-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BWGvgCyhLf/GXb4M9KhptpeTqULoDTBkqi+Pw19R+NQLF6wp/sQbkcztXVJYRrg1 syU5qlH2P1eBKMfUQPheCQ== 0000898430-97-002051.txt : 19970514 0000898430-97-002051.hdr.sgml : 19970514 ACCESSION NUMBER: 0000898430-97-002051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19970513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEATTLE FILMWORKS INC CENTRAL INDEX KEY: 0000791050 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PHOTOFINISHING LABORATORIES [7384] IRS NUMBER: 910964899 STATE OF INCORPORATION: WA FISCAL YEAR END: 0928 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15338 FILM NUMBER: 97602524 BUSINESS ADDRESS: STREET 1: 1260 16TH AVE WEST CITY: SEATTLE STATE: WA ZIP: 98119 BUSINESS PHONE: 2062811390 MAIL ADDRESS: STREET 1: 1260 16TH AVENUE WEST CITY: SEATTLE STATE: WA ZIP: 98119 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN PASSAGE MARKETING CORP DATE OF NAME CHANGE: 19890320 10-Q 1 FORM 10-Q FOR QUARTER ENDED 03/29/97 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: MARCH 29, 1997 Commission file No.0-15338 -------------- ------- SEATTLE FILMWORKS, INC. ------------------------ (Exact name of registrant as specified in its charter.) WASHINGTON 91-0964899 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1260 16TH AVENUE WEST, SEATTLE, WA 98119 - ----------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 281-1390 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No ---- ---- As of April 30, 1997, there were issued and outstanding 16,280,127 shares of common stock, par value $.01 per share. Index to Exhibits at Page 14 Page 1 of 49 SEATTLE FILMWORKS, INC. INDEX ----- Page No. -------- PART I -- FINANCIAL INFORMATION Item 1 - Financial Statements 3-7 Balance Sheets as of March 29, 1997 and September 28, 1996 3-4 Statements of Income for the second quarter and six months ended March 29, 1997 and March 30, 1996 5 Statements of Cash Flows for the six months ended March 29, 1997 and March 30, 1996 6 Notes to Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II -- OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders 12 Item 6 - Exhibits and Reports on Form 8-K 12 SIGNATURES 13 INDEX TO EXHIBITS 14 EXHIBITS 15 Page 2 of 49 PART I -- FINANCIAL INFORMATION ------------------------------- ITEM 1 - FINANCIAL STATEMENTS SEATTLE FILMWORKS, INC. BALANCE SHEETS (in thousands)
(UNAUDITED) (NOTE) March 29, September 28, ASSETS 1997 1996 ============================================================================================================================ CURRENT ASSETS Cash and cash equivalents $ 4,758 $ 6,135 Securities available-for-sale 5,874 4,559 Accounts receivable, net of allowance for doubtful accounts 1,650 1,980 Inventories 8,494 6,577 Capitalized promotional expenditures 41 238 Prepaid expenses and other 483 351 Deferred income taxes 439 311 ------- ------- TOTAL CURRENT ASSETS 21,739 20,151 FURNITURE, FIXTURES, AND EQUIPMENT, at cost, less accumulated depreciation 6,183 5,337 CAPITALIZED CUSTOMER ACQUISITION EXPENDITURES 13,139 11,334 DEPOSITS AND OTHER ASSETS 374 253 NON-COMPETE AGREEMENT, net of accumulated amortization 563 751 ------- ------- TOTAL ASSETS $41,998 $37,826 ======= =======
Note: The September 28, 1996 balance sheet has been derived from audited financial statements. See notes to financial statements. Page 3 of 49 SEATTLE FILMWORKS, INC. BALANCE SHEETS (CONTINUED) (in thousands, except per share and share data)
(UNAUDITED) (NOTE) March 29, September 28, LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 ==================================================================================================================================== CURRENT LIABILITIES Accounts payable $ 5,720 $ 3,490 Accrued expenses 1,090 1,086 Accrued compensation 1,517 2,001 Income taxes payable 311 972 ------- ------- TOTAL CURRENT LIABILITIES 8,638 7,549 DEFERRED INCOME TAXES 4,148 3,602 ------- ------- TOTAL LIABILITIES 12,786 11,151 SHAREHOLDERS' EQUITY Preferred Stock, $.01 par value, authorized 2,000,000 shares, none issued Common Stock, $.01 par value, authorized 101,250,000 shares, issued and outstanding 16,280,127 163 162 Additional paid-in capital 1,713 1,680 Retained earnings 27,336 24,833 ------- ------- TOTAL SHAREHOLDERS' EQUITY 29,212 26,675 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $41,998 $37,826 ======= =======
Note: The September 28, 1996 balance sheet has been derived from audited financial statements. See notes to financial statements. Page 4 of 49 SEATTLE FILMWORKS, INC. STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share and share data)
Second Quarter Ended Six Months Ended ------------------------ ------------------------- March 29, March 30, March 29, March 30, 1997 1996 1997 1996 ==================================================================================================================================== Net revenues $21,657 $17,821 $42,893 $34,510 Cost of goods and services 12,762 10,510 25,744 20,907 ------- ------- ------- ------- GROSS PROFIT 8,895 7,311 17,149 13,603 Operating expenses: Customer acquisition costs 3,762 3,236 7,244 5,774 Other selling expenses 2,100 2,130 3,860 3,462 Research and development 209 274 382 521 General and administrative 1,213 1,012 2,120 1,780 ------- ------- ------- ------- Total operating expenses 7,284 6,652 13,606 11,537 ------- ------- ------- ------- INCOME FROM OPERATIONS 1,611 659 3,543 2,066 Other income (expense): Interest expense (1) (1) Interest income 141 112 287 254 Non operating income (expense), net 7 - 9 93 ------- ------- ------- ------- Total other income 148 111 296 160 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 1,759 770 3,839 2,226 Provision for income taxes (613) (267) (1,336) (772) ------- ------- ------- ------- NET INCOME $ 1,146 $ 503 $ 2,503 $ 1,454 ======= ======= ======= ======= EARNINGS PER SHARE $.06 $.03 $.14 $.08 ==== ==== ==== ==== WEIGHTED AVERAGE SHARES AND EQUIVALENTS OUTSTANDING 17,761,909 17,772,080 17,797,503 17,766,036 ========== ========== ========== ==========
See notes to financial statements. Page 5 of 49 SEATTLE FILMWORKS, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Six Months Ended ----------------------- March 29, March 30, 1997 1996 ==================================================================================================================================== OPERATING ACTIVITIES: - --------------------- Net income $ 2,503 $ 1,454 Charges to income not affecting cash: Depreciation and amortization 1,393 1,111 Amortization of capitalized customer acquisition expenditures 6,594 5,124 Deferred income taxes 418 861 Loss on disposal of equipment 88 Net change in receivables, inventories, payables and other (630) (2,066) Capitalized promotional expenditures, net 197 115 Additions to capitalized customer acquisition expenditures (8,399) (7,413) ------- ------- NET CASH FROM (USED IN) OPERATING ACTIVITIES 2,076 (726) INVESTING ACTIVITIES: - --------------------- Purchase of furniture, fixtures, and equipment (2,172) (2,320) Purchases of securities available-for-sale (6,257) (2,350) Sales of securities available-for-sale 4,942 3,195 Proceeds from sale of equipment 2 ------- ------- NET CASH USED IN INVESTING ACTIVITIES (3,487) (1,473) FINANCING ACTIVITIES: - --------------------- Proceeds from issuance of Common Stock 214 253 Payment on purchase of Common Stock (180) ------- ------- NET CASH FROM FINANCING ACTIVITIES 34 253 ------- ------- DECREASE IN CASH AND CASH EQUIVALENTS (1,377) (1,946) Cash and cash equivalents at beginning of period 6,135 8,560 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,758 $ 6,614 ======= =======
See notes to financial statements. Page 6 of 49 SEATTLE FILMWORKS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE A -- BASIS OF PRESENTATION Seattle FilmWorks, Inc. (the "Company") is a leading direct-to-consumer marketer and provider of high-quality amateur photofinishing services and products. The Company offers an array of complementary services and products, primarily on a mail-order basis, under the brand name Seattle FilmWorks(R). To a lesser extent, the Company provides services, products and photofinishing supplies on a wholesale basis to a variety of commercial customers. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation of interim results have been included. The Company follows a policy of recording its interim periods and year-end on a 5 week, 4 week and 4 week basis for comparability of results and to be consistent with its internal weekly reporting. Operating results for the second quarter and six months ended March 29, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending September 27, 1997. For further information, refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 28, 1996. NOTE B -- STOCK SPLIT On March 17, 1997 the Company effected a three-for-two stock split by declaring a stock dividend of one share for every two shares outstanding. All share data, per share data and related accounts in the accompanying financial statements have been retroactively adjusted for this stock split. NOTE C -- CHANGE IN ESTIMATES Effective as of the beginning of the second quarter of fiscal 1996, the Company changed from twelve months to six months the period over which it amortizes certain capitalized customer acquisition expenditures related to groups of existing customers. This change in accounting estimate was made to more accurately match incremental revenues and expenses. At that time the Company also changed the estimated life of the benefit of a non-compete agreement from ten years to five years. NOTE D -- EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which shall be effective for financial statements for both interim and annual periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share for the second quarter and six months ended March 29, 1997, and the six-months ended March 30, 1996, of $.01 per share. The impact of Statement No. 128 on the calculation of fully diluted earnings per share for these same periods is not expected to be material. Page 7 of 49 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Information - --------------------------- Statements in this report concerning expectations for the future constitute forward-looking statements which are subject to a number of known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company or industry trends to differ materially from those expressed or implied by such forward-looking statements. Relevant risks and uncertainties include, among others, those described below, those stated in the Company's Annual Report on Form 10-K and those identified by the Company from time to time in other filings with the Securities and Exchange Commission, press releases and other communications. General - ------- Seattle FilmWorks, Inc. (the "Company") is a leading direct-to-consumer marketer and provider of high-quality amateur photofinishing services and products. The Company offers an array of complementary services and products primarily on a mail-order basis under the brand name Seattle FilmWorks(R). The Company has experienced an increase in net revenues in each year since 1990. Management believes this growth is attributable principally to its direct- marketing programs, including the customer acquisition technique of offering two rolls of film for $2.00 or less (the "Introductory Offer"). The Introductory Offer has been nationally advertised in package inserts, newspaper supplements and magazines and through various other direct-response media. Beginning in fiscal 1995, the Company shifted the focus of, and substantially expanded, its customer acquisition programs. Management believes that these steps are the primary reasons for the growth of net revenues and net income during fiscal 1995, 1996 and the first six months of fiscal 1997. In addition, management believes its core photofinishing