UNITED STATES
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 |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-12
PHOTOWORKS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------------------
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------------------
PHOTOWORKS, INC.
Notice of Annual Meeting of Shareholders
To be held on Tuesday, February 3, 2004
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 1:30 p.m. Pacific Standard Time, on
Tuesday, February 3, 2004, at PhotoWorks, Inc., 1260 16th Avenue West, Seattle,
Washington 98119, for the following purposes:
1. To elect three (3) Class I directors to serve a three year term.
2. To approve an amendment to the Company's 1999 Stock Incentive
Compensation Plan to increase by 500,000 the aggregate number of
shares of Common Stock available for issuance under the Plan.
3. 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 5, 2003, 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 22, 2003
- --------------------------------------------------------------------------------
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 27, 2003 is enclosed.
- --------------------------------------------------------------------------------
1
PhotoWorks, 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 December 30, 2003) 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 3, 2004, at 1:30 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 5, 2003 (the "Record
Date"), are entitled to vote at the meeting. As of December 5, 2003, there were
16,682,285 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 (on an as
converted basis) 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 on
which the Common Stock is entitled to vote. 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. Holders of the Common Stock and
Preferred Stock vote together on all matters presented at the Annual Meeting,
except for the election of two Class I directors, Mr. Ross Chapin and Mr. Paul
Goodrich. Under the terms of the Series A Preferred Stock, the holders of the
Preferred Stock are entitled to elect two directors voting separately from the
Common Stock.
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.
2
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. The two nominees who receive the greatest number of votes
cast by the holders of the Preferred Stock will be elected as directors,
regardless of the vote of the holders of the Common Stock. With respect to the
amendment to the 1999 Stock Incentive Plan, the approval of a majority of
shareholders present and voting on the proposal is required for passage.
Abstentions and broker non-votes will have no impact on the outcome of any of
the proposals.
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.
Voting Securities and Principal Holders
The following table sets forth information, as of December 5, 2003, 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
- --------------------------------------------------------------------------------
Common Stock
Dimensional Fund Advisors (1) 979,387 5.88%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Robert A. Simms (2) 1,137,144 6.83%
55 Railroad Avenue
Greenwich, CT 06830
Gary R. Christophersen (3) 1,691,761 10.0%
1260 16th Avenue West
Seattle, WA 98119
Matinicus LP (4) 3,373,533 17.1%
187 Foreside Road
Falmouth, Maine 04105
Preferred Stock
The Tahoma Fund, L.L.C. (5) 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. (6) 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
3
(1) The holding shown is as reported by Dimensional Fund Advisors,
("Dimensional") in a Schedule 13G filed February 3, 2003 by
Dimensional pursuant to Rule 13d-1 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). According to the Schedule
13G filed by Dimensional Fund Advisors, Dimensional is an investment
advisor registered under Section 203 of the Investment Advisors Act
of 1940, furnishes investment advice to four investment companies
registered under the Investment Company Act of 1940, and serves as
investment manager to certain commingled group trusts and separate
accounts. These investment companies, trusts and accounts are the
"Funds." In its role as investment advisor or manager, Dimensional
possesses voting and/or investment power over the securities of the
Issuer described in this schedule that are owned by the Funds, and
may be deemed to be the beneficial owner of the shares of the Issuer
held by the Funds. However, all securities reported in this schedule
are owned by the Funds. Dimensional disclaims beneficial ownership
of such securities. In addition, all securities reported in this
schedule are owned by advisory clients of Dimensional, no one of
which, to the knowledge of Dimensional, owns more than 5% of the
class.
(2) The holding shown is as reported by Robert A. Simms ("Simms") in a
Schedule 13D filed January 16, 2002 by Simms pursuant to Rule 13d-1
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(3) Includes options to purchase 198,958 shares of Common Stock granted
under the Company's Stock Option Plans which are currently
exercisable or exercisable within 60 days of December 5, 2003.
(4) Includes Subordinated Convertible Debentures that are convertible to
3,002,533 shares of Series B Preferred Stock, $.01 par value with a
stated value of $75 per share ("Series B Preferred Stock"). The
debentures were acquired by Matinicus from Zesiger Capital Group in
December 2003. Series B Preferred Stock is convertible into common
stock, $.01 par value ("Common Stock") at an initial conversion
price of $.75 per share of Common Stock, subject to anti-dilution
protection.
4
(5) 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 13.62%
of the Common Stock, based on 16,682,285 shares outstanding as of
December 5, 2003.
(6) 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 16,682,285 shares outstanding as of December 5, 2003.
Equity Compensation Plan Information
(at September 27, 2003)
Number of Securities to Weighted average Number of securities remaining
be issued upon exercise of exercise price of available for future issuance under
outstanding options, warrants, outstanding options, equity compensation plans
and rights warrants and rights (excluding securities reflected
Plan Category in column (a))
- --------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by shareholders 2,312,337 $1.71 569,503
Equity compensation plans not
approved by shareholders 681,285 $1.32 118,715
---------- --------
Total 2,993,622 $1.62 688,218
========== ========
- ----------
1999 Employee Stock Option Plan. In October 1999, The Company's board of
directors adopted the 1999 Employee Stock Option Plan, or 1999 Employee Plan,
which provides for discretionary grants of non-qualified stock options to
non-officer employees and other service providers. A total of 800,000 shares of
common stock have been reserved for issuance under the 1999 Employee Plan. As of
September 27, 2003 there were options to purchase 681,285 shares outstanding and
118,715 shares available for awards under the 1999 Employee Plan.
