- ------- ------- ---------
5,444,853 2,971,352 43,660 1,575,646
2. The following individuals were elected to the Company's Board of
Directors, to hold office for the specified terms and until their successors are
duly elected and qualified. The number of votes cast for each individual, the
number of votes withheld, and the number of broker non-votes are listed for each
individual.
For Withheld Non-votes
--- -------- ---------
Gary Christophersen 9,755,343 280,168 N/A
Sam Rubinstein 9,751,255 284,256 N/A
Douglas A. Swerland 9,751,341 284,170 N/A
Craig E. Tall 9,754,466 281,045 N/A
Peter H. van Oppen 9,754,166 281,345 N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
---------
3 Articles of Amendment of Incorporation of Seattle FilmWorks, Inc.
10.1* Supply Agreement effective January 1, 1997 with Fuji Photo Film
U.S.A., Inc.
10.2* AT&T Agreement dated March 5, 1997
10.3 Lease Agreement dated March 4, 1997, between Smith Cove
Partnership and the Company.
11 Computation of Earnings Per Share
(B) REPORTS ON FORM 8-K.
--------------------
None
* Portions of this exhibit have been omitted pursuant to an application
for an order granting confidential treatment filed with the Commission on May
13, 1997. The omitted portions have been separately filed with the Commission.
Page 12 of 49
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: May 12, 1997 /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 49
INDEX TO EXHIBITS
SEATTLE FILMWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 29, 1997
Exhibit Description Page No.
- ------- ----------- --------
3 Articles of Amendment of Incorporation of Seattle FilmWorks, Inc. 15
10.1* Supply Agreement effective January 1, 1997 with Fuji Photo Film U.S.A., Inc. 16
10.2* AT&T Agreement dated March 5, 1997 29
10.3 Lease Agreement dated March 4, 1997, between Smith Cove Partnership and the Company. 33
11 Computation of Earnings Per Share 49
27 Financial Data Schedule
* Portions of this exhibit have been omitted pursuant to an
application for an order granting confidential treatment filed with
the Commission on May 13, 1997. The omitted portions have been
separately filed with the Commission.
Page 14 of 49