business has benefited from the introduction of new products, such as the January 1994 introduction of Pictures On Disk[TM] and PhotoWorks(R). Customer acquisition costs are comprised of the costs of generating a lead and the amortization of direct costs associated with the Company's promotional offers sent to prospective and existing customers. The costs of generating a lead include all direct-response media, advertising and other costs associated with developing target customer lists. These costs per lead have declined during each of the last three fiscal years. The direct costs of customer acquisition include film, postage and printed material costs associated with mailings to prospective and existing customers. These direct costs per recipient of the Introductory Offer have also declined during each of the last three fiscal years. The direct costs of customer acquisition are capitalized as an asset on the Company's balance sheet as "capitalized customer acquisition expenditures." Capitalized customer acquisition expenditures relating to prospective customers are amortized over three years, and capitalized customer acquisition expenditures relating to certain marketing activities to groups of existing customers are amortized over six months. These amortization rates are based on estimates of the timing of future roll processing volumes per customer. The proportion of capitalized customer acquisition expenditures to be amortized over three years relative to those to be amortized over six months will vary from period to period based on the timing and mix of promotional activities. Rates of amortization are compared from time to time with the actual timing of roll processing volumes in order to assess whether the amortization rates appropriately match the direct costs of customer acquisition with the related revenues. If the Company were to experience a material change in the timing of roll processing volumes, it could be required to accelerate the rate of amortization of capitalized customer acquisition expenditures, which could have a material adverse effect on the Company's business, financial condition and operating results. Customer acquisition costs as a percentage of net revenues have increased to 16.9% in the first six months of fiscal 1997 as compared to 16.7% in the first six months of fiscal 1996. Management believes this increase in customer acquisition costs as a percentage of net revenues was due primarily to expansion of the Company's customer acquisition programs. Future periods may reflect increased customer acquisition costs due to timing of the amortization of capitalized expenditures or the development and initiation of additional marketing programs. For tax purposes, customer acquisition expenditures are expensed as incurred, thereby reducing current federal income tax liabilities and increasing deferred federal income tax liabilities. Page 8 of 49 Net income as a percentage of net revenues increased to 5.8% for the first six months of fiscal 1997 as compared to 4.2% for the same period of fiscal 1996 primarily due to the relationship between changes in costs of goods sold, customer acquisition costs and other selling expenses which in turn are primarily driven by changes in sales mix and the Company's customer acquisition strategy. Operating results will fluctuate in the future due to changes in the mix of sales, intensity and effectiveness of promotional activities, price increases by suppliers, introductions of new products, research and development requirements, actions by competitors, foreign currency exchange rates, conditions in the direct-to-consumer market and the photofinishing industry in general, national and global economic conditions and other factors. Demand for the Company's photo-related services and products is highly seasonal, with the highest volume of photofinishing activity occurring during the summer months. However, seasonality of demand may be offset by the introduction of new services and products, changes in the level of effectiveness of customer acquisition programs and other factors. This seasonality, when combined with the general growth of the Company's photofinishing business, has produced greater photofinishing net revenues during the last half of the Company's fiscal year (April through September), with a peak occurring in the fourth fiscal quarter. Net income is affected by the seasonality of the Company's net revenues due to the fixed nature of a portion of the Company's operating expenses, seasonal variation in sales mix and the Company's practice of relatively higher expenditures on marketing programs prior to the summer months. RESULTS OF OPERATIONS The following table presents information from the Company's statements of income, expressed as a percentage of net revenues for the periods indicated.
Second Quarter Ended Six Months Ended March 29, March 30, March 29, March 30, 1997 1996 1997 1996 ==================================================================================================================================== Net revenues 100.0% 100.0% 100.0% 100.0% Cost of goods and services 58.9 59.0 60.0 60.6 ----- ----- ----- ----- GROSS PROFIT 41.1 41.0 40.0 39.4 Operating expenses: Customer acquisition costs 17.4 18.2 16.9 16.7 Other selling expenses 9.7 11.9 9.0 10.0 Research and development 1.0 1.5 0.9 1.5 General and administrative 5.6 5.7 4.9 5.2 ----- ----- ----- ----- Total operating expenses 33.7 37.3 31.7 33.4 ----- ----- ----- ----- INCOME FROM OPERATIONS 7.4 3.7 8.3 6.0 Total other income 0.7 0.6 0.6 0.4 ----- ----- ----- ----- INCOME BEFORE INCOME TAXES 8.1 4.3 8.9 6.4 Provision for income taxes 2.8 1.5 3.1 2.2 ----- ----- ----- ----- NET INCOME 5.3% 2.8% 5.8% 4.2% ===== ===== ===== =====
Net revenues for the second quarter of fiscal 1997 increased 21.5% to $21,657,000 as compared to net revenues of $17,821,000 in the second quarter of fiscal 1996. For the six months ended March 29, 1997, net revenues increased 24.3% to $42,893,000 compared to $34,510,000 for the same period of fiscal 1996. The increased net revenues in fiscal 1997 were primarily due to expanded customer acquisition activities and marketing to existing customers during fiscal year 1996 and the first six months of fiscal year 1997 which have resulted in increased net revenues from photofinishing services and products. Management believes that its Seattle FilmWorks(R) branded business has benefited from the Company's entry into Page 9 of 49 the personal computer market with its PhotoWorks(R) and Pictures On Disk[TM] products, which were first introduced in January 1994. Cost of goods and services consist of labor, postage and supplies related to the Company's services and products. Gross profit in the second quarter of fiscal 1997 increased to 41.1% of net revenues compared to 41.0% in the second quarter of fiscal 1996. For the first six months of fiscal 1997, gross profit increased to 40.0% compared to 39.4% for the same period of fiscal 1996. The increase in fiscal 1997 periods was due primarily to a product mix containing a higher percentage of the Company's Seattle FilmWorks(R) branded products, which carry a higher gross profit margin than the Company's other services and products. Gross profit was favorably impacted in the second quarter of fiscal 1996 by the reversal of $227,000 of state tax reserves upon the resolution of uncertainties related to a state tax examination. Fluctuations in gross profit will occur in future periods due to the seasonal nature of revenues, mix of product sales, intensity of promotional activities and other factors. Total operating expenses in the second quarter of fiscal 1997 decreased to 33.7% of net revenues compared to 37.3% in the second quarter of fiscal 1996. For the first six months of fiscal 1997 total operating expenses decreased to 31.7% of net revenues compared to 33.4% for the same period of fiscal 1996. The decreases, as a percent of net revenues, were due primarily to a decrease in customer acquisition and other selling expenses. Effective as of the beginning of the second quarter of fiscal 1996 the Company reduced from twelve to six months the amortization period for certain marketing activities to specific groups of existing customers. This change in accounting estimate resulted in incremental amortization of $414,000 of previously deferred customer acquisition costs in the second quarter of fiscal 1996. The Company's principal technique for acquiring new customers is its Introductory Offer of two rolls of 35 mm film for $2.00 or less. The Company capitalized $8,399,000 of customer acquisition expenditures in the first two quarters of fiscal 1997 compared to $7,413,000 for the first two quarters of fiscal 1996 while amortization of these costs was $6,594,000 and $5,124,000 during these two same periods, respectively. Capitalized customer acquisition expenditures as of March 29, 1997, increased to $13,139,000 compared to $11,334,000 as of September 28, 1996. Management believes this increased investment in customer acquisition combined with new service and product introductions are the primary reasons for the increase in photofinishing-related revenues. Each year the Company prepares detailed plans for its various marketing activities, including the mix between customer acquisition expenditures and other selling expenses. However, the Company occasionally changes both the mix and total marketing expenditures between periods to take advantage of marketing opportunities as they become available. Future periods may reflect increased customer acquisition costs due to the timing of the amortization of capitalized expenditures or the development and initiation of additional marketing programs. Other selling expenses include marketing costs associated with building brand awareness, testing of new marketing strategies and marketing to existing customers, as well as certain costs associated with acquiring new customers. Other selling expenses in the second quarter of fiscal 1997 decreased to 9.7% of net revenues compared to 11.9% of net revenues for the second quarter of fiscal 1996. For the first six months of fiscal 1997, other selling expenses decreased to 9.0% of net revenues compared to 10.0% of net revenues for the first six months of fiscal 1996. The second quarter of fiscal 1996 included approximately $43,000 resulting from an increase in amortization of a non-compete agreement due to a change in the estimated life from ten years to five years and $126,000 in expenses related to securing rights to the PhotoWorks(R) mark claimed by a third party. Research and development expenses decreased to $209,000 in the second quarter of fiscal 1997 as compared to $274,000 for the second quarter of fiscal 1996. Research and development expenses for the first six months of fiscal 1997 decreased to $382,000 as compared to $521,000 for the first six months of fiscal 1996. The decreases resulted primarily from lower contract service costs for the first and second quarters of fiscal 1997. Research and development expenses consist primarily of costs incurred in researching new computerized digital imaging concepts, developing computer software products and creating equipment necessary to provide customers with new computer-related photographic services and products. General and administrative expenses increased to $1,213,000 for the second quarter of fiscal 1997 as compared to $1,012,000 for the second quarter of fiscal 1996. General and administrative costs increased to $2,120,000 for the first six months of fiscal 1997 as compared to $1,780,000 for the first six months of fiscal 1996. The increases were due to increased compensation expenses based on the Company's profitability, increased costs related to the Company's management information systems and increased legal and accounting costs. General and administrative expenses as a percent of net Page 10 of 49 revenues