SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
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|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
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|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
Photoworks, Inc
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(Name of Registrant as Specified In Its Charter)
not applicable
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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PHOTOWORKS, INC.
(Formerly Seattle FilmWorks, Inc.)
Notice of Annual Meeting of Shareholders
To be held on Tuesday, February 5, 2002
To the Shareholders of PhotoWorks, Inc.:
Notice is hereby given that the Annual Meeting of Shareholders of PhotoWorks,
Inc. (the "Company") will be held at 2:00 p.m. Pacific Standard Time, on
Tuesday, February 5, 2002, at PhotoWorks, Inc., 1260 16th Avenue West, Seattle,
Washington 98119, for the following purposes:
1. To elect one (1) Class II director to serve a three year term.
2. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
Shareholders of record at the close of business on December 7, 2001, will be
entitled to notice of and to vote at the Annual Meeting and any adjournment or
postponement of the Annual Meeting.
By Order of the Board of Directors
/s/ Loran Cashmore Bond
Loran Cashmore Bond
Secretary
1260 - 16th Avenue West
Seattle, Washington 98119
December 21, 2001
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YOUR VOTE IS IMPORTANT
The Company invites all shareholders to attend the Annual Meeting in person.
Whether or not you plan to attend the meeting in person, please sign, date and
return the accompanying proxy in the enclosed stamped envelope. This will ensure
the presence of a quorum at the meeting. Promptly signing, dating and returning
the Proxy will save the Company the expense of additional solicitations. Your
proxy is revocable at your request at any time before it is voted. Any
shareholder may attend the Annual Meeting and vote in person even if that
shareholder has returned a proxy card.
Your copy of the Company's Annual Report for the fiscal year ended
September 29, 2001 is enclosed.
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- 1 -
PhotoWorks, Inc.
(Formerly Seattle FilmWorks, Inc.)
1260 - 16th Avenue West
Seattle, Washington 98119
PROXY STATEMENT
General
The Company is furnishing this Proxy Statement and the enclosed proxy (which are
being mailed to shareholders on or about January 8, 2002) in connection with the
solicitation of proxies by the Board of Directors of PhotoWorks, Inc. (the
"Company") for use at the Annual Meeting of Shareholders to be held on Tuesday,
February 5, 2002, at 2:00 p.m. local time at PhotoWorks, Inc., 1260 16th Avenue
West, Seattle, Washington 98119, and at any adjournment thereof (the "Annual
Meeting").
Record Date and Outstanding Shares
The Company has called the Annual Meeting for the purposes stated in the
accompanying Notice of Annual Meeting of Shareholders. All holders of Common
Stock of the Company ("Common Stock") and Series A Preferred Stock (the
"Preferred Stock") as of the close of business on December 7, 2001 (the "Record
Date"), are entitled to vote at the meeting. As of December 7, 2001, there were
16,655,971 shares of Common Stock and 15,000 shares of Preferred Stock
outstanding. The Company's Common Stock trades on the Over the Counter Bulletin
Board (OTCBB) under the symbol FOTO.
Quorum
A quorum for the Annual Meeting will consist of a majority of the aggregate
number of outstanding shares of Common Stock and Preferred Stock entitled to
vote at the Annual Meeting, present in person or by proxy. Shareholders of
record who are present at the meeting in person or by proxy and who abstain,
including brokers holding customers' shares of record who cause abstentions to
be recorded at the meeting, are considered shareholders who are present and
entitled to vote and count toward the quorum.
Voting
Each share of Common Stock outstanding on the Record Date is entitled to one
vote at the Annual Meeting on all matters presented at the Annual Meeting. Each
share of Preferred Stock outstanding on the Record Date is entitled to 210.526
votes per share on all matters presented at the Annual Meeting. All shares
represented by proxies will be voted in accordance with shareholder directions.
Holders of the Common Stock and Preferred Stock vote together on all matters
presented at the Annual Meeting. If the accompanying proxy is properly signed
and is not revoked by the shareholder, the shares it represents will be voted at
the Annual Meeting by the proxy holder in accordance with the instructions of
the shareholder. If no specific instructions are designated, the shares will be
voted as recommended by the Board of Directors.
The Company is not aware, as of the date hereof, of any matters to be voted upon
at the Annual Meeting other than as stated in the Proxy Statement and the
accompanying Notice of Annual Meeting of Shareholders. If any other matters are
properly brought before the Annual Meeting, the enclosed Proxy gives
discretionary authority to the persons named therein to vote the shares in their
discretion.
Under Washington law and the Company's Amended and Restated Articles of
Incorporation and Bylaws, if a quorum exists at the meeting, the nominee who
receives the greatest number of votes cast for the election of a director by the
shares present in person or represented by proxy and entitled to vote shall be
elected as a director. Abstentions will have no impact on the outcome of this
proposal since they have not been cast in favor of any nominee. There can be no
broker non-votes on this matter since brokers who hold shares for the accounts
of their clients have discretionary authority to vote such shares with respect
to the election of directors.
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Revocability of Proxies
A proxy may be revoked at any time before it is voted at the meeting. Any
shareholder of record who attends the meeting and wishes to vote in person may
revoke his or her proxy at that time. Otherwise, to revoke a proxy a shareholder
must deliver a proxy revocation, or another duly executed proxy bearing a later
date, to the Corporate Secretary of the Company, at 1260 16th Avenue West,
Seattle, Washington 98119, before the Annual Meeting or at the Annual Meeting.