All options under the 1999 Employee Plan expire five years from the grant date
and each option will have an exercise price of not less than the fair market
value of the Company's stock on the date the option is granted. The options
granted under the 1999 Employee Plan generally vest over three to four years. In
the event of termination of an optionee's employment with the Company, vesting
of options will stop and the optionee may exercise vested options for a
specified period of time after the termination. Upon certain changes in control
of the Company, options may vest as determined by the Plan Administrator, or
unless the acquiring company assumes the options or substitutes with comparable
options.
5
PROPOSAL 1
Election of Directors
The Board of Directors of the Company currently consists of seven 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.
- --------------------------------------------------------------------------------
Name Age Class Expiration of Term
- --------------------------------------------------------------------------------
Paul B. Goodrich 58 I 2004
- --------------------------------------------------------------------------------
Ross K. Chapin 50 I 2004
- --------------------------------------------------------------------------------
Philippe Sanchez 39 1 2004
- --------------------------------------------------------------------------------
Gary R. Christophersen 57 II 2005
- --------------------------------------------------------------------------------
Douglas M. Rowan 65 II 2006
- --------------------------------------------------------------------------------
Douglas A. Swerland 58 III 2006
- --------------------------------------------------------------------------------
Matthew A. Kursh 39 III 2006
- --------------------------------------------------------------------------------
The Board of Directors has unanimously nominated Mr. Sanchez, Mr. Chapin, and
Mr. Goodrich for re-election to the Board. The holders of the Preferred Stock
have nominated Mr. Chapin and Mr. Goodrich for re-election to the Board and only
holders of the Preferred Stock will be entitled to vote with respect to Mr.
Chapin and Mr. Goodrich. If elected, Class I directors will serve until the
Annual Meeting in 2007. All directors hold office until the Annual Meeting of
shareholders at which their terms expire and the election and qualification of
their successors.
Although the Board of Directors anticipates that all nominees will be available
to serve as directors of the Company, should any of them 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 the
Class I directors.
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 directors 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 5, 2003.
Amount and Nature
of Beneficial Percent of
Directors: Age Ownership Class
- ------------------------------------------------------------------------------------------------------
Philippe Sanchez 39 0 *
Gary R. Christophersen (1) 57 1,691,761 10.0%
Ross K. Chapin (2) 50 117,500 *
Paul B. Goodrich (3) 58 117,500 *
Matthew A. Kursh (4) 39 356,250 2.1%
Douglas A. Swerland (5) 58 181,063 1.1%
Douglas M. Rowan (6) 65 328,500 2.0%
Additional Named Executives:
Michael F. Lass (7) 49 587,218 3.5%
Loran Cashmore Bond (8) 46 229,446 1.4%
All current directors and named executive officers
as a group (9 persons) (9) 3,609,238 20.1%
* Percent of class is less than 1%
6
(1) Includes options to purchase 198,958 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
5, 2003.
(2) Includes options to purchase 117,500 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
5, 2003. 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 117,500 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
5, 2003. 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 356,250 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
5, 2003.
(5) Includes options to purchase 169,250 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
5, 2003.
(6) Includes options to purchase 95,000 shares of Common Stock which are
currently exercisable or exercisable within 60 days of December 5,
2003.
(7) Includes options to purchase 251,145 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
5, 2003.
(8) Includes options to purchase 139,917 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
5, 2003.
(9) Includes options to purchase 1,445,520 shares of Common Stock which
are currently exercisable or exercisable within 60 days of December
5, 2003.
Philippe Sanchez has been the President and Chief Operating Officer since
October 2003. From 2001 to 2003, Mr. Sanchez was senior Vice President of
Marketing at Getty Images, a leading imagery company, where he managed worldwide
strategic brand initiatives. From 1995 to 2001, Mr. Sanchez worked for Nike,
Inc. serving in various general management, product marketing and merchandising
roles in Europe, Asia and the Americas. From 1993 to 1995, Mr. Sanchez served as
a licensing manager for Disney's Consumer Products Europe and Middle East out of
the company's European headquarters in Paris.
Gary R. Christophersen has been the Company's Chairman since July 2000. Mr.
Christophersen reassumed the role of President and Chief Executive Officer from
August 2001 to October 2003. 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 Andover Acquisition Co., 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 Sharebuilder Corporation.
7
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.
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.
Douglas M. Rowan became a Director of the Company in August 2002. Mr. Rowan has
served as President and CEO since June 1997 of Imaging Solutions Corporation, a
Kirkland, Washington-based consulting company, established to create value from
digital content assets through technology, copyright and creative marketing
approaches. Mr. Rowan also served as founder and CEO at Impli, Inc. from August
1998 until February 2002 and was President and CEO of Corbis Corporation from
1994 to 1997.