decreased to 4.9% for first six months of fiscal 1997 as compared to 5.2% for the same period of fiscal 1996. General and administrative expenses consist of costs related to computer operations, human resource functions, finance, accounting, investor relations and general corporate activities. Total other income for the second quarter of fiscal 1997 increased to $148,000 as compared to $111,000 for the second quarter of fiscal 1996. For the first six months of fiscal 1997, total other income was $296,000 as compared to $160,000 for the same period of fiscal 1996. The increases in the fiscal 1997 periods resulted from higher interest income and a $90,000 loss on equipment disposals during the first quarter of fiscal 1996. The federal income tax rate for the first six months of fiscal 1997 as compared to the first six months of fiscal 1996 increased to 34.8% from 34.7%. The increase in the effective tax rate was due primarily to an increase in the marginal federal corporate tax rate due to expected income levels. Net income in the second quarter of fiscal 1997 was $1,146,000, or $.06 per share, compared to $503,000 or $.03 per share for the second quarter of fiscal 1996. Net income for the first six months of fiscal 1997 was $2,503,000 or $.14 per share as compared to $1,454,000 or $.08 per share for the same period of fiscal 1996. The increases in net income were primarily attributable to the increase in net revenues and gross profit and decreases in operating expenses, as a percent of net revenues, as compared to fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES As of May 2, 1997, the Company's principal sources of liquidity included cash and short-term investments of $11,536,535 and an unused revolving line of credit of $6,000,000. The ratio of current assets to current liabilities for the Company was 2.5 to 1 at the end of the second quarter of fiscal 1997, down slightly from the current ratio of 2.7 to 1 at September 28, 1996. During the second quarter of fiscal 1997 the Company increased its investment in securities available-for-sale by $1,315,000 which was the primary reason for the decrease in cash and cash equivalents. The Company also increased inventory levels by $1,917,000 to accommodate expanded marketing plans, achieve faster turnaround of customer orders, and support increased photofinishing volume. This increase in inventory was the principal reason for the $2,230,000 increase in accounts payable at the end of the second quarter. Federal income taxes payable were favorably affected by the increase in capitalized customer acquisition expenditures which are expensed as incurred for federal income tax purposes, thereby having the effect of reducing current federal income tax liabilities and increasing deferred federal income tax liabilities. On January 22, 1997, the Company announced that it may repurchase shares of its Common Stock, either through open market purchases at prevailing market prices, through block purchases or in privately negotiated transactions. Repurchases may be commenced or discontinued by the Company at any time. Although the number of shares to be repurchased is uncertain, any repurchased shares will to some degree offset the dilutive effect on earnings per share of shares of Common Stock issued under the Company's stock option and stock purchase plans. On March 4, 1997 the Company signed a lease agreement for office and warehouse space in Seattle, Washington, which will be primarily utilized as office space and certain photofinishing and mail order operations. This lease commenced on April 1, 1997, for a term of forty-two months and includes 46,317 of total square feet including 7,700 square feet of mezzanine office space. The monthly base rent for this building is $18,766 throughout the lease. Although the Company does not currently have any fixed material commitments with regard to capital expenditures, it currently expects to spend approximately $2,500,000 during the remainder of fiscal 1997, principally for photofinishing equipment and for leasehold improvements. The Company currently anticipates that existing funds together with anticipated cash flow from operations and the Company's available line of credit of $6,000,000 will be sufficient to finance its operations and planned capital expenditures and to service its indebtedness for the foreseeable future. However, if the Company does not generate sufficient cash from operations to satisfy its ongoing expenses, the Company will be required to seek external sources of financing or to refinance its obligations. Possible sources of financing include the sale of equity securities or additional bank borrowings. There can be no assurance that the Company will be able to obtain adequate financing in the future. Page 11 of 49 PART II -- OTHER INFORMATION ---------------------------- ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS On February 12, 1997, the Company held its annual meeting of shareholders. The meeting was reconvened on March 5, 1997. The shareholders acted on the following matters at the annual meeting. 1. An amendment to the Company's Restated Articles of Incorporation to establish a classified Board of Directors and to provide for removal of directors only for cause was approved. The number of votes cast for the proposal, the number of votes against the proposal, the number of votes withheld, and the number of broker non-votes are listed. For Against Abstain Non-votes --- ------- ------- --------- 5,444,853 2,971,352 43,660 1,575,646 2. The following individuals were elected to the Company's Board of Directors, to hold office for the specified terms and until their successors are duly elected and qualified. The number of votes cast for each individual, the number of votes withheld, and the number of broker non-votes are listed for each individual.
For Withheld Non-votes --- -------- --------- Gary Christophersen 9,755,343 280,168 N/A Sam Rubinstein 9,751,255 284,256 N/A Douglas A. Swerland 9,751,341 284,170 N/A Craig E. Tall 9,754,466 281,045 N/A Peter H. van Oppen 9,754,166 281,345 N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS. --------- 3 Articles of Amendment of Incorporation of Seattle FilmWorks, Inc. 10.1* Supply Agreement effective January 1, 1997 with Fuji Photo Film U.S.A., Inc. 10.2* AT&T Agreement dated March 5, 1997 10.3 Lease Agreement dated March 4, 1997, between Smith Cove Partnership and the Company. 11 Computation of Earnings Per Share (B) REPORTS ON FORM 8-K. -------------------- None * Portions of this exhibit have been omitted pursuant to an application for an order granting confidential treatment filed with the Commission on May 13, 1997. The omitted portions have been separately filed with the Commission. Page 12 of 49 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEATTLE FILMWORKS, INC. DATED: May 12, 1997 /s/ Gary R. Christophersen -------------------------------------------------- Gary R. Christophersen President/Chief Executive Officer (Principal Executive Officer) /s/ Case H. Kuehn -------------------------------------------------- Case H. Kuehn Vice President-Finance/Treasurer (Principal Financial and Chief Accounting Officer) Page 13 of 49 INDEX TO EXHIBITS SEATTLE FILMWORKS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 29, 1997
Exhibit Description Page No. - ------- ----------- -------- 3 Articles of Amendment of Incorporation of Seattle FilmWorks, Inc. 15 10.1* Supply Agreement effective January 1, 1997 with Fuji Photo Film U.S.A., Inc. 16 10.2* AT&T Agreement dated March 5, 1997 29 10.3 Lease Agreement dated March 4, 1997, between Smith Cove Partnership and the Company. 33 11 Computation of Earnings Per Share 49 27 Financial Data Schedule
* Portions of this exhibit have been omitted pursuant to an application for an order granting confidential treatment filed with the Commission on May 13, 1997. The omitted portions have been separately filed with the Commission. Page 14 of 49 EX-3 2 ARTICLES TO AMENDMENT EXHIBIT 3 ARTICLES OF AMENDMENT OF SEATTLE FILMWORKS, INC. Pursuant to RCW 23B.10.060, the undersigned corporation adopts the following Articles of Amendment to its Restated Articles of Incorporation: FIRST: The name of the corporation is SEATTLE FILMWORKS, INC. (the "Corporation"). SECOND: The Restated Articles of Incorporation are hereby amended by deleting Article IV, Section 1 in its entirety and replacing it with a new Article IV, Section 1 to read as follows: ARTICLE IV (1) Authorized Capital. The total number of shares which the Corporation is authorized to issue is one hundred three million two hundred fifty thousand (103,250,000), consisting of one hundred one million two hundred fifty thousand (101,250,000) shares of common stock, par value $.01, and two million (2,000,000) shares of preferred stock, par value $.01. Shares shall be issued at such prices as shall be determined by the Board of Directors. The common stock is subject to the rights and preferences of the preferred stock as hereinafter set forth. THIRD: This amendment does not provide for an exchange, reclassification or cancellation of issued shares. FOURTH: The foregoing amendment was adopted by the Board of Directors of the Corporation on February 12, 1997 without shareholder action. Pursuant to RCW 23B.10.020(4), shareholder action with regard to this amendment of the Restated Articles of Incorporation of the Corporation is not required. SEATTLE FILMWORKS, INC. By:/s/ Gary R. Christophersen Date: February 13, 1997 Gary R. Christophersen, President EX-10.1 3 SUPPLY AGREEMENT EXHIBIT 10.1 [*] DESIGNATES MATERIAL FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED, WHICH MATERIAL HAS BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. SUPPLY AGREEMENT ---------------- SUPPLY AGREEMENT, made as of January 1, 1997, between FUJI PHOTO FILM U.S.A., INC., a New York corporation ("Fuji"), and SEATTLE FILM WORKS, INC., a Washington corporation ("Customer"), W I T N E S S E T H: ------------------- WHEREAS, Customer is engaged in the retail businesses of photofinishing and sales of photographic products, and Fuji is engaged in the manufacture, through its affiliated companies, and distribution of photographic products. WHEREAS, Customer desires to purchase quantities of Fuji's color negative photographic film, packaged to Customer's specifications, from Fuji, and Fuji is willing to sell such quantities of its color negative photographic film, so packaged, to Customer on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained, the parties hereby agree as follows: 1. Definitions. When used in this Agreement, the following terms will ----------- have the respective meanings set forth in this Article 1. Definitions used herein are used without regard to gender, and definitions in the singular shall apply equally when used in the plural. "Annual Period" means a period of time, the first of which begins on the date of the first shipment of Product and ends on the anniversary day thereof; the second and each successive Annual Period shall be each successive twelve-month period ending on an anniversary of the end of the first Annual Period. "Calendar Quarter" means a period of time of three-calendar months, or such part thereof which occurs during the term of this Agreement, commencing on January 1, April 1, July 1 and October 1 of each calendar year. "Confidential Information" means all information and data of the disclosing party designated as confidential concerning products or the business of the disclosing party or its affiliated companies, disclosed to the receiving party orally or in writing, including, without limitation, the Specifications. If either party hereunder discloses information to the other party orally, then within two (2) weeks after such disclosure the disclosing party will confirm in 1 writing to the receiving party the confidential nature of the information so disclosed. "Confidential Information" shall not include any information which the receiving party can establish: (a) is now generally known or available to the public or which hereafter through no act or failure on the part of the receiving party becomes generally known or available to the public; (b) is legally known to the receiving party at the time of receiving such information; (c) is furnished to others by the disclosing party without a restriction on disclosure; (d) is hereafter furnished to the receiving party in writing by a third party without restriction on disclosure, where such third party legally obtained such information and the right to disclose it to the receiving party; or (e) is independently developed by the receiving party without violation of any legal rights which the disclosing party may have in such information. "Fuji," as the context may require, means the corporation under common control with Fuji Photo Film U.S.A., Inc. to which the manufacture and packaging of the Products will be delegated hereunder and Fuji Photo Film U.S.A., Inc., collectively. "Product" means the [*] color negative photographic film manufactured by Fuji, as the same may be improved from time to time, or such new color negative photographic film that Fuji introduces as a replacement for the foregoing to be cut into [*] exposure lengths and marked and packaged by Fuji for sale to Customer under this Agreement. "Specifications" means the technical and other specifications for the Product and the packaging therefor set forth on Exhibit A attached hereto. --------- "UCC" means the Uniform Commercial Code, as in force in the State of Washington on the date of this Agreement. 