Attendance at the Annual Meeting will not revoke a shareholder's proxy unless
the shareholder votes in person at the meeting.
Solicitation of Proxies
The proxy accompanying this Proxy Statement is solicited by the Board of
Directors of the Company. Proxies may be solicited by officers, directors, and
regular supervisory and executive employees of the Company, none of whom will
receive any additional compensation for their services. In addition, the Company
may engage an outside proxy solicitation firm to render proxy solicitation
services and, if so, will pay a fee for such services. Solicitations of proxies
may be made personally, or by mail, telephone, telecopier or messenger. The
Company, if requested, will pay persons holding shares of Common Stock in their
names or in the names of nominees, but not owning such shares beneficially, such
as brokerage houses, banks and other fiduciaries, for the expense of forwarding
materials to their principals. All of the costs of solicitation of proxies will
be paid by the Company. Proxies and ballots will be received and tabulated by
Mellon Investor Services, an independent business entity not affiliated with the
Company.
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Voting Securities and Principal Holders
The following table sets forth information, as of December 7, 2001, with respect
to all shareholders known by the Company who beneficially own more than 5% of
the Company's Common Stock and of the Preferred Stock. Except as noted below,
each person or entity has sole voting and investment power with respect to the
shares shown.
Amount and Nature Percent of
Name and Address of Beneficial Ownership Class
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Common Stock
T. Rowe Price Associates, Inc. (1) 1,170,300 7.10%
Small-Cap Value Fund, Inc.
100 East Pratt Street
Baltimore, MD 21202
Dimensional Fund Advisors (2) 1,163,487 7.09%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Sawtooth Capital Management, L.P. (3) 1,157,540 7.00%
Sawtooth Capital Management, Inc.
Sawtooth Partners, L.P.
Bartley B. Blout
1801 Century Park East, Suite 460
Los Angeles, CA 90067
Zesiger Capital Group L.L.C. (4) 1,791,600 10.90%
320 Park Avenue, 30th Floor
New York, NY 10022
Gary R. Christophersen (5) 1,560,615 9.30%
1260 16th Avenue West
Seattle, WA 98119
Preferred Stock
The Tahoma Fund, L.L.C. (6) 10,000 67%
Orca Bay Capital Corporation
Orca Bay Partners, L.L.C
Tim Carver and Alexa Carver
Stanley McCammon
John E. McCaw, Jr.
Ross Chapin
P.O. Box 21749
Seattle, WA 98111
Madrona Venture Fund I-A, L.P. (7) 5,000 33%
Madrona Venture Fund I-B, L.P.
Madrona Managing Director Fund L.L.C.
Madrona Investment Partners L.L.C.
Paul Goodrich
1000 2nd Avenue - Suite 3700
Seattle, WA 98104
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(1) The holding shown is as reported by T. Rowe Price Associates, Inc. ("Price
Associates") in a Schedule 13G filed February 14, 2001 by Price Associates
pursuant to Rule 13d-1 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Price Associates has indicated that these
shares are held by it in its capacity as investment advisor to various
individual and institutional investors. According to the Schedule 13G
filed by Price Associates, Price Associates has sole dispositive power
with respect to all of these shares, and T. Rowe Price Small-Cap Value
Fund, Inc. has sole voting power with respect to 1,169,200 of these
shares.
(2) The holding shown is as reported by Dimensional Fund Advisors,
("Dimensional") in a Schedule 13G filed February 2, 2001 by Dimensional
pursuant to Rule 13d-1 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Dimensional has indicated that these shares
are held by it in its capacity as investment advisor to four investment
companies and serves as investment manager to certain other investment
vehicles, including commingled trusts (these investment companies and
investment vehicles are the "Funds"). According to the Schedule 13G filed
by Dimensional Fund Advisors, Dimensional in its role as investment
advisor and investment manager, possesses both sole voting and dispositive
power with respect to all of these shares. All securities reported in the
13G filed by Dimensional are owned by the Funds, and Dimensional disclaims
beneficial ownership of such securities.
(3) The holding shown is as reported by Sawtooth Capital Management, L.P.,
Sawtooth Capital Management, Inc., Sawtooth Partners, L.P., and Bartley
Boyd Blout ("Sawtooth"), in a Schedule 13G filed February 23, 2000
pursuant to Rule 13d-1 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Sawtooth has indicated that these shares are
held by Sawtooth Capital Management L.P., ("SCMLP") as a registered
investment advisor whose clients, including Sawtooth Partners L.P.,
("SPLP") have the right to receive or the power to direct the receipt of
dividends from, or the proceeds from the sale of, the common stock of the
Issuer. No individual client, other than SPLP, holds more than 5% of the
common stock of the Issuer. SCMLP is the sole general partner of SPLP.
Sawtooth Capital Management, Inc., ("SCMI") is the sole general partner of
SCMLP. Mr. Blout is the president and the controlling shareholder of SCMI.
In its Schedule 13G, Sawtooth has indicated that SPLP has shared voting
and dispositive power with respect to 933,040 shares, SCMLP has shared
voting and dispositive power with respect to 1,095,540 shares, and SCMI
and Mr. Blout have shared voting and dispositive power with respect to
1,157,540 shares.