Board and Committee Meetings
The Board of Directors of the Company held a total of twelve meetings during the
fiscal year ended September 27, 2003. 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 Rowan. As defined by the rules of the Nasdaq Stock Market, Mr.
Swerland and Mr. Rowan are independent directors. Mr. Chapin is not independent
due to his position with Orca Bay Partners, L.L.C., an affiliate of the Company.
The Committee is governed by a charter adopted by the Board of Directors on May
30, 2000, a copy of which is attached to this Proxy Statement as Exhibit A.
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 six meetings during fiscal 2003.
No member of the Audit Committee qualifies as an "audit committee financial
expert" as defined by the rules of the Securities and Exchange Commission. The
Board has been seeking to add a director who would so qualify, but has been
unsuccessful to date.
8
The Board of Directors has a Compensation Committee which consists of Messrs.
Goodrich, Kursh, and Swerland. Each member of the Compensation Committee is an
independent director as defined by the rules of the Nasdaq Stock Market. The
Committee is responsible for establishing the policies which govern the
compensation of executive officers of the Company, setting compensation levels
for the President 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 plans.
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 $1,800
per month 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 20,000 shares of the Company's Common Stock on November 26, 2002 in
lieu of the 2003 annual grant.
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 a severance
payment equal to one half (50%) of the executive's annual base salary for the
fiscal year in which the termination occurs.
In addition, the Company and Mr. Lass and Ms. Cashmore Bond have entered into an
employment and severance agreement to ensure that the Company will have the
continued dedication of the Executive subsequent to the hiring of Mr. Philippe
Sanchez as President and CEO. In the event of the termination of the executive's
employment for a reason other than cause or the executive's resignation for good
reason, the executive shall be entitled to a severance payment equal to one half
(50%) of the executive's base salary as of October 2003. The agreement expires
on October 20, 2004.
The Company and Mr. Sanchez have entered into a employment agreement as more
fully described under "Employment Agreements".
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.
Mr. Chapin, Mr. Goodrich, Mr. Swerland, Mr. Kursh, Mr. Rowan, Mr.
Christophersen, Mr. Lass and Ms. Cashmore Bond were late in filing a Report on
Form 4 relating to a stock option grant on November 26, 2002.
9
Remuneration of Executive Officers
The following table sets forth certain information concerning the compensation
paid by the Company for services rendered during fiscal years 2003, 2002 and
2001 to any person who served as Chief Executive Officer during fiscal 2003, and
executive officers of the Company whose total salary and bonus exceeded $100,000
in fiscal 2003 (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 (*)
- --------------------------------------------------------------------------------------------------------------------------
Gary R. Christophersen 2003 $175,099 $ 43,740 45,000 $9,693
President/CEO, Chairman 2002 150,630 56,182 125,000 7,499
and Director 2001 238,905 0 0 9,112
Michael F. Lass 2003 $175,362 $ 36,450 45,000 $7,123
Executive Vice President 2002 175,304 62,637 125,000 6,646
2001 150,258 29,387 125,000 4,162
Loran Cashmore Bond
Vice President-Administration 2003 $126,621 $ 21,060 35,000 $7,622
Secretary/Treasurer 2002 125,239 31,675 75,000 6,511
2001 105,202 21,594 40,000 6,277
- ----------
(*) These amounts represent Company contributions to the PhotoWorks
401(k) Plan and payments for term life insurance, short-term
disability insurance and long-term disability insurance.
Employment Agreements
The Company and Mr. Philippe Sanchez are parties to an employment agreement
dated October 3, 2003 (the "agreement"). Under terms of the agreement, Mr.
Sanchez will receive a base annual salary of $225,000. Upon certain conditions,
Mr. Sanchez's salary will increase to $300,000 per year. Mr. Sanchez will also
participate in a performance bonus program of up to 60% of base salary. The
performance bonus plan provides financial incentives based on the Company's
results compared to financial and other metrics established by the Compensation
Committee and approved by the Board of Directors.
As a hiring incentive, Mr. Sanchez received a stock option grant of 750,000
shares of Common Stock at an exercise price equal to the fair market value of
the shares on the date the option was granted with a vesting period equal to
four years.
In addition, Mr. Sanchez received a stock option grant for 100,000 shares of
Common Stock at an exercise price of $.01. Shares vest in full at the one-year
anniversary of the grant date.
Vesting of the stock options is subject to continued employment with PhotoWorks.
Vesting may accelerate in certain instances.
10
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 2003, 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 45,000 8.67% $.13 11/26/2007 $1,678 $3,709
Michael F. Lass 45,000 8.67% $.13 11/26/2007 $1,678 $3,709
Loran Cashmore Bond 35,000 6.75% $.13 11/26/2007 $1,305 $2,885
- ----------
(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 2003 generally vest in equal annual
installments over three years. 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.
The vesting of options may be accelerated at the
discretion of the administrator of the option plans.
11
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
The following table sets forth certain information as of September 27, 2003,
regarding options to purchase Common Stock held as of September 27, 2003, by
each of the Named Executive Officers, as well as the exercise of such options
during the fiscal year ended September 27, 2003. 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 27, 2003.