2. Manufacture and Sale. -------------------- 2.1 Fuji will manufacture, mark and package the Product in strict accordance with the Specifications. 2.2 Customer will be solely responsible for the content and layout of all packaging and labeling as set forth in the Specifications, including any warranties and limitations of liability or remedies, disclaimers, cautionary statements or warnings or notices on care and instructions directed to the end user of the Product. 2 3. Forecasts; Orders. ----------------- 3.1 Prior to the execution of this Agreement, Customer has submitted to Fuji a forecast of its requirements of the Product during the first Annual Period. Hereafter, Customer will submit to Fuji on a monthly basis, not less than fifteen (15) days prior to the commencement of each month, a written estimate for its requirements for the Product during the next following six months, on a rolling basis. The parties agree that, although Fuji may, in its sole discretion, permit adjustments, the forecast of Products required for a particular calendar month shall become a "firm order" within the meaning of Section 2-205 of the UCC three months prior to the commencement of such month. The format for such written forecasts will be mutually agreeable to both parties. 3.2 Customer will submit purchase orders to Fuji in writing, which may be transmitted to Fuji by electronic facsimile or by electronic data interchange system. Customer will submit its purchase orders not less than ninety (90) days prior to the requested shipment date of such order. Each such purchase order will be a "firm offer" within the meaning of Section 2-205 of the UCC. (a) Customer must place orders in minimum lots of one full container of each Product ordered. (b) Customer's purchase orders will be subject to acceptance by Fuji, which will not be unreasonably withheld or delayed; provided that, in all events, Fuji will be entitled to withhold or delay its acceptance of Customer's purchase orders or to refuse to ship Products ordered if Customer is in default (and any grace or cure period therefor has elapsed) in payment of any amounts due to Fuji hereunder and such default is continuing. Should Fuji decline to accept any purchase order from Customer when Customer is not in default under this Agreement, Customer may, in its sole discretion, terminate this Agreement. 4. Purchase Targets. ---------------- 4.1 The parties hereto have agreed on an aggregate annual purchase target for all Products to be purchased by Customer during the three Annual Periods occurring during the term of this Agreement, as follows: Annual Period Number of Rolls ------------- --------------- First [*] Second [*] Third [*] 4.2 The parties agree that such purchase targets are not purchase orders and that Customer is not required to purchase all pieces of the Product specified in such targets. However, such targets constitute an inducement to Fuji to enter into this Agreement, and Customer's failure to place purchase orders for the minimum number of rolls of the Products 3 specified above for the applicable purchase target during any Annual Period will constitute cause for Fuji to terminate this Agreement as provided in Section 10.2(d). For any renewal or extension of this Agreement pursuant to Section 10.1 hereof, the parties agree to negotiate in good faith to set new purchase targets for any additional Annual Periods. 5. Sales Terms; Delivery. --------------------- 5.1 Fuji will sell the Product to Customer pursuant to the terms and conditions of sale (the "Sales Terms") set forth in this Agreement. 5.2 The Sales Terms govern the sales transactions between the parties except to the extent otherwise provided herein. If there are any inconsistencies between the Sales Terms and the provisions of this Agreement, the provisions of this Agreement will control. If there are any inconsistencies between the Sales Terms or the provisions of this Agreement and the terms of any purchase order, invoice or other writing used by the parties regarding sale transactions involving the Products, the Sales Terms or provisions of this Agreement will control. No additional or different terms or conditions contained in any such writing will be binding on a party unless expressly and affirmatively accepted in writing by that party. 5.3 Fuji will deliver Products F.O.B. Customer's dock at Seattle. Shipments will be made by carrier selected by Fuji and approved by Customer. Product ordered by Customer pursuant to a particular purchase order shall be completed and made available for delivery or other disposition as specified herein in approximately one hundred twenty (120) days from Fuji's receipt of such purchase order; provided that Fuji's specification of any delivery date is approximate and Fuji will have no liability if delivery is not made on or by such date; further provided, however, that if Customer is not in default of this Agreement and Fuji shall fail to deliver Product pursuant to a particular purchase order within approximately one hundred twenty (120) days from Fuji's receipt of such purchase order, Customer may, except as otherwise provided in this Agreement, terminate this Agreement. 6. Prices; Payment. --------------- 6.1 The prices for Products during the term hereof are as follows: Product Price Per Roll ------- -------------- [*] [*] [*] [*] 6.2 The foregoing notwithstanding, upon the occurrence of any economic, governmental or political events which affect manufacturers or distributors of color negative photographic film and which result in an extraordinary increase or decrease in prices to U.S. customers for color negative photographic film, Fuji or Customer, as the case may be, may give 4 notice of such events to the other party and Fuji and Customer shall thereupon renegotiate the prices of Product hereunder. For purposes of this Agreement, "extraordinary increase or decrease" means an aggregate increase or decrease on or after the commencement of the term hereof of [*] or more. If, within forty-five (45) days after the date of such notice, Fuji and Customer fail to agree upon new prices for Product, then either Fuji or Customer may terminate this Agreement. If the parties fail to agree upon new prices and the party who did not provide the notice of the need to renegotiate fails to terminate this Agreement pursuant to this Section 6.2 within ten (10) days of the end of the 45 day renegotiation period, the Agreement shall continue in effect at the new prices reasonably substantiated as necessary by the notifying party. After prices for Product are renegotiated or reset pursuant to this Section 6.2, upon the occurrence of any subsequent extraordinary increase or decrease in prices to U.S. customers for color negative photographic film, the provisions of this Section 6.2 shall again apply. For any renewal or extension of this Agreement pursuant to Section 10.1 hereof, the parties agree to negotiate in good faith to revise the Product prices set forth in Section 6.1 hereof. 6.3 Prices are exclusive of all federal, state, local, excise, use and similar taxes. All taxes of any nature which are billed to Customer shall be identified, separately stated and paid by Customer or, in lieu thereof, Customer shall provide Fuji with a tax-exemption certificate acceptable to the relevant taxing authorities. Prices include duty and freight. 6.4 Payment shall be due net thirty (30) days after invoice date. 7. Warranty. -------- 7.1 Fuji's Warranty. Fuji warrants to Customer that all pieces of --------------- the Products sold hereunder will conform in all respects to the Specifications and will be free from defects in manufacturing and packaging. This warranty will survive any delivery, acceptance, inspection or payment by Customer or a third person of and for pieces of the Product. Fuji will, at Fuji's option, replace any pieces of the Product which Fuji finds do not conform to the Specifications or contain defects in manufacturing or packaging after delivery to Customer or to Customer's customer. 7.2 Customer Warranty. Fuji acknowledges that Customer's warranty ----------------- to its customers for the Products is initially as set forth in Exhibit B --------- attached hereto. Fuji shall have no responsibility for such warranty extended by Customer except to the extent expressly stated in this Article 7. 7.3 Intellectual Property Warranty. Fuji hereby warrants that the ------------------------------ Products do not infringe any rights of third persons. 7.4 Limited Liability. Except as specifically and unambiguously ----------------- provided herein, Fuji does not make any warranties to Customer or to Customer's customers with respect to the Products. THIS ARTICLE 7 IS A COMPLETE STATEMENT OF FUJI'S 5 WARRANTIES REGARDING THE PRODUCTS AND IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE WARRANTIES SET FORTH IN THIS ARTICLE 7 PROVIDE THE EXCLUSIVE REMEDIES FOR ANY NON-CONFORMITY OR DEFECT IN THE PRODUCTS. If any court having jurisdiction finally holds that this limitation of remedies is void or unenforceable, Fuji's liability for any claim shall be limited to the invoice price of the Product giving rise to the claim. IN NO EVENT WILL FUJI BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES, EVEN IF SUCH DAMAGES RESULT FROM NEGLIGENCE OR OTHER FAULT. 8. Confidential Information. ------------------------ 8.1 Both during and after the term of this Agreement, each party will maintain in secrecy, and will neither disclose to a third person nor use for any purpose other than its performance hereunder, the other party's Confidential Information. In implementation of the preceding sentence, forthwith upon the expiration or earlier termination of this Agreement, each party will return to the other party, at no charge, all Confidential Information previously delivered to the receiving party in written, quantitative or schematic expression or other tangible form and all copies of the foregoing (including as Confidential Information for purposes hereof Exhibit A provided by Customer to --------- Fuji). Fuji shall limit access to Confidential Information to those of its employees and subcontractors for whom access is necessary in order to perform their employment or subcontracting duties. 