(4) The holding shown is as reported by Zesiger Capital Group, L.L.C.,
("ZCG"), in a Schedule 13G filed February 12, 2001 pursuant to Rule 13d-1
under the Securities Exchange Act of 1934, as amended ("the Exchange
Act"). Zesiger has indicated that clients, for whom ZCG acts as an
investment advisor, may withdraw dividends or the proceeds of sales from
the accounts managed by ZCG. No single client account owns more than 5% of
the securities. In its Schedule 13G, Zesiger has indicated the ZCG has
sole voting power with respect to 1,130,000 shares and sole dispositive
power with respect to 1,791,600 shares. ZCG disclaims beneficial ownership
of all securities. Such securities are held in discretionary accounts
which ZCG manages.
(5) Includes options to purchase 92,812 shares of Common Stock granted under
the Company's Stock Option Plans which are currently exercisable or
exercisable within 60 days of December 7, 2001.
(6) The holding shown is as reported by Orca Bay Partners, L.L.C., ("Orca
Bay") in a Schedule 13G filed February 24, 2000. Orca Bay is the Manager
of The Tahoma Fund, L.L.C., ("Tahoma"). Orca Bay Capital Corporation
("OBCC"), Tim and Alexa Carver ("Carver"), Stanley McCammon ("McCammon"),
John E. McCaw, Jr. ("McCaw"), and Ross Chapin ("Chapin") are all
affiliates of Orca Bay. The schedule 13G relates to shares of Series A
Preferred Stock, $.01 par value with a stated value of $1,000 per share
("Series A Preferred Stock") convertible into common stock, $.01 par value
("Common Stock"). Each share of Series A Preferred Stock is convertible
into shares of Common Stock of the Company at an initial conversion price
of $210.526 per share of Common Stock, subject to anti-dilution
protection. The total Common Stock covered by the Schedule 13G, when
converted, equals 2,105,261 shares. In addition, the Schedule 13G relates
to 526,316 shares of Common Stock issuable upon the exercise of warrants
at an exercise price of $6.00 per share ("Warrant Shares"). The total
converted shares of Common Stock from the Series A Preferred Stock and the
Warrant Shares (2,631,577 shares) together represent 13.6% of the Common
Stock, based on 16,655,971 shares outstanding as of December 7, 2001.
- 5 -
(7) The holding shown is as reported by Madrona Investment Partners, L.L.C.,
("Madrona") in a Schedule 13G filed February 24, 2000. Madrona is the
Manager of the Madrona Venture Fund I-A, L.P. ("Fund I-A"), Madrona
Venture Fund I-B, L.P. ("Fund I-B"), Madrona Managing Director Fund,
L.L.C. ("Director LLC"), and Paul Goodrich ("Goodrich"). The schedule 13G
relates to shares of Series A Preferred Stock, $.01 par value with a
stated value of $1,000 per share ("Series A Preferred Stock") convertible
into common stock, $.01 par value ("Common Stock"). Each share of Series A
Preferred Stock is convertible into shares of Common Stock of the Company
at an initial conversion price of $210.526 per share of Common Stock,
subject to anti-dilution protection. The total Common Stock covered by the
Schedule 13G, when converted, equals 1,052,631 shares. In addition, the
Schedule 13G relates to 263,158 shares of Common Stock issuable upon the
exercise of warrants at an exercise price of $6.00 per share ("Warrant
Shares"). The total converted shares of Common Stock from the Series A
Preferred Stock and the Warrant Shares (1,315,789 shares) together
represent 7.3% of the Common Stock, based on 16,655,971 shares outstanding
as of December 7, 2001.
- 6 -
PROPOSAL
Election of Directors
The Board of Directors of the Company currently consists of five directors
classified into three classes. The table below sets forth the name, age, class
and expiration of the term of the current Board of Directors.
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Name Age Class Expiration of Term
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Paul B. Goodrich 56 I 2004
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Ross K. Chapin 48 I 2004
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Gary R. Christophersen 55 II 2002
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Douglas A. Swerland 56 III 2003
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Matthew A. Kursh 37 III 2003
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At the end of the Company's fiscal year, Mr. Peter van Oppen and Mr. Craig Tall
resigned as Class II directors. In order to maintain as even a number of
directors in each class as possible, the Board changed Mr. Christophersen's
class to Class II. He is standing for election as Class II director at the
Annual Meeting. If elected, he will serve until the Annual Meeting in 2005.
All directors hold office until the Annual Meeting of shareholders at which
their terms expire and the election and qualification of their successors.
The Board of Directors has unanimously nominated Mr. Christophersen to serve as
a Class II director. Although the Board of Directors anticipates that Mr.
Christophersen will be available to serve as a director of the Company, should
he not accept the nomination, or otherwise be unable or unwilling to serve, it
is intended that proxies will be voted for the election of a substitute nominee
designated by the Board of Directors.
The Board of Directors recommends a vote "FOR" the election of
Class II director.
Unless otherwise instructed, it is the intention of the persons named in the
accompanying form of proxy to vote shares represented by properly executed
proxies for election of the director set forth above.
Security Ownership of Management
The following chart indicates ownership of the Company's Common Stock by each
director of the Company, each executive officer named in the compensation tables
appearing later in this Proxy Statement, and by all directors and executive
officers as a group, all as of December 7, 2001.