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at September 27, 2003 (2) at September 27, 2003 (3)
Shares Acquired Value ------------------------------ ----------------------------
Upon Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
Gary R. Christophersen 0 $0 131,042 142,708 $12,500 $37,825
Michael F. Lass 0 $0 170,104 191,146 $12,500 $37,825
Loran Cashmore Bond 0 $0 100,250 108,750 $7,500 $24,975
- ----------
(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) Value is calculated by subtracting the exercise price of the option
from the market value of a share of the Company's Common Stock as
reported on the Over The Counter Bulletin Board (OTCBB) on September
27, 2003 and multiplying the difference thereof by the number of
shares.
12
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors (the "Committee") for
fiscal year 2003, 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 President 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 President 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 2003, the President and Chief
Executive Officer's base compensation was reduced from $180,000 to $162,000.
Base salaries for executive officers other than the President 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. Compensation for executive officers was
reduced in fiscal 2003 by 10%.
Incentive Bonus. The Company has an annual incentive compensation plan
pursuant to which executive officers and other managers, supervisory and
professional personnel (approximately 82 persons during fiscal 2003) 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 President 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. The Company
Performance Percentage for fiscal 2003 was a combination of the Company's cash
balance and achievement of growth in digital revenues. Subjective assessments of
performance may result in adjustments in individual awards.
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% to 33% 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.
13
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 2003
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 27, 2003, the Compensation Committee of
the Board of Directors consisted of Messrs. Goodrich, Kursh and Swerland. None
of these individuals has served at any time as an officer or employee of the
Company or is an executive officer at any company where an executive officer of
the Company serves on the Compensation Committee of the Board of Directors.
14
Relationship with Independent Auditor
The following table presents the fees for services rendered by Ernst & Young LLP
during fiscal 2003.
Audit fees $137,635
Audit-related fees $ 2,500
Tax fees $ 68,020
All other fees $ 0
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.
All services provided by Ernst & Young LLP to the Company must be pre-approved
by the Audit Committee or a designated member of the Audit Committee.
Audit Committee Report
The Audit Committee of the Board of Directors (the "Committee") consists of
Messrs. Chapin, Swerland and Rowan. The Board has determined that Mr. Swerland
and Mr. Rowan are independent based on the definition of independence used by
the NASDAQ Stock Market.
The following is a report of the audit committee with respect to the Company's
audited financial statements for the fiscal year ended September 27, 2003, which
include the consolidated balance sheets of the Company as of September 27, 2003
and September 28, 2002, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended September 27, 2003, and the notes thereto.
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 Auditing 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.
The audit committee has reviewed and discussed the Company's audited financial
statements with management.
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 27, 2003.
SUBMITTED BY THE AUDIT COMMITTEE OF THE
BOARD OF DIRECTORS
Ross K. Chapin, Chairman
Douglas A. Swerland
Douglas M. Rowan
15
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 9/30/98 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
1998 $100 $100 $100
1999 135 163 119
2000 94 217 88
2001 6 89 77
2002 5 70 84
2003 14 106 108
16
PROPOSAL 2
Approval of an Amendment to the 1999 Stock Incentive Compensation Plan to
Increase the Number of Shares Available for Issuance
The Board has approved, subject to shareholder approval, an amendment to
the PhotoWorks, Inc. 1999 Stock Incentive Compensation Plan as amended (the
"Incentive Plan") which increases the number of shares available for issuance
under the Incentive Plan from 1,800,000 shares of Common Stock to 2,300,000
shares. At December 5, 2003, 1,624,000 shares are issued and outstanding under
the Incentive Plan and 176,000 remain available for grant. The Board of
Directors believes that the use of equity incentive compensation is an important
element in attracting and retaining qualified employees, directors and
consultants. The average exercise price of options granted under the Incentive
Plan is approximately $1.44, which is significantly higher than the current
market price of the Common Stock. The Board believes that it must be able to
continue to grant equity incentives if the Company is going to be able to retain
the management and employees who are critical to the long-term success of the
Company.
The following description of the Incentive Plan is a summary and so is
qualified by reference to the complete text of the Incentive Plan, which is
available at the Securities and Exchange Commission Website, www.sec.gov, or
upon request of the Company.
Summary Description of the Incentive Plan
The Incentive Plan may be administered either by the Board or a Committee
of the Board (in either case, the "Committee"). The Committee will have broad
discretion to determine the amount and type of awards and terms and conditions
of the awards. Individual grants will generally be based on a person's present
and potential contribution to the Company. As of November 30, 2003, the Company
had approximately 208 employees and 6 non-employee directors who are eligible to
participate in the Incentive Plan. Since the grant of awards is based upon a
determination made by the Committee after a consideration of various factors,
the Company currently cannot determine the nature and amount of any awards that
will be granted in the future to any eligible individual or group of
individuals. However, the maximum number of shares that can be made subject to
awards under the Incentive Plan during any calendar year to any executive
officer whose compensation is required to be disclosed pursuant to the rules and
regulations under the Exchange Act (generally, the chief executive officer and
the four other most highly compensated executive officers) is 375,000, except
that the Company may make additional one-time grants to newly hired participants
of up to 375,000 shares per such participant. In addition, the maximum number of
shares that can be made subject to awards to a non-employee director of the
Company during any calendar year is generally limited to 50,000 unless approved
by the Board of Directors. The Company believes that with these limitations and
other provisions of the Incentive Plan, options granted under the Incentive Plan
will generate "qualified performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended, (the "Code")
and will therefore not be subject to the $1,000,000 cap on deductibility for
federal income tax purposes of certain compensation payments in excess of
$1,000,000. See "Certain Federal Income Tax Consequences" below.