8.2 Neither Fuji nor Customer shall, at any time, disclose Confidential Information to any third party except (i) with the prior written consent of the other party, or (ii) by reason of legal compulsion in any legal proceedings or pursuant to law. In the event either party proposes to make any such disclosure pursuant to the exclusion contained in clause (ii) of the preceding sentence, such party shall, prior to or concurrently with such disclosure, furnish the other party a written opinion of legal counsel to the effect that such disclosure is made by reason of legal compulsion. 9. Trademarks; Product Origin. -------------------------- 9.1 Fuji will cause the Customer trade name, trademarks and logo (collectively the "Mark") and applicable product designations to be imprinted on the Product therefor in strict conformity to the Specifications; provided, however, that nothing herein contained will confer on Fuji any right to or interest in the Mark, and Fuji shall not use the Mark except on the Product ordered by Customer pursuant to this Agreement, and shall not sell pieces of the Product bearing the Mark to any person other than Customer. Forthwith upon the expiration or earlier termination of this Agreement, except as may be required to fill any orders outstanding hereunder as of the date of expiration or earlier termination (and not cancelled by Customer pursuant to Article 9), Fuji will cease and desist from the use of the Mark and any name, mark or logo similar thereto. 6 9.2 Neither party shall, at any time, disclose to any third party the fact that Fuji manufactures the Product sold under the Mark, disclose the terms and conditions of this Agreement or in any manner advertise or publish any information concerning this Agreement, except that either party may make such disclosure (i) with the prior written consent of the other party, or (ii) by reason of legal compulsion in any legal proceedings or pursuant to law, including any disclosure requirements existing under federal Securities Laws relating to public companies. In the event either party proposes to make any such disclosure pursuant to the exclusion contained in clause (ii) of the preceding sentence, such party shall, prior to or concurrently with such disclosure, furnish the other party an opinion of outside legal counsel in the same manner as provided in Section 8.2. Each party shall take all reasonable measures to cause its employees and agents to hold in confidence the fact that Fuji manufactures the Product sold under the Mark and the terms and conditions of this Agreement. For purposes of the preceding sentence, each party shall be deemed to take "reasonable measures" to the extent that it adopts, or causes to be adopted, the same or more stringent procedures and acts with the same or greater care that it adopts in respect of its own proprietary information, know- how and trade secrets. 10. Term and Termination. -------------------- 10.1 This Agreement will become effective as of the date and year first above written and, unless earlier terminated in accordance with Section 10.2, will continue in effect until the end of the third Annual Period. Thereafter, this Agreement shall renew automatically for successive one year periods, each of which shall constitute an additional Annual Period, unless either party provides the other with at least sixty (60) days' prior notice of its intent not to renew the Agreement. 10.2 This Agreement may be terminated prior to expiration as follows: (a) Upon any of the following events, either party may give notice of termination, effective immediately: (i) the other party becomes insolvent or admits its inability to pay its debts generally as they come due; (ii) any sheriff, marshall, custodian, trustee or receiver is appointed by order of any court of competent jurisdiction to take charge of or sell any material portion of the other party's property; (iii) a case is filed by the other party under the Bankruptcy Code or any other insolvency law; (iv) a case is filed against the other party without such party's application or consent under the Bankruptcy Code or any other insolvency law and such case continues undismissed for 60 days; (v) the other party makes a general assignment for the benefit of creditors; or (vi) the other party is dissolved or liquidated or takes any corporate action for such purpose. (b) Either party may terminate this Agreement if the other party commits a material breach of this Agreement and such breach shall continue more than 30 days after written notice of such breach is given to the party in breach by the party not in breach. (c) Either party may terminate this Agreement as provided in Section 11.9. 7 (d) Fuji may terminate this Agreement for the cause set forth in Section 4.2 by written notice to Customer given within 90 days following the end of the Annual Period during which the minimum purchase target was not satisfied, such termination to be effective as of the end of the next Calendar Quarter. 10.3 Upon expiration or termination of this Agreement for any cause, Customer shall purchase from Fuji all finished Product which are the subject of unfilled purchase orders outstanding at the price specified in the respective purchase orders. 10.4 Upon termination of this Agreement for any reason specified in Sections 10.2(a), 10.2(b) or 10.2(d) of this Agreement, all amounts payable by Customer hereunder will be accelerated and will become due immediately. 11. General. ------- 11.1 Each of the parties has taken all corporate action required to duly authorize its execution, delivery and performance of this Agreement, and this Agreement constitutes an obligation enforceable against it in accordance with its terms. 11.2 Fuji and Customer are acting in the capacity of independent contractors. Nothing herein contained may be construed as constituting either party the agent, employee, partner or co-venturer of the other party. 11.3 This Agreement may be amended by the parties hereto only by an instrument in writing signed on behalf of each of the parties hereto. 11.4 Any waiver of any default in performance of the provisions hereof must be in writing and shall not operate as a waiver of, or estoppel with respect to, any subsequent default. 11.5 All notices, consents, approvals, or other communications hereunder (other than routine operational communications) shall be in writing and shall be delivered personally or by overnight delivery service (e.g., FedEx) or registered or certified mail, postage prepaid, or sent by telecopy, promptly confirmed by mail as set forth above, addressed to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to Fuji, to Fuji Photo Film U.S.A., Inc. 555 Taxter Road Elmsford, New York 10523 Attention: Mr. Manny Almeida Fax: (914) 789-8179 8 with a copy to: Fuji Photo Film U.S.A., Inc. 555 Taxter Road Elmsford, New York 10523 Attention: Jonathan E. File, Esq. Fax: (914) 789-8142 If to Customer, to: Seattle Film Works 1260 16th Avenue West Seattle, WA 98119-3401 Attention: Mr. Rob Brammer Fax: (206) 284-5357 with a copy to: Seattle Film Works 1260 16th Avenue West Seattle, WA 98119-3401 Attention: Case Kuehn Fax: (206) 284-5357 Any such notice, consent, approval and other communication shall be deemed given, in the case of mailing, on the third day following its deposit in the mail, in the case of telecopy, upon transmission if confirmed by mail as set forth above, and in all other cases upon receipt. 11.6 Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned (either consensually or by operation of law) by either of the parties hereto without the prior written consent of the other party, and any purported assignment in the absence of such consent will be void. The foregoing notwithstanding, Fuji acknowledges that Customer may, from time to time, purchase Product on behalf of its wholly owned subsidiary, Seattle Film Works Manufacturing Company pursuant to the terms of this Agreement, and (ii) Customer acknowledges that Fuji will cause one or more corporations under common control with it to manufacture and package the Products Fuji will sell to Customer hereunder; provided that Fuji remains obligated for the performance of all of Fuji's obligations hereunder. 11.7 This Agreement shall be governed by and construed in accordance with the laws of the State of Washington (without giving effect to its principles of conflict of laws). The parties acknowledge and agree that each has entered into this Agreement in the mutual expectation that its terms and conditions will be governed by and interpreted in accordance with the substantive law of the State of Washington. Therefore, the parties waive any right which either may have to challenge the efficacy of this provision or to contend that the laws of any 9 other jurisdiction should govern the interpretation of this Agreement because such other jurisdiction has more significant contacts with, or a greater interest in, the matter in dispute than does the State of Washington. 11.8 The expiration or earlier termination of this Agreement will not operate to release either party hereto from its obligations under Articles 7 or 8 and Section 9.2 (which obligations will survive such expiration or termination) or from any liability which has already accrued to the other party as of the date of expiration or termination or which may thereafter accrue in respect of an act or omission occurring prior to expiration or termination. The expiration or earlier termination of this Agreement will not operate to relieve either party hereto of the obligation to perform in a timely manner all duties which it is required hereunder to perform in respect of any orders for pieces of the Product outstanding as of the date of expiration or earlier termination and not cancelled by Customer as permitted hereby. 11.9 Neither party shall be held liable for any failure or delay in the performance of any of the obligations on its part to be performed hereunder, if and to the extent such failure or delay results from any cause or causes beyond the reasonable control of such party, including, but not limited to, fire, storm, flood, earthquake, explosion, accident, military operation, war, rebellion, riot, wreck, epidemic, quarantine, regulations, labor, labor dispute, shortage of manpower, embargo, failure or delay in transportation, governmental regulations, or inability to obtain required raw materials or machines. Both parties will have the right to terminate or suspend performance under this Agreement by reasonable notice due to circumstances beyond the affected party's control, including but not limited to actions or impending proceedings by governmental authorities or other events of force majeure specified above, for the duration of such event. 11.10 The headings in this Agreement are for convenience only and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties. 11.11 This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.12 This Agreement, including the preamble and the Exhibits hereto, contains the entire agreement between Fuji and Customer with respect to the transaction which is the subject matter hereof. 10 IN WITNESS WHEREOF, Fuji and Customer have caused this Agreement to be executed by their duly authorized representatives as of the date and year first above written. FUJI PHOTO FILM U.S.A., INC. By: /s/ Osamu Inoue Name: Osamu Inoue Title: President SEATTLE FILM WORKS, INC. By: /s/Case H. Kuehn Name: Case H. Kuehn Title: Vice President List of Exhibits ---------------- EXHIBIT A Specifications EXHIBIT B Customer's Warranty 11 EXHIBIT A SPECIFICATIONS 1. FILM Type: [*] Speed: [*] Size: [*] Edge Prints: [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] 2. 135 METAL CARTRIDGE Graphic Design: To be Provided by Customer Bar Code: Position and Bar Code as Specified by ISO CAS Patterns: Position and Patterns as Specified by ISO Lot No.: Printed, Customer's Own Lot Number Expiration Date: Printed 3. PLASTIC CASE (to contain film in 135 metal cartridge) Color: Black Recycling Mark: Yes, with Abbreviated Description of the Plastic Material Used. Outer Label: No 4. SHIPPING CASE Case Quantity: Eight Thousand (8,000) Rolls of a Film Speed in Plastic Case. Case Mark: At Fuji's Option 12 EXHIBIT B CUSTOMER'S WARRANTY LIMIT OF LIABILITY: The photographic material you send us for handling will be treated with care. However, our responsibility for damage or loss, even though due to negligence or other fault, will be limited to the cost of unexposed film unless you have declared a higher value and paid a premium for that value in advance. SFW is wholly separate from any shipper and all other warranties, express or implied, and all incidental or consequential damages are specifically excluded. SFW reserves the right to refuse to reproduce any image when such action would be prohibited under copyright law (Title 17 of the United States code). Pictures On Disk, PhotoWorks, PhotoMail and Pictures Plus are trademarks of Seattle FilmWorks, Inc. Windows is a trademark of Microsoft Corporation. Macintosh is a registered trademark of Apple Computer Corporation. 13 EX-10.2 4 CONTRACT TARIFF WITH AT&T EXHIBIT 10.2 [*] DESIGNATES MATERIAL FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED, WHICH MATERIAL HAS BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