Amount and Nature
of Beneficial Percent of
Directors: Age Ownership Class
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Gary R. Christophersen (1) 55 1,560,615 9.3%
Ross K. Chapin (2) 48 22,500 *
Paul B. Goodrich (3) 56 22,500 *
Matthew A. Kursh (4) 37 211,250 1.3%
Douglas A. Swerland (5) 56 128,813 *
Additional Named Executives:
Michael F. Lass (6) 47 398,885 2.4%
Loran Cashmore Bond (7) 44 134,629 *
All current directors and named executive officers
as a group (7 persons) (8) 2,479,192 14.4%
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* Percent of class is less than 1%
- 7 -
(1) Includes options to purchase 92,812 shares of Common Stock which are
currently exercisable or exercisable within 60 days of December 7,
2001.
(2) Includes options to purchase 22,500 shares of Common Stock which are
currently exercisable or exercisable within 60 days of December 7,
2001. Does not include 2,631,577 common stock equivalents related to
preferred stock and warrants owned by The Tahoma Fund L.L.C. listed
above under "Voting Securities and Principal Holders", for which Mr.
Chapin has shared beneficial ownership as an affiliate of the
manager of the Fund
(3) Includes options to purchase 22,500 shares of Common Stock which are
currently exercisable or exercisable within 60 days of December 7,
2001. Does not include 1,315,789 common stock equivalents related to
preferred stock and warrants owned by Madrona Investment Partners,
L.L.C. listed above under "Voting Securities and Principal Holders",
for which Mr. Goodrich has shared beneficial ownership as an
affiliate of the manager of the Limited Liability Company.
(4) Includes options to purchase 211,250 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
7, 2001.
(5) Includes options to purchase 117,000 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
7, 2001.
(6) Includes options to purchase 62,812 shares of Common Stock which are
currently exercisable or exercisable within 60 days of December 7,
2001.
(7) Includes options to purchase 40,625 shares of Common Stock which are
currently exercisable or exercisable within 60 days of December 7,
2001.
(8) Includes options to purchase 569,499 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
7, 2001.
Gary R. Christophersen has been the Company's Chairman since July 2000. In
August 2001, Mr. Christophersen reassumed the role of Chief Executive Officer.
From August 1988, until being named as Chairman, he served as the Company's
President and Chief Executive Officer. Mr. Christophersen joined the Company in
January 1982 as Vice President Operations and has served as a Director of the
Company since 1982. From May 1983 to August 1988, Mr. Christophersen was a
Senior Vice President of the Company and its General Manager.
Ross K. Chapin became a director in February 2000. Mr. Chapin is a principal
with Orca Bay Partners, a private equity investment firm headquartered in
Seattle, Washington, which he co-founded in 1998. Prior to Orca Bay, he was a
founder of Capstan Partners, a Seattle-based management buyout firm. In addition
to being a principal investor, he has experience with Ragen MacKenzie and Paine
Webber as an investment banker. Mr. Chapin sits on the boards of Flow Solutions,
Inc., Skeletech, Inc., Parametric Portfolio Associates L.L.C., EnvestNetPMC,
Inc., and Undiscovered Managers, L.L.C.
Paul B. Goodrich became a director in February 2000. Mr. Goodrich is a Managing
Director of Madrona Venture Group, L.L.C., an early-stage venture capital firm
focused on the Internet economy in the Northwest. Mr. Goodrich was formerly the
Seattle Partner for a Chicago-based venture capital firm and a Partner with
Perkins Coie, a Seattle law firm. He is a director of Netstock Direct
Corporation.
Matthew A. Kursh became a director of the Company in April 2000. Mr. Kursh
started his career as president and co-founder of Clearview Software, which he
sold to Apple Computer in 1989. Mr. Kursh then co-founded and was CEO of eShop
Corporation, one of the first companies to offer platforms and services for
online shopping. eShop's customers included such leading companies as AT&T,
Tower Records, Spiegel, 1-800-Flowers and the Good Guys. eShop was later
acquired by Microsoft where Mr. Kursh ran Sidewalk, HomeAdvisor and MSN.com. Mr.
Kursh left Microsoft in 1999 to focus on creative projects and work with
start-up companies.
- 8 -
Douglas A. Swerland became a Director of the Company in October 1988. In October
2000, Mr. Swerland became a principal and Managing Director of Alan &
Associates, business consultants. Mr. Swerland had been the founder and Chairman
of SAVI, Inc., a clothing superstore specializing in men's retail apparel and
accessories from 1993 to 2000. Mr. Swerland had previously been employed by Jay
Jacobs, Inc., the operator of a chain of specialty retail apparel stores, in
various capacities beginning in 1969, and as President and a director from 1978
to 1993.
Board and Committee Meetings
The Board of Directors of the Company held a total of seventeen meetings during
the fiscal year ended September 29, 2001. Each of the incumbent Directors
attended at least 75% of the aggregate of the total number of meetings held by
the Board of Directors and by all committees of the Board of Directors on which
they served.
The Board of Directors has an Audit Committee which consists of Messrs. Chapin,
Swerland, and Goodrich. The Committee is governed by a charter adopted by the
Board of Directors on May 30, 2000. Pursuant to the charter, the function of the
Audit Committee is:
o to provide the opportunity for direct communication between the Board of
Directors and the Company's internal and external auditors;
o to monitor the design and maintenance of the Company's system of internal
accounting controls;
o to select, evaluate and replace the external auditors;
o to review the results of internal and external audits as to the
reliability and integrity of financial and operating information and the
systems established to monitor compliance with the Company's policies,
plans and procedures and with laws and regulations; and
o to review the relationships between the Company and the external auditors
to ascertain the independence of the external auditors.