Awards may be granted in the form of incentive stock options ("ISOs")
within the meaning of Section 422 of the Code, nonqualified stock options
("NQOs") (each ISO or NQO, an "Option," and collectively, "Options"), stock
appreciation rights, stock awards in the form of restricted stock ("Restricted
Stock"), or other arrangements determined by the Committee. Any award may be
granted either alone or in tandem with other awards granted under the Incentive
Plan. The option price of ISOs must be equal to or greater than the fair market
value of the Common Stock on the date of grant (or 110% of the fair market value
in the case of employees who own stock representing more than 10% of the
combined voting power of the Company's stock). The option price of NQOs may not
be less than the fair market value of the Common Stock on the date of grant. The
Committee may condition the grant of the award upon the attainment of specified
performance goals or other criteria, which need not be the same for all
participants. No ISOs may be granted under the Incentive Plan on or after
November 23, 2009, but ISOs outstanding under the Incentive Plan may extend
beyond that date.
17
Options. Options granted under the Incentive Plan may be ISOs or NQOs. The
exercise price of ISOs may not be less than the fair market value of the shares
subject to the ISO on the date of grant. The term of any ISO granted under the
Incentive Plan may not exceed ten years. In addition, ISOs are subject to
certain other limitations in order to take advantage of the favorable U.S. tax
treatment that may be available for ISOs.
Restricted Stock. Restricted Stock awards consist of non-transferable
shares of Common Stock of the Company which may be subject to a right of
repurchase by the Company. The Committee may provide for the lapse of the
transfer restrictions over a period of time, or may accelerate or waive such
restrictions, in whole or in part, based on service, performance or other
criteria determined by the Committee.
Stock Appreciation Rights. A stock appreciation right will give the holder
the right to receive an appreciation distribution in an amount equal to the
excess of the fair market value of the number of shares of Common Stock covered
by the right over the exercise price per share subject to the right. Stock
appreciation rights may be granted separately or in tandem with a related
Option. Payment may be made in a combination of shares of Common Stock or in
cash, as determined by the Committee.
The consideration payable upon issuance or exercise of an award and any
taxes related to an award must generally be paid in cash or check. However, the
Committee, in its sole discretion, may authorize payment by the tender of Common
Stock already owned by the participant, or by delivery of other property,
including securities of the Company. The Company generally will not receive any
consideration upon the grant of any awards. Awards generally may be exercised at
any time within three months after termination of a participant's employment by,
or consulting relationship with, the Company (but, only to the extent
exercisable or payable at the time of termination). However, if termination is
due to the participant's death or disability, the award generally may be
exercised for one year. Except as authorized by the Committee, no award shall be
assignable or otherwise transferable by a participant other than by will or by
the laws of descent and distribution.
The Committee may adjust the performance goals and measurements applicable
to awards. The Committee also may waive in whole or in part any or all
restrictions, conditions, vesting or forfeiture with respect to any award
granted under the Incentive Plan. The Board may amend, alter or discontinue the
Incentive Plan or any award at any time, except that the consent of a
participant is required if the participant's rights under an outstanding award
would be impaired. In addition, the shareholders of the Company must approve any
amendment, alteration or discontinuance of the Incentive Plan that would (i)
increase the total number of shares reserved under the Incentive Plan, (ii) with
respect to provisions solely as they relate to ISOs, to the extent required for
the Incentive Plan to comply with Section 422 of the Code, (iii) to the extent
required by other applicable laws, rules or regulations or (iv) to the extent
that the Board otherwise concludes that shareholder approval is advisable.
The Incentive Plan constitutes an unfunded plan for incentive and deferred
compensation. The Company is not required to create trusts or arrangements to
meet its obligations under the Incentive Plan to deliver stock or make payments.
In the event of a "change in control" of the Company, as defined in the
Incentive Plan, in which the outstanding options do not remain outstanding or
are not assumed by the surviving entity or replaced with comparable options, the
vesting of outstanding awards under the Incentive Plan will, unless the
applicable agreement with respect to the award or the Committee determines
otherwise, subject to certain limitations, be accelerated. A "change in control"
is defined to include (i) a merger or consolidation of the Company in which more
than 50% of the voting power of the continuing or surviving entity's outstanding
securities after the transaction is owned by persons who were not Company
shareholders immediately prior to such transaction, and (ii) the sale or
transfer of all or substantially all of the Company's assets.
Certain Federal Income Tax Consequences
The following summary of United States federal income tax consequences is
based upon the existing Code, administrative pronouncements, judicial decisions
and final, temporary and proposed Treasury Regulations, all of which are subject
to change, including on a retroactive basis. The applicable rules are complex,
and income tax consequences may vary depending upon the particular circumstances
of each plan participant. This proxy statement describes United States federal
income tax consequences of general applicability, but does not purport to
describe particular consequences to any individual plan participant, or any
foreign, state or local tax consequences. Each participant should therefore
consult his or her own tax advisor concerning participation in the Incentive
Plan.