CUSTOMER AT&T - -------- ---- 1. NAME: SEATTLE FILMWORKS, INC. 6. CONTRACT TARIFF NO. 2. STREET: 1260 16TH AVENUE WEST 7. STREET: 2601 4TH STREET-SUITE 500 3. CITY: SEATTLE S. CITY: SEATTLE 4. STATE & ZIP: WASHINGTON 98119 9. STATE & ZIP: WA 98121 5. Att'n: CASE KUEHN 10. Att'n: HEIDI DUFFY - ----------------------------------------------------------------------------
1. CUSTOMER hereby orders and AT&T agrees to provide communications services ("Services") pursuant to the Contract Tariff ("CT") referenced above, a copy of which is attached hereto and is incorporated by reference. The Availability provisions of the CT may be revised by AT&T from time to time. Services will be provided in accordance with the rates, terms and conditions described in the CT and, except as provided in the CT, the rates, terms and conditions in Applicable Tariffs pertaining to Services provided under this Agreement. Applicable Tariffs are the AT&T tariffs referenced in CT, as such tariffs may be revised from time to time. 2. The term of this Agreement is as specified in the CT. Notices pursuant to this Agreement shall be in writing to the addresses specified above. 3. In the event of any inconsistency between the terms of any Applicable Tariff and the CT, the terms of the CT shall prevail. In the event of any inconsistency between the terms of this Agreement and any Applicable Tariff or the CT, the terms of the Applicable Tariff or the CT shall prevail. Nothing contained in this Agreement shall require AT&T to take any action prohibited or omit to take any action required by the FCC or any other regulatory authorities. 4. EXCEPT FOR ANY WARRANTIES EXPRESSLY MADE IN THE CT OR THE APPLICABLE TARIFFS, AT&T EXCLUDES ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. AT&T'S LIABILITY TO CUSTOMER IS SUBJECT TO THE LIMITATIONS STATED IN THE CT AND APPLICABLE TARIFFS. 5. This Agreement (whether in contract, indemnity, warranty, strict liability, tort or otherwise, except choice of law) shall be governed by the law of the State of New York, or applicable federal statutes. 6. If any provision of the CT is held to be invalid or unenforceable, then AT&T and CUSTOMER shall cooperate to develop a mutually agreeable replacement for such provision. If the parties are unable to reach agreement on a replacement for the CT provision within 30 days after the provision is held to be invalid or unenforceable (or within such additional time as the parties agree in writing), then this Agreement shall be immediately terminated. CUSTOMER shall remain liable for all charges and liabilities for services provided under the CT prior to such termination. 7. Neither party shall publish or use any advertising, sales promotions, press releases or other publicity matters which use the other party's name, logo, trademarks or service marks without the prior written approval of the other party. Neither party is licensed hereunder to conduct business under any name, logo, trademark, service mark or tradename (or any derivative thereof) of the other party. 8. AT&T's relationship with CUSTOMER under this Agreement shall be that of an independent contractor. 9. THIS AGREEMENT, THE CT, AND THE APPLICABLE TARIFFS CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SERVICES TO BE PROVIDED HEREUNDER. THIS AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS, PROPOSALS, REPRESENTATIONS, STATEMENTS, OR UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, CONCERNING SUCH SERVICES OR THE RIGHTS AND OBLIGATIONS RELATING THERETO. No change, modification or waiver of any of the terms of this Agreement, except for revisions to the Applicable Tariffs and the Availability provisions of the CT, shall be binding unless reduced to writing and signed by authorized representatives of both parties hereto. 10. Each party represents and warrants that the person executing this Agreement on its behalf is fully authorized to do so.
ORDERED BY CUSTOMER: ACCEPTED BY AT&T: 11. Signature: /s/ Case Kuehn 15. Signature: /s/ Paul Pinard 12. Printed Name: Case Kuehn 16. Printed Name: Paul Pinard 13. Title: CFO, VP, Treasurer 17. Title: General Manager 14. Date: 3-5-97 18. Date: 3-5-97 - ------------------------------------------------------------------
AT&T UNIPLAN(R) BASIC SERVICE OPTION ATTACHMENT "A" 1. SERVICES PROVIDED: AT&T UniPlan Basic Service and the associated optional AT&T 800 Services, ACCUNET T1.5 Access Connections and Terrestrial 1.544 Mbps Local Channel Service. 2. TERM OF CONTRACT; RENEWAL OPTIONS: The Customer has selected a term of 3 year(s). The term begins with the first day of the first full billing month (hereinafter referred to as the Customer's Initial Service Date [CISD]) for the Services provided under this Contract Tariff; no renewal option. 3. MONTHLY USAGE COMMITMENT: The Customer has selected a Gross Monthly Minimum Revenue Commitment (MMRC) for AT&T UniPlan Basic Service and the Associated Optional AT&T 800 Services of [*] for the Contract Tariff term. If, within the term, the Customer fails to meet the annualized MMRC, the Customer will be billed the difference between the annualized MMRC and the gross actual billed charges. A. The Customer may increase the MMRC to a higher available MMRC specified in the Contract Tariff any time during the term of the Contract Tariff. When the Customer increases the MMRC, the term originally selected by the Customer will be restarted beginning with the first day of the first full billing month following the month in which the Customer increased the MMRC. B. If the Customer selects an MMRC of $3,000 or higher, and within 90 days following the CISD, the customer fails to satisfy the MMRC in any preceding billing month, the customer may decrease the MMRC one commitment level. When the customer decreases the MMRC, the term originally selected by the customer will be restarted beginning with the first day of the first full billing month following the month in which the customer decreased the MMRC. The customer may exercise this option only once. C. If the Customer migrates from switched access to dedicated access, after the 3rd billing month following the customer's CISD under this Contract Tariff, and as a result the customer's usage is reduced so that the customer cannot satisfy the monthly MMRC, the customer may decrease the MMRC provided the value of the new MMRC and term is equal to or greater than the remaining value of the existing MMRC and term at the time this election is made. Remaining value shall mean the total amount of the MMRC multiplied by the number of months remaining in the term. 4. CONTRACT PRICE: The Contract Price for AT&T UniPlan Basic Service and Associated Optional AT&T 800 Services is the same as the undiscounted Recurring and Non-recurring Rates and Charges specified in AT&T Tariff F.C.C. No. 1, as amended from time to time. The customer has selected the East/West Regional Trade Zone Option. The Customer may, at any time, after the 6th billing month following the Customer's CISD, during the Contract Tariff Term, change to a different Regional Trade Zone for international calling. If, as a result of the Customer selecting one of the Regional Trade Zones, or as a result of the Customer changing from one Regional Trade Zone to another Regional Trade Zone, after the 3rd billing month following the Customer's CISD under this contract tariff, the volume of the Customer's usage is sufficiently reduced so that the Customer cannot satisfy the MMRC, the Customer may decrease the MMRC provided the value of the new MMRC and term is equal to or greater than the Remaining Value of the existing MMRC and term at the time this election is made. Remaining Value shall mean the total amount of the MMRC multiplied by the number of months remaining in the term. When the Customer decreases the MMRC, the new term selected by the Customer will commence with the first day of the first full billing month following the month in which the Customer decreased the MMRC. The usage rates for the selected Regional Trade Zone will be the same as specified in AT&T Tariff F.C.C. No. 1, as amended from time to time. The Contract Price for ACCUNET T1.5 Access Connections is the same as specified in AT&T Tariff F.C.C. No. 9, as amended from time to time. Customer Initials and Date -------------- AT&T Proprietary (Restrictred) Solely for authorized persons having a new to know 1 AT&T UNIPLAN(R) BASIC SERVICE OPTION ATTACHMENT "A" The Contract Price for AT&T Terrestrial 1.544 Mbps Local Channel Service is the same as specified in AT&T Tariff F.C.C. No. 11, as amended from time to time. 5. DISCOUNTS: The Customer will receive the following discounts associated with the services provided under this Contract Tariff: A. The Customer has selected a Contract Tariff Term length of 36 Months B. The Customer will receive the Business-to-Business Discount Plan as specified in AT&T Tariff F.C.C. No. 1. C. The Customer will receive the following discount each month, on AT&T UniPlan Basic Service and the Associated Optional AT&T 800 Services gross usage charges on amounts up to [*] . No discount will apply to gross usage amounts over [*] . For customers who have usage billing prior to the beginning of the Contract Tariff Term, the discount will be based on the terms that the Customer selects and will be applied in the same manner as the UniPlan Basic Optional Term Plan as specified in the AT&T Tariff F.C.C. No. 1. Gross Monthly Usage Commitment 36 Month Term ---------------- ------------- [*] [*] D. No other Tariff F.C.C. No. I or No. 2 Volume or Term Plan Discounts will apply. 6. CLASSIFICATIONS, PRACTICES AND REGULATIONS: Except as otherwise provided, the terms, conditions, regulations and charges for AT&T UniPlan Service as set forth in AT&T Tariff F.C.C. No. 1, for ACCUNET T1.5 Access Connections as set forth in AT&T Tariff F.C.C. No. 9 and for Terrestrial 1.544 Mbps Local Channel Service as set forth in AT&T Tariff F.C.C. No. 11 apply, as these tariffs are amended from time to time. A. PROMOTIONS, CREDITS AND WAIVERS: The customer is ineligible for any promotions, credits or waivers for the Services provided under this Contract Tariff, which are filed or which may be filed in the AT&T tariffs specified in Section 1, preceding, except for which the Customer qualifies under those promotions and except for the promotion(s) specified below, which even though such promotion(s) may be due to expire or have expired, remain available to any Customer who orders this Contract Tariff during the Availability Period.