The Audit Committee held four meetings during fiscal 2001.
The Board of Directors has a Compensation Committee which consists of Messrs.
Goodrich, Kursh, and Swerland. The Committee is responsible for establishing the
policies which govern the compensation of executive officers of the Company,
setting compensation levels for the Chairman and Chief Executive Officer, and
reviewing the compensation packages for other executive officers recommended by
the Chief Executive Officer. The Compensation Committee has been appointed by
the Board of Directors to administer the Company's stock option and stock
purchase plans. The Compensation Committee held two meetings during fiscal 2001.
The Board of Directors does not have a standing nominating committee. The Board
of Directors will consider written proposals from shareholders for nominees or
directors which are submitted to the Secretary of the Company in accordance with
the procedures contained in this proxy statement under the caption, "Proposals
of Shareholders."
Directors' Compensation
Currently, Directors who are not employees of the Company are each paid $500
each quarter and $200 for each Board of Directors meeting attended and $100 for
each telephonic meeting of the Board. In addition, Directors are entitled to
reimbursement for reasonable travel expenses, including lodging, incurred in
connection with attendance at Board meetings. Pursuant to the terms of the
Company's 1987 Stock Option Plan, each Director who is not an employee of the
Company is automatically granted an option to purchase 11,250 shares of the
Company's Common Stock, annually on the first Wednesday of March. Such options
have an exercise price equal to the fair market value of the Common Stock on the
date of grant and become exercisable in full at the end of the fiscal year in
which they are granted. Non-employee Directors were granted an option to
purchase 75,000 shares of the Company's Common Stock on October 30, 2001. Such
options have an exercise price of $.12 which is equal to the fair market value
of the Common Stock on the date of grant and becomes exercisable in full on
October 30, 2002.
- 9 -
Certain Transactions
The Company and Mr. Lass and Ms. Cashmore Bond have entered into a change of
control agreement to ensure that the Company will have the continued dedication
of the Executive, notwithstanding the possibility, threat or occurrence of a
Change of Control. In the event of the termination of the executive's employment
following a change in control for a reason other than cause or the executive's
resignation for good reason, the executive shall be entitled to severance
payment equal to one half (50%) of the executive's annual base salary for the
fiscal year in which the termination occurs.
During the last fiscal year, Loran Cashmore Bond's spouse was employed by the
Company and received total compensation of $140,144 which included severance and
vacation benefits.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires directors, certain officers and
greater-than-10% shareholders ("Reporting Persons") of all publicly-held
companies to file certain reports ("Section 16 Reports") with respect to
beneficial ownership of such companies' equity securities.
Based solely on its review of the Section 16 Reports furnished to the Company by
its Reporting Persons and, where applicable, any written representation by them
that no Form 5 was required, all Section 16(a) filing requirements applicable to
the Company's Reporting Persons during and with respect to fiscal 2001 have been
complied with on a timely basis.
- 10 -
Remuneration of Executive Officers
The following table sets forth certain information concerning the compensation
paid by the Company for services rendered during fiscal years 2001, 2000 and
1999 to any person who served as Chief Executive Officer during fiscal 2001, and
four executive officers of the Company whose total salary and bonus exceeded
$100,000 in fiscal 2001 (the "Named Executive Officers"):
Summary Compensation Table
Long Term
Compensation
Awards
Annual Compensation ------------
Name and Fiscal ------------------- Securities Underlying All Other
Principal Position Year Salary Bonus Options Compensation (1)
- ----------------------------------------------------------------------------------------------------------------
Gary R. Christophersen 2001 $238,905 $ 0 0 $9,112
CEO, Chairman and Director 2000 206,223 150,000 70,000 6,178
1999 179,856 0 33,750 8,884
Howard Lee (2)
Chief Executive Officer 2001 $274,039 $125,000 700,000 $1,990
And President
Michael F. Lass 2001 $150,258 $ 29,387 125,000 $4,162
Executive Vice President 2000 150,496 17,691 55,000 5,028
1999 138,033 22,849 11,250 8,174
Annette F. Bailey (3) 2001 $150,958 $ 5,588 40,000 $7,759
Vice President - Human 2000 102,982 12,000 40,000 3,667
Resources and Organizational 1999 88,049 17,739 16,250 5,276
Development
Ben J. Calica (4)
Vice President - Online 2001 $133,486 $ 0 90,000 $ 833
Loran Cashmore Bond
Vice President-Administration 2001 $105,202 $ 21,594 40,000 $6,277
2000 104,878 10,000 40,000 3,435
1999 81,931 13,781 19,000 4,861
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(1) These amounts represent Company contributions to the PhotoWorks 401K
Plan and payments for term life insurance, short-term disability
insurance and long-term disability insurance.
(2) Mr. Lee resigned as Chief Executive Officer and President in August
2001.
(3) Ms. Bailey left the Company in August 2001.
(4) Mr. Calica left the Company in June 2001.
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Option Grants in Last Fiscal Year
The Company has stock option plans pursuant to which options to purchase Common
Stock are granted to officers and key employees of the Company. The following
tables show stock option grants and exercises pertaining to the named Executive
Officers of the Company during fiscal year 2001, and the year-end potential
realizable value of all their outstanding options.