18
Incentive Stock Options
Awards and Exercise of Options. ISOs are intended to constitute "incentive
stock options" within the meaning of Section 422 of the Code. ISOs may be
granted only to employees of the Company (including directors who are also
employees). The recipient of an option (the "Optionee") does not recognize
regular taxable income upon either the grant or exercise of an ISO. However, the
excess of the fair market value of the shares purchased upon exercise over the
option exercise price (the "Option Spread") is includable in the Optionee's
"alternative minimum taxable income" ("AMTI") for purposes of the alternative
minimum tax ("AMT"). The Option Spread is generally measured on the date of
exercise and is includable in AMTI in the year of exercise. Special rules
regarding the time of AMTI inclusion and holding period may apply for shares
subject to a "substantial risk of forfeiture" within the meaning of Section 83
of the Code (including, shares treated as subject to a substantial risk of
forfeiture because sale of such shares could subject the seller to suit under
Section 16(b) of the Exchange Act. Optionees whose shares at the time of
exercise are subject to a substantial risk of forfeiture should consult their
own tax advisors regarding such special rules, including the advisability of
making an election under Section 83(b) of the Code (a "Section 83(b) Election")
within 30 days of exercising their options.
Sale of Option Shares. If an Optionee holds the shares purchased under an
ISO for more than two years from the date the ISO was granted and for more than
one year from the date such shares were transferred to the Optionee, any gain
from a sale of the shares other than to the Company should be long-term capital
gain. Under these circumstances, the Company would not be entitled to a tax
deduction at the time the ISO was exercised or at the time the stock was sold.
If an Optionee were to dispose of stock acquired pursuant to an ISO before the
end of either of the foregoing required holding periods (a "Disqualifying
Disposition"), the amount by which the fair market value of the stock at the
time the ISO was exercised exceeded the exercise price (or in most cases, if
less, the amount of gain realized on the sale) would be taxable as ordinary
income, and the Company would be entitled to a corresponding tax deduction. Such
income is subject to information reporting requirements and may become subject
to withholding of income and employment taxes at a future time, but is not
currently subject to such withholding. Gain from a Disqualifying Disposition in
excess of the amount required to be recognized as ordinary income is capital
gain and will be long-term capital gain if such Disqualifying Disposition occurs
more than one year after exercise. Optionees are required to notify the Company
promptly after making a Disqualifying Disposition. If stock is sold to the
Company rather than to a third party, the sale may not produce capital gain or
loss. A sale of shares to the Company will constitute a redemption of such
shares, which could be taxable as a dividend unless the redemption is "not
essentially equivalent to a dividend" within the meaning of the Code or
satisfies another redemption test.
Exercise With Stock. If an Optionee pays for ISO shares with other shares
of the Company acquired under an ISO or a qualified employee stock purchase plan
("statutory option stock"), the tender of such other shares is a Disqualifying
Disposition of such other shares if the above described (or other applicable)
holding periods respecting those other shares have not been satisfied. If the
holding periods with respect to such other shares are satisfied, or the other
shares were not acquired under a statutory stock option of the Company, then any
appreciation in value of the surrendered other shares is not taxable upon
surrender. Special basis and holding period rules apply where previously owned
stock is used to exercise an ISO.
Nonqualified Stock Options
Awards and Exercise of Options. An Optionee is not taxable upon the award
of a NQO. Federal income tax consequences upon exercise will depend upon whether
the shares thereby acquired are subject to a "substantial risk of forfeiture."
If the shares are not subject to a substantial risk of forfeiture, or if they
are so restricted and the Optionee files a Section 83(b) Election with respect
to the shares, the Optionee will have ordinary income at the time of exercise
measured by the Option Spread on the exercise date. The Optionee's tax basis in
the shares will be their fair market value on the date of exercise, and the
holding period for purposes of determining whether capital gain or loss upon
sale is long- or short-term also will begin on that date. If the shares are
subject to a substantial risk of forfeiture and no Section 83(b) Election is
filed, the Optionee will not be taxable upon exercise, but instead will have
ordinary income, on the date stock is no longer subject to a substantial risk of
forfeiture, in an amount equal to the difference between the amount paid for the
shares under the Option and their fair market value as of the date of lapse; in
addition, the Optionee's holding period will begin on the date of lapse.
19
Optionees whose shares at the time of exercise are subject to a
substantial risk of forfeiture should consult their own tax advisors regarding
the special rules that apply to such shares, including the advisability of
making a Section 83(b) Election within 30 days of exercising their options. The
amount of ordinary income taxable to an Optionee who was an employee at the time
of grant constitutes "supplemental wages" subject to withholding of income and
employment taxes by the Company, and the Company receives a corresponding income
tax deduction.