AT&T Tariff F.C.C. No. Section Number Expiration Date - ------------------------- -------------- --------------- [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
The preceding promotions will be applied to the Customer's bill for the Services provided under this Contract Tariff, provided the Customer is current in payment to AT&T for all services provided under this Contract Tariff at the time the promotion is to be applied. There are no credits or waivers that will be applied to the Customer's bill for the Services provided under this Contract Tariff. B. MONITORING CONDITIONS: The Customer must satisfy the following conditions at all times during the term of this Contract Tariff: 1. The Customer must not exceed [*] Customer Premises associated with UniPlan Basic. Customer Initials and Date -------------- AT&T Proprietary (Restricted) Solely for authorized persons having a need to know 2 AT&T UniPlan(R) Basic Service Option ATTACHMENT "A" 2. At least [*] of the total gross monthly Domestic billed usage must be Interstate Outbound Direct Dialed and/or Interstate Dialed. Compliance with these provisions shall be monitored each quarter. If in any such monitoring period the Customer has failed to satisfy the above Monitoring Conditions, the Customer will be billed an amount equal to 50% of the discount specified in Section 5.C. preceding, that the customer received during the monitoring period. Any such bill must be paid by the customer within 30 days. C. DISCONTINUANCE: In lieu of any Discontinuance With or Without Liability provisions that are specified in the AT&T Tariff F.C.C. Nos. I and 2, the following provisions shall apply, except for the AT&T UniPlan Service Term Plan Satisfaction Guarantee. Customers who select a three-year term, may discontinue this Contract Tariff after the 24th month following the CISD, provided the Customer has met the following conditions: 1. Notifies AT&T in writing no less than 30 days prior to such intent of discontinuance; 2. The Customer has met the MMRC for the entire Contract Tariff Term; and 3. The Customer is current in payment to AT&T for all services provided under this Contract Tariff. The customer may discontinue this Contract Tariff without liability for termination charges prior to the end of the Contract Tariff Term provided: 1) the customer replaces this Contract Tariff with a different Contract Tariff for AT&T UniPlan Service or AT&T UniPlan Service with FlatRate Pricing Option; and 2) the value of the new term and commitment is equal to or greater than the Remaining Value of the existing plan. The customer may discontinue this Contract Tariff without liability for termination charges after the 6th billing month following the CISD, provided: 1) the customer replaces this Contract Tariff with other AT&T Tariff F.C.C. Nos. 1 and 2 Services applicable to Contract Tariffs and 2) the value of the new term and commitment is equal to or greater than the Remaining Value of the existing plan. If the customer discontinues this Contract Tariff for any reason other than specified above, prior to the expiration of the Contract Tariff Term, a Termination Charge will apply. The Termination Charge for the AT&T UniPlan Basic Service and the Associated Optional AT&T 800 Services will be an amount equal to 100% of the unsatisfied annualized MMRC for the year in which the customer discontinues this Contract Tariff and 100% of the annualized MMRC for each year remaining in the term. D. AVAILABILITY: This Contract Tariff has been designed to respond to competitive circumstances affecting specific Customers. The initial customer received an offer from another Interexchange Carrier for substantially similar service. This Contract Tariff has been developed for Customers who will order this Contract Tariff only once. This Contract Tariff is available to any similarly situated Customer that orders service within 90 days after the effective date of this Contract Tariff and requests initial installation of the Services provided no later than 30 days after the date service is ordered. Customer Initials and Date -------------- AT&T Proprietary (Restricted) Solely for authorized persons having a need to know 3 EX-10.3 5 LEASE AGREEMENT EXHIBIT 10.3 LEASE AGREEMENT 1. PARTIES. This Lease, dated for reference purposes only, MARCH 4, 1997 ------- ------- -- is made by and between SMITH COVE PARTNERSHIP, a WASHINGTON GENERAL PARTNERSHIP ---------------------- ------------------------------ (herein called "Landlord"), and SEATTLE FILMWORKS, INC., A WASHINGTON ------------------------------------- CORPORATION (herein called "Tenant"). - ----------- 2. PREMISES. Landlord hereby leases to Tenant and Tenant leases from -------- Landlord for the term, at the rental, and upon all of the conditions set forth herein, that certain real property situated in the City of Seattle, County of King, State of Washington, commonly known as 38,617 square feet of office and ------ warehouse space located at 1240 AND 1250 16TH AVENUE WEST, SEATTLE, Washington ------------------------------ ------- and described as see Legal Description attached as Exhibit "A". Said real property, including the land and all improvements thereon, is herein called the "Premises". A map showing the Premises outlined in red is attached hereto as Exhibit "B" and is by this reference made a part hereof. 3. TERM. ---- 3.1 TERM. The term of this Lease shall be for FORTY-TWO (42) MONTHS ---- --------------------- commencing on APRIL 1, 1997 and ending on SEPTEMBER 30, 2000 unless sooner ------------- ------------------ terminated pursuant to any provisions hereof. 3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, --------------------- if for any reason Landlord cannot deliver possession of the Premises to Tenant on said date, Landlord shall not be subject to any liability therefore, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder or extend the term hereof, but in such case Tenant shall not be obligated to pay rent until possession of the Premises is tendered to Tenant. If the actual term commencement date be a date other than the scheduled term commencement date, all dates set forth in this Lease Agreement shall be adjusted accordingly. However, if Landlord shall not have delivered possession of the Premises within one hundred twenty (120) sixty (60) days from said commencement date, Tenant may, at Tenant's option, by notice in writing to Landlord within ten (10) days thereafter, AT ANY TIME THEREAFTER BUT PRIOR TO THE ACTUAL ---------------------------------------------- DELIVERY OF POSSESSION, cancel this lease. If either party cancels as herein - ----------------------- provided, Landlord shall return any money previously deposited by Tenant and the parties shall be discharged from all obligations hereunder. In no event, however, shall Tenant have the right to cancel this Lease because of any delay in delivering possession of the Premises as the result of (i) any act of God or the elements, (ii) shortage or unavailability of necessary materials, supplies, or labor, (iii) shortage of or interruption in transportation or facilities, (iv) regulations or restrictions, or (v) any other cause beyond Landlord's reasonable control unless such delay exceeds one year from said commencement date, then either party may cancel on written notice to the other prior to delivery of possession. 3.3 EARLY POSSESSION. In the event that Landlord shall permit Tenant ---------------- to occupy the Premises prior to the commencement date of the term, such occupancy shall be subject to all of the provisions of this Lease. Said early possession shall not advance the termination date of this Lease. 3.4 DELIVERY OF POSSESSION. Tenant shall be deemed to have taken ---------------------- possession of the Premises when any of the following occur: (a) a Certificate of Occupancy is granted by the proper governmental agency, or (b) upon issuance of a Certificate by Landlord's architect or contractor stating that the Premises are ready for occupancy. BOTH THE 1240 AND 1250 BUILDINGS ARE VACATED BY PORT ----------------------------------------------------- CHATHAM PACKING COMPANY. - ------------------------- 4. RENT. Tenant shall, without notice or demand, pay to Landlord as rent ---- for the Premises equal monthly installments of EIGHTEEN THOUSAND SEVEN HUNDRED ------------------------------- SIXTY-SIX AND NO/100 Dollars ($18,766.00) in advance, on the first day of each - -------------------- --------- month of the term hereof. Tenant shall pay Landlord upon execution hereof the sum of EIGHTEEN THOUSAND SEVEN HUNDRED SIXTY-SIX AND NO/100 Dollars ---------------------------------------------------- ($18,766.00), AS RENT FOR THE FIRST MONTH OF THE TERM, As of the commencement - ----------- ------------------------------------------ date, Tenant shall not be obligated as to rental payments for a period of ________________________. Tenant shall continue to be obligated for all other charges and expenses specified within this Lease Agreement. Rent for any period during the term hereof which is for less than one (1) month shall be a pro rata portion of the monthly installment. Rent shall be payable without notice or demand and without any deduction, offset, or abatement, in lawful money of the United States of America to Landlord at the address stated herein or to such other persons or at such places as Landlord may designate in writing. 