Individual Options Granted Potential Realizable
------------------------------------------- Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation For
Underlying Granted to Option Term (3)
Options Employees in Exercise Expiration ----------------------
Granted (1) Fiscal Year Price (2) Date 5% 10%
- --------------------------------------------------------------------------------------------------------------------
Gary R. Christophersen 0 0% $ .00 N/A N/A N/A
Howard Lee (4) 500,000 36.47% $ 2.37 N/A N/A N/A
100,000 7.29% $ 8.00 N/A N/A N/A
100,000 7.29% $12.00 N/A N/A N/A
Michael F. Lass 50,000 3.65% $ .66 01/02/2006 $ 9,062 $20,025
75,000 5.47% $ .66 03/27/2006 $13,593 $30,037
Annette F. Bailey (4) 40,000 2.92% $ .66 N/A N/A N/A
Ben J. Calica (4) 90,000 6.56% $ 2.38 N/A N/A N/A
Loran Cashmore Bond 40,000 2.92% $ .66 01/02/2006 $ 7,250 $16,020
- ----------
(1) The Company's stock option plans are administered by the Compensation
Committee of the Board of Directors, which determines to whom options are
granted, the number of shares subject to each option, the vesting schedule and
the exercise price. The options granted in fiscal year 2001 generally vest in
equal annual installments over four years. Options granted to officers of the
Company from the Company's 1987 Stock Option Plan may be exercised for a period
of 190 days following termination of employment. Options granted to officers of
the Company from the Company's 1999 Stock Incentive Compensation Plan may be
exercised for a period of three months following termination of employment.
(2) All options are granted with an exercise price equal to the fair
market value of the Company's Common Stock on the date of grant. The exercise
price may be paid by delivery of shares already owned by the option holder with
a market value equal to the aggregate exercise price. With the permission of the
Compensation Committee, the exercise price may also be paid by withholding
shares that would otherwise be received by the option holder.
(3) Potential realizable value is based on the assumption that the stock
price of the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the five year option term.
These values are calculated based upon requirements of the Securities and
Exchange Commission and do not reflect the Company's estimate or projection of
future stock price performance. The actual value realized may be greater or less
than the realizable value set forth in this table.
(4) None of the options granted in Fiscal Year 2001 were vested and,
therefore, were cancelled upon termination of employment.
The vesting of options may be accelerated at the discretion of the
administrator of the option plans.
- 12 -
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
The following table sets forth certain information as of September 29, 2001,
regarding options to purchase Common Stock held as of September 29, 2001, by
each of the Named Executive Officers, as well as the exercise of such options
during the fiscal year ended September 29, 2001. In addition, the following
table reports the values for in-the-money options, which values represent the
positive spread between the exercise price of such options and the fair market
value of the Company's Common Stock as of September 29, 2001.
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at September 29, 2001 (2) at September 29, 2001 (3)
Shares Acquired Value ---------------------------- ---------------------------
Upon Exercise Realized (1) Exercisable/ Unexercisable Exercisable/ Unexercisable
- -------------------------------------------------------------------------------------------------------------------
Gary R. Christophersen 0 $0 81,562 74,688 $0 $0
Howard Lee 0 $0 0 0 $0 $0
Michael F. Lass 0 $0 41,562 172,188 $0 $0
Annette F. Bailey 0 $0 38,124 0 $0 $0
Ben J. Calica 0 $0 0 0 $0 $0
Loran Cashmore Bond 0 $0 20,750 78,250 $0 $0
- ----------
(1) Value realized is calculated by subtracting the exercise price of the
option from the market value of a share of the Company's Common Stock on the
date of exercise and multiplying the difference thereof by the number of shares
purchased.
(2) Future exercisability is subject to vesting and the option holder
remaining employed by the Company.
(3) The exercise price of all outstanding options held by the Named
Executive Officers at September 29, 2001 was greater than the closing price of
the Common Stock reported on the Over The Counter Bulletin Board (OTCBB) on
September 28, 2001.
- 13 -
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors (the "Committee") for
fiscal year 2001, consisted of three members of the Board who were all
non-employee directors of the Company. The Committee is responsible for
establishing the policies which govern the compensation of executive officers of
the Company, setting compensation levels for the Chairman and Chief Executive
Officer and reviewing the compensation packages for other executive officers
recommended by the Chief Executive Officer. The goal of the Committee in
administering executive compensation is to create a compensation plan which (i)
rewards individual performance, (ii) aligns the interests of the executive with
the immediate and long-term interests of the shareholders of the Company, (iii)
ties a significant portion of compensation to improvements in the Company's
financial performance and (iv) assists the Company in attracting and retaining
key executives critical to the long-term success of the Company.
The compensation package provided to executive officers consists primarily of
base salary, incentive bonus and long-term incentive in the form of stock
options.
Base Salary. The Committee bases the combination of base salary and
incentive bonus paid to the Chairman and Chief Executive Officer on the
approximate range of cash remuneration paid to executives performing similar
duties for companies of comparable size in the Pacific Northwest. Although
generally available data on the compensation of chief executive officers in the
Pacific Northwest is considered, the experience of the members of the Committee
and their knowledge of the community and industry practice have been the primary
bases for this determination. During fiscal year 2001, the President and Chief
Executive Officer's base compensation was $250,000. Mr. Christophersen's base
salary was reduced to $150,000 beginning August 2001.