Sale of Option Shares. Upon sale, other than to the Company, of shares
acquired under a NQO, an Optionee generally will recognize capital gain or loss
to the extent of the difference between the sale price and the Optionee's tax
basis in the shares, which will be long-term gain or loss if the employee's
holding period in the shares is more than one year. If stock is sold to the
Company rather than to a third party, the sale may not produce capital gain or
loss. A sale of shares to the Company will constitute a redemption of such
shares, which could be taxable as a dividend unless the redemption is "not
essentially equivalent to a dividend" within the meaning of the Code or
satisfies another redemption test.
Exercise with Stock. If an Optionee tenders Common Stock (other than
statutory option stock -- see above) to pay all or part of the exercise price of
a NQO, the Optionee will not have a taxable gain or deductible loss on the
surrendered shares. Instead, shares acquired upon exercise that are equal in
value to the fair market value of the shares surrendered in payment are treated
as if they had been substituted for the surrendered shares, taking as their
basis and holding period the basis and holding period that the Optionee had in
the surrendered shares. The fair market value of the additional shares is
included in the Optionee's income and those shares have a tax basis equal to
this fair market value and a holding period that begins on the date of exercise.
If the surrendered shares are statutory option stock as described above
under "Incentive Stock Options", with respect to which the applicable holding
period requirements for favorable income tax treatment have not expired, then
the newly acquired shares substituted for the statutory option shares should
remain subject to the federal income tax rules governing the surrendered shares,
but the surrender should not constitute a "Disqualifying Disposition" of the
surrendered stock.
Section 162(m) Limitations
Section 162(m) of the Code limits to $1,000,000 per person the amount that
the Company may deduct for compensation paid to its CEO or any of its four other
most highly compensated executive officers in any year. Compensation received
through the exercise of an option will not be subject to the $1,000,000 limit if
the option and the plan meet certain requirements. One such requirement is that
the plan must state the maximum number of shares with respect to which options
may be granted to any employee during a specified period. Accordingly, the
Incentive Plan provides that no participant, with certain exceptions, may be
granted options to acquire more than 375,000 shares in any year.
Shareholders are being asked to approve the increase to the number of
shares available for issuance under the Incentive Plan. The affirmative vote of
the holders of a majority of the outstanding shares of the Common Stock and
Preferred Stock of the Company, voting together, represented and voting at the
Annual Meeting is required to approve the amendment to the Incentive Plan.
The Board recommends a vote "FOR" approval of the
amendment to the Incentive Plan.
20
MISCELLANEOUS MATTERS
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 2004 Annual Meeting must
submit the proposal to the Company no later than September 2, 2004. Shareholders
who intend to present a proposal at the 2005 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 4, 2004. 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 22, 2003
Seattle, Washington
21
Exhibit A
AUDIT COMMITTEE CHARTER
Adopted by the Board of Directors of
PhotoWorks, Inc.
Adopted May 30, 2000
Composition:
The audit committee shall be composed of three or more directors, as determined
by the board of directors. Each of the committee members shall meet the
independence and financial literacy requirements of NASDAQ unless the Board
determines that no more than one individual who does not meet the independence
requirements would bring valuable financial or accounting experience to the
committee. In addition, at least one of the members shall have past employment
experience in finance or accounting, requisite professional certification in
accounting, or any other comparable experience or background which results in
the individual's financial sophistication, including being or having been a
chief executive officer, chief financial officer or other senior officer with
financial oversight responsibilities.
Unless a chair is designated by the board of directors, the committee members
may appoint their own chair by majority vote.
Responsibilities
1. Recommend to the board of directors the selection of the independent auditor,
evaluate the performance of the independent auditor and, if so determined by the
audit committee, recommend to the board of directors replacement of the
independent auditor; it being acknowledged that the independent auditor is
ultimately accountable to the board of directors and the audit committee, as
representatives of the stockholders.
2. Ensure the receipt of, and evaluate, the written disclosures and the letter
that the independent auditor submits to the audit committee regarding the
auditor's independence in accordance with Independence Standards Board Standard
No. 1, discuss such reports with the auditor and, if so determined by the audit
committee in response to such reports, recommend that the board of directors
take appropriate action to address issues raised by such evaluation.
3. Discuss with the independent auditor the matters required to be discussed by
SAS 61, as it may be modified or supplemented.
4. Instruct management, the independent auditor and the internal auditor that
the committee expects to be informed if there are any subjects that require
special attention or if they perceive any significant weaknesses in the
company's information and reporting systems.
5. Meet with management and the independent auditor to discuss the annual
financial statements and the report of the independent auditor thereon, and to
discuss significant issues encountered in the course of the audit work,
including restrictions on the scope of activities, access to required
information and the adequacy of internal financial controls.
6. Review the management letter delivered by the independent auditor in
connection with the audit.
7. Meet quarterly with management and the independent auditor to discuss the
quarterly financial statements prior to the filing of the Form 10Q; provided
that this responsibility may be delegated to the chairman of the audit
committee.
8. Meet at least once each year in separate executive sessions with management
and the independent auditor to discuss matters that any of them or the committee
believes could significantly affect the financial statements and should be
discussed privately.
9. Have such meetings with management and the independent auditor as the
committee deems appropriate to discuss significant financial risk exposures
facing the company and management's plans for monitoring and controlling such
exposures.