Base salaries for executive officers other than the Chairman and CEO are
determined annually by the CEO and reviewed by the Committee. In determining
salary adjustments for executive officers, the CEO considers the individual
officer's historical performance against his or her job responsibilities and
personal compensation packages provided to executives performing similar duties
for companies of comparable size in the Pacific Northwest, the rate of
inflation, salary adjustments to be awarded to other executive officers of the
Company and other subjective factors.
Incentive Bonus. The Company has an annual incentive compensation plan
pursuant to which executive officers and other managers, supervisory and
professional personnel (approximately 125 persons during fiscal 2001) are
eligible to receive cash bonuses based on the Company's and their personal
performance during the year (the "Incentive Plan"). The factors used in
determining payments under the Incentive Plan are a specified percentage of each
participant's base salary ("eligible base salary"), his or her performance
against personal performance goals, and a Company Performance Percentage
comprised of target goals for the Company. The Incentive Plan sets eligible base
salary percentages for the Chairman and CEO at 60 percent and all other
executive officers at 40 to 50 percent. The portion of each participant's
eligible base salary which will be multiplied by the Company Performance
Percentage for the year is determined based on points awarded for each
participant's actual performance against his or her personal performance goals.
Performance goals for each executive officer are determined by the CEO at the
beginning of the fiscal year and reviewed by the Committee. Examples of
individual performance goals for fiscal 2001 included Corporate transition
goals, marketing and online customer activity goals, product releases, net
revenue and earnings per share targets, and goals related to labor costs, gross
margin percentage, and administrative and overhead expenses. Subjective
assessments of performance may result in adjustments in individual awards.
- 14 -
Stock Option Plans. The Committee administers the Company's stock option
plans under which options to purchase the Company's Common Stock may be granted
in an effort to align the interests of management with those of shareholders and
provide a reward for long-term performance. Historically, options granted by the
Company have been granted with an exercise price equal to the market price of
the Company's stock on the date of grant. Accordingly, options will have value
to the holder only if the Company's stock price increases. Outstanding options
generally become exercisable at a rate of 25% per year. All grants are subject
to possible acceleration of vesting in connection with certain events leading to
a change in control of the Company. Options are granted from time to time to
executive officers and other management and supervisory personnel based on
recommendations of the CEO. The number of shares of Common Stock subject to each
grant is set at a level intended to create a meaningful opportunity for stock
ownership based on the executive officer or employee's current position with the
Company, the base salary associated with that position, and the executive
officer or employee's personal performance in recent periods. The Compensation
Committee also takes into account the number of vested and unvested options held
by the executive officer or employee in order to maintain an appropriate level
of equity incentive for that executive officer or employee. However, the
Compensation Committee does not adhere to any specific guidelines as to the
relative option holdings of the Company's executive officers or employees.
Under the Omnibus Budget Reconciliation Act of 1993, the federal income tax
deduction for certain types of compensation paid to the chief executive officer
and four other most highly compensated executive officers of publicly held
companies is limited to $1 million per officer per fiscal year unless such
compensation meets certain requirements. The Committee is aware of this
limitation and believes no compensation paid by the Company during fiscal 2001
will exceed the $1 million limitation.
COMPENSATION COMMITTEE
Paul B. Goodrich, Chairman
Matthew A. Kursh
Douglas A. Swerland
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended September 29, 2001, the Compensation Committee of
the Board of Directors consisted of Messrs. Goodrich, Tall, and Kursh. None of
these individuals has served at any time as an officer or employee of the
Company.
- 15 -
Audit Committee Report
The Audit Committee of the Board of Directors (the "Committee") consists of
Messrs. Goodrich, Swerland and Chapin. Each of the Committee members meets the
independence tests established by the New York Stock Exchange.
The following is a report of the audit committee with respect to the Company's
audited financial statements for the fiscal year ended September 29, 2001, which
include the consolidated balance sheets of the Company as of September 29, 2001
and September 30, 2000, and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended September 29, 2001, and the notes thereto.
The audit committee has reviewed and discussed the Company's audited financial
statements with management.
Audit Fees. The aggregate fees billed by Ernst & Young LLP were $104,000
for professional services rendered for the audit of the Company's annual
financial statements for the Company's fiscal year ended September 29, 2001 and
the reviews of the financial statements included in the Company's Forms 10-Q.
Financial Information Systems Design and Implementation Fees. No fees were
billed by Ernst & Young LLP to the Company for the professional services
described in Paragraph (c)(4)(ii) of Rule 2-01 of Regulation SX (financial
information systems design and implementation services). No such services were
rendered by Ernst & Young LLP to the Company for the Company's fiscal year ended
September 29, 2001.
All other fees. The aggregate fees billed by Ernst & Young LLP to the
Company were $42,000 for other professional services rendered to the Company for
its fiscal year ended September 29, 2001, consisting of audit related services
of $13,000 for accounting consultations and Securities and Exchange Commission
("SEC") registration statements, and $29,000 for nonaudit services which
generally included tax compliance and tax consultations.
The Audit Committee did consider whether the provision of nonaudit services is
compatible with the principal accountants' independence and concluded that the
provision of other nonaudit services has been compatible with maintaining the
independence of the Company's external auditors.
The audit committee has discussed with Ernst & Young LLP, the Company's
independent accountants, the matters required to be discussed by SAS 61
(Codification of Statements on Accounting Standards) which includes, among other
items, matters related to the conduct of the audit of the Company's financial
statements.
The audit committee has also received written disclosures and the letter from
Ernst & Young LLP required by Independence Standards Board Standard No. 1 (which
relates to the accountant's independence from the Company and its related
entities) and has discussed with Ernst & Young LLP its independence from the
Company.