10. Review significant changes to the company's accounting principles and
practices proposed by the independent auditor or management.
22
11. Conduct or authorize such inquiries into matters within the committee's
scope of responsibility as the committee deems appropriate. The committee shall
be empowered to retain independent counsel and other professionals to assist in
the conduct of any such inquiries.
12. Provide minutes of audit committee meetings to the board of directors, and
report to the board of directors on any significant matters arising from the
committee's work.
13. At least annually, review and reassess this charter and, if appropriate,
recommend proposed changes to the board of directors.
14. Prepare the report required by the rules of the Securities and Exchange
Commission to be included in the company's annual proxy statement.
15. In the performance of its responsibilities, the audit committee is the
representative of the shareholders. However, it is not the responsibility of the
audit committee to plan or conduct audits, or to determine whether the company's
financial statements are complete and accurate or in accordance with generally
accepted accounting principles.
23
Please
Mark Here
for Address |_|
Change or
Comments
SEE REVERSE SIDE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1 AND 2.
1. ELECTION OF DIRECTORS: Election of the following nominee to serve his term
or until his respective successor is elected and qualified.
Class I nominee to serve a three year term:
Nominee 01 Philippe Sanchez
WITHHOLD
AUTHORITY
FOR to vote for
nominee nominee
listed listed
|_| |_|
2. To approve an amendment to the Company's 1999 Stock Incentive Compensation
Plan to increase by 500,000 the aggregate number of shares of Common Stock
available for issuance under the plan.
FOR AGAINST ABSTAIN
|_| |_| |_|
Consenting to receive all future annual meeting materials and shareholder
communications electronically is simple and fast! Enroll today at
www.melloninvestor.com/ISD for secure online access to your proxy
materials, statements, tax documents and other important shareholder
correspondence.
"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" ITEMS 1 AND 2.
Signature ______________________ Signature ______________________ Date _________
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 ^
Vote by Internet or Telephone or Mail
24 Hours a Day, 7 Days a Week
Internet and telephone voting is available through 11:59 PM Eastern Time
the day prior to annual meeting day.
Your Internet or telephone vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card.
- ------------------------------------ -------------------------------- ---------------------
Internet Telephone Mail
http://www.eproxy.com/foto 1-800-435-6710 Mark, sign and date
Use the Internet to vote your proxy. OR Use any touch-tone telephone to OR your proxy card
Have your proxy card in hand when vote your proxy. Have your proxy and
you access the web site. card in hand when you call. return it in the
enclosed postage-paid
envelope.
- ------------------------------------ -------------------------------- ---------------------
If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.
You can view the Annual Report and Proxy Statement
on the internet at www.photoworks.com
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF PHOTOWORKS, INC.
The undersigned hereby appoints Philippe Sanchez and Loran Cashmore Bond,
and each of them, with power to act without the other and with power of
substitution, as proxies and attorneys-in-fact and hereby authorizes them to
represent and vote, as provided on the other side, all the shares of PhotoWorks,
Inc. Common Stock which the undersigned is entitled to vote, and, in their
discretion, to vote upon such other business as may properly come before the
Annual Meeting of Shareholders of the Company to be held February 3, 2004 or any
adjournment thereof, with all powers which the undersigned would possess if
present at the Meeting.
(Continued, and to be marked, dated and signed, on the other side.)
________________________________________________________________________________
Address Change/Comments (Mark the corresponding box on the reverse side)
________________________________________________________________________________
________________________________________________________________________________
- --------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
You can now access your PhotoWorks, Inc. account online.
Access your PhotoWorks, Inc. shareholder account online via Investor
ServiceDirect(R) (ISD).
Mellon Investor Services LLC, agent for PhotoWorks, Inc., now makes it easy and
convenient to get current information on your shareholder account. After a
simple and secure process of establishing a Personal Identification Number
(PIN), you are ready to log in and access your account to:
o View account status
o View certificate history
o View book-entry information
o View payment history for dividends
o Make address changes
o Obtain a duplicate 1099 tax form
o Establish/change your PIN
Visit us on the web at http://www.melloninvestor.com
and follow the instructions shown on this page.
Step 1: FIRST TIME USERS - Establish a PIN
You must first establish a Personal Identification Number (PIN) online by
following the directions provided in the upper right portion of the web screen
as follows. You will also need your Social Security Number (SSN) or Investor ID
available to establish a PIN.
The confidentiality of your personal information is protected using secure
socket layer (SSL) technology.
o SSN or Investor ID
-------------
o Then click on the Establish PIN button
-------------
Please be sure to remember your PIN, or maintain it in a secure place for future
reference.
Step 2: Log in for Account Access
You are now ready to log in. To access your account please enter your:
o SSN or Investor ID
o PIN
------
o Then click on the Submit button
------
If you have more than one account, you will now be asked to select the
appropriate account.
Step 3: Account Status Screen
You are now ready to access your account information. Click on the appropriate
button to view or initiate transactions.
o Certificate History
o Book-Entry Information
o Issue Certificate
o Payment History
o Address Change
o Duplicate 1099
For Technical Assistance Call 1-877-978-7778 between
9am-7pm Monday-Friday Eastern Time