Based on the review and discussions referenced to above, the Committee
recommended to the Company's Board that the Company's audited financial
statements be included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 29, 2001.
SUBMITTED BY THE AUDIT COMMITTEE OF
THE BOARD OF DIRECTORS
Ross K. Chapin, Chairman
Douglas A. Swerland
Paul B. Goodrich
- 16 -
Stock Price Performance Graph
Stock Price Performance Graph
Shown on this page is a table comparing cumulative total shareholder return on
PhotoWorks, Inc. Common Stock for each of the last five fiscal years to the
cumulative total return for the Nasdaq Composite Index and the Nasdaq Retail
Index. This cumulative return includes the reinvestment of cash dividends.
$100 invested on 9/30/96 in stock or index-including reinvestment of
dividends Fiscal year ending September 30.
MEASUREMENT PERIOD PHOTOWORKS NASDAQ NASDAQ
(FISCAL YEAR COVERED) INC. COMPOSITE INDEX RETAIL INDEX
1996 $100 $100 $100
1997 74 137 114
1998 20 139 98
1999 28 228 116
2000 19 302 86
2001 1 124 75
- 17 -
MISCELLANEOUS MATTERS
Independent Auditors
The Company has selected Ernst & Young LLP to continue as its independent
auditors for the current year. Representatives of Ernst & Young LLP are expected
to be present at the Annual Meeting and have the opportunity to make a statement
if they so desire and respond to appropriate questions.
Other Business
As of the date of this Proxy Statement, management knows of no other business
which will be presented for action at the meeting. If any other business
requiring a vote of the shareholders should come before the meeting, the persons
designated as your proxies will vote or refrain from voting in accordance with
their best judgment.
Proposals of Shareholders
The Company's Bylaws provide that advance notice of nominations for the election
of directors at a meeting of shareholders must be delivered to or mailed and
received by the Company ninety (90) days prior to the date one year from the
date of the immediately preceding annual meeting of shareholders or, in the case
of a special meeting of shareholders to elect directors, the close of business
on the 10th day following the date on which notice of such meeting is first
given to shareholders. The Bylaws also provide that advance notice of proposals
to be brought before an annual meeting by a shareholder must be submitted in
writing and delivered to or mailed and received by the Company not later than
ninety (90) days prior to the date one year from the date of the immediately
preceding annual meeting of shareholders.
Each notice of a nomination or proposal of business must contain, among other
things, (i) the name and address of the shareholder who intends to make the
nomination or proposal; (ii) a representation that the shareholder is a holder
of record of stock of the Company entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice or to vote at the meeting for the proposal; (iii) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder and any material interest of such shareholder in any proposal to be
submitted to the meeting; (iv) such other information regarding each nominee or
proposals as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission; and (v)
with respect to any nominations, the consent of each nominee to serve as a
director of the Company if elected.
A copy of the full text of the provisions of the Company's Bylaws dealing with
shareholder nominations and proposals is available to shareholders from the
Secretary of the Company upon written request.
Shareholders who intend to have a proposal considered for inclusion in the
Company's proxy materials for presentation at the 2003 Annual Meeting must
submit the proposal to the Company no later than November 7, 2002. Shareholders
who intend to present a proposal at the 2003 Annual Meeting without inclusion of
such proposal in the Company's proxy materials are required to provide notice of
such proposal to the Company no later than November 7, 2002. The Company
reserves the right to reject, rule out of order, or take appropriate action with
respect to any proposal that does not comply with these and other applicable
requirements.
By Order of the Board of Directors
/s/ Loran Cashmore Bond
Loran Cashmore Bond
Secretary
December 21, 2001
Seattle, Washington
- 18 -
Please mark your
vote as indicated |X|
in this example
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 1.
1. ELECTION OF DIRECTOR: WITHHOLD
FOR AUTHORITY
Election of the following nominee to serve nominee from nominee
his term or until his respective successor listed listed
is elected and qualified.
|_| |_|
Class II nominee to serve a three year term:
Nominee: 01 Gary R. Christophersen
"Please Mark Inside Boxes so that Data
Processing Equipment will Record Your Vote."
In their discretion, the Proxies are
authorized to vote upon such other business
as may properly come before the meeting or
any adjournments or postponements thereof.
This Proxy, when properly executed, will be
voted in the manner directed herein by the
undersigned. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED "FOR" ITEM 1.
Signature(s) Dated , 2002
-------------------------------------------- -----------
NOTE: Please sign exactly as your name appears on your stock certificate. When
shares are held jointly, each person should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title as such. An
authorized person should sign on behalf of corporations, partnerships, and
associations and give his or her title.
- --------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
PHOTOWORKS, INC.
(Formerly Seattle FilmWorks, Inc.)
PROXY
Proxy Solicited on behalf of the Board of Directors
for the Annual Meeting of the Shareholders to be held February 5, 2002
The undersigned hereby appoints Gary R. Christophersen and Loran Cashmore
Bond, and each of them, as Proxies, with full power of substitution, and hereby
authorizes them to represent and vote, as directed below, all the shares of
Common Stock of PHOTOWORKS, INC. held of record by the undersigned on December
7, 2001, at the Annual Meeting of Shareholders to be held February 5, 2002, or
any adjournment or postponement thereof.
(Continued, and to be signed on the other side.)
- --------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^