1 5. SECURITY DEPOSIT. Tenant shall deposit with Landlord upon execution ---------------- hereof the sum of EIGHTEEN THOUSAND SEVEN HUNDRED SIXTY-SIX AND NO/100 Dollars ---------------------------------------------------- ($18,766.00) as security for Tenant's faithful performance of Tenant's --------- obligations hereunder. If Tenant fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Landlord may become obligated by reason of Tenant's default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of said deposit, Tenant shall within ten (10) days after written demand therefore deposit cash with Landlord in an amount sufficient to restore said deposit to the full amount hereinabove stated, and Tenant's failure to do so shall be a breach of this Lease and Landlord may at its option terminate this Lease. Landlord shall not be required to keep said deposit separate from its general accounts. If Tenant performs all of Tenant's obligations hereunder, said deposit or so much thereof as has not theretofore been applied to Landlord, shall be returned, without payment of interest or other increment for its use, to Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's interest hereunder) within fifteen (15) days after the expiration of the term hereof, or after Tenant has vacated the Premises, whichever is later. 6. USE. --- 6.1 USE. The Premises shall be used and occupied only for office, --- light manufacturing, and storage of Tenant's products, and all other uses incidental thereto and for no other purpose without prior written consent of Landlord, which consent may be withheld or conditioned as Landlord may deem appropriate within the exercise of its sole REASONABLE discretion. ---------- 6.2 COMPLIANCE WITH LAW. Tenant shall, at Tenant's expense, comply ------------------- promptly with all laws, rules, orders, ordinances, directions, regulations, and requirements of federal, state, county and municipal authorities, including without limitation, those relating to persons with disabilities (ADA) now in force or which may hereafter be in force, which shall impose any duty upon Landlord or Tenant with respect to the use, occupation or alteration of the Premises. Tenant shall not use or permit the use of the Premises in any manner that will tend to create waste or a nuisance, or, if there shall be more than one tenant of the building containing the Premises, which shall tend to unreasonably disturb such other tenants. 6.3 CONDITION OF PREMISES. Tenant hereby accepts the Premises in --------------------- their condition existing as of the date of the possession hereunder, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. LANDLORD REPRESENTS AND WARRANTS, AS OF THE DATE OF THE ------------------------------------------------------- EXECUTION OF THIS LEASE AND AS OF THE COMMENCEMENT DATE TENANT ACCEPTS - ---------------------------------------------------------------------- POSSESSION OF THE PREMISES, THAT, TO THE BEST OF LANDLORD'S ACTUAL KNOWLEDGE, - ----------------------------------------------------------------------------- (I) THE PREMISES MEET THE REQUIREMENTS OF ALL APPLICABLE FEDERAL, STATE AND - --------------------------------------------------------------------------- LOCAL LAWS AND REGULATIONS EXCEPT COMPLIANCE WITH AND REQUIREMENTS OF THE - ------------------------------------------------------------------------- AMERICANS WITH DISABILITIES ACT; AND (II) ALL SYSTEMS AND EQUIPMENT LOCATED IN - ------------------------------------------------------------------------------ OR UPON THE PREMISES, INCLUDING, WITHOUT LIMITATION, ALARM, PLUMBING, HEATING, - ------------------------------------------------------------------------------ AIR CONDITIONING, VENTILATION, ELECTRICAL AND LIGHTING FACILITIES AND EQUIPMENT, - -------------------------------------------------------------------------------- ARE IN GOOD WORKING ORDER, CONDITION AND REPAIR AND MEET THE REQUIREMENT OF ALL - ------------------------------------------------------------------------------- APPLICABLE FEDERAL, STATE, AND LOCAL LAWS AND REGULATIONS. Tenant acknowledges - ---------------------------------------------------------- that neither Landlord nor Landlord's agent has made any representation or warranty as to the suitability of the Premises for the conduct of Tenant's business. 6.4 INSURANCE CANCELLATION. Notwithstanding the provisions of ---------------------- Article 6.1 hereinabove, no use shall be made or permitted to be made of the Premises nor acts done which will cause the cancellation of any insurance policy covering said Premises or any building of which the Premises may be a part, and if Tenant's use of the Premises causes an increase in said insurance rates, Tenant shall pay any such increase. 7. MAINTENANCE, REPAIRS AND ALTERATIONS. ------------------------------------ 7.1 LANDLORD'S OBLIGATIONS. Subject to the provisions of Article 9, ---------------------- and except for damage caused by any negligent or intentional act or omission of Tenant, Tenant's agents, employees, or invitees, Landlord, at Landlord's expense, shall keep in good order, condition and repair the foundations and exterior walls of the Premises. Landlord shall not however, be obligated to paint such exterior, nor shall Landlord be required to maintain the interior surface of exterior walls, windows, doors or plate glass. Landlord shall have no obligations to make repairs under this Article 7.1 until a reasonable time after receipt of written notice of the need for such 2 repairs. Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. IF LANDLORD FAILS TO -------------------- COMMENCE SUCH REPAIRS OR MUTUALLY AGREE TO A PLAN OF ACTION WITHIN THIRTY (30) - ------------------------------------------------------------------------------ DAYS OF RECEIPT OF SUCH NOTICE OR FAILS TO PROSECUTE SUCH REPAIRS TO COMPLETION - ------------------------------------------------------------------------------- WITH REASONABLE DILIGENCE, TENANT MAY MAKE ANY SUCH REPAIRS, AT LANDLORD'S - -------------------------------------------------------------------------- EXPENSE, AND TENANT MAY DEDUCT ANY COSTS AND EXPENSES ASSOCIATED WITH SUCH - -------------------------------------------------------------------------- REPAIR FROM THE NEXT MONTHLY RENTAL PAYMENTS DUE TO LANDLORD UNTIL ALL SUCH - --------------------------------------------------------------------------- COSTS AND EXPENSES ARE REIMBURSED TO TENANT. - ------------------------------------------- 7.2 TENANT'S OBLIGATIONS. Subject to the provisions of Article 7.1 -------------------- and Article 9. Tenant, at Tenant's expense, shall keep in good order, condition and repair the Premises and every part thereof (regardless of whether the damaged portion of the Premises or the means of repairing the same are accessible to Tenant) including, without limiting the generality of the foregoing, all plumbing, heating, air conditioning, ventilating, electrical and lighting facilities and equipment, fixtures, interior walls, ceilings, roof, windows, doors, plate glass, and skylights, tenant identification signs and fences surrounding the Premises including but not limited to damage due to break-ins, theft or vandalism. If the Premises include a fire sprinkler system Tenant shall be responsible for all repairs and maintenance including performing an annual inspection of said system and providing Landlord with a copy of the inspection report. If the system is monitored by a central monitoring station Tenant shall be responsible for all costs. During the term of this Lease. Tenant shall contract for preventative maintenance and a minimum of four (4) filter changes per year on the heating, ventilating and air conditioning (HVAC) systems. Annually Tenant shall provide Landlord with evidence that a maintenance contract exists. Tenant shall be directly responsible for any repairs to the HVAC System serving the Premises. Tenant is responsible for maintenance (including periodic cleaning) of the catch basins serving the parking lot areas. Tenant shall reimburse Landlord for all damage done to the Premises, normal wear and tear excepted, occasioned by any act or omission of Tenant or Tenant's officers, contractors, agents, invitees, licensees, or employees, including, but not limited to, cracking or breaking of glass. 7.3 SURRENDER. On the last day of the term hereof, or on any sooner --------- termination, Tenant shall surrender the Premises to Landlord in good condition, broom clean, ordinary wear and tear excepted. Tenant shall repair any damage to the Premises occasioned by its use thereof, or by the removal of Tenant's trade fixtures, signs, furnishings and equipment pursuant to Article 7.5, which repair shall include the patching and filling of holes and repair of structural damage. 7.4 LANDLORD'S RIGHTS. If Tenant fails to perform Tenant's ----------------- obligations under this Article 7, Landlord may, at its option (but shall not be required to) enter upon the Premises, after ten (10) days prior written notice to Tenant or with no prior written notice if an emergency, and put the same in good order, condition and repair, and the cost thereof together with interest thereon at the rate of sixteen percent (16%) per annum, shall become due and payable as additional rent to Landlord together with Tenant's next rental installment. 7.5 ALTERATIONS AND ADDITIONS. ------------------------- (a) LANDLORD ACKNOWLEDGES TENANT INTENDS TO MAKE SUBSTANTIAL -------------------------------------------------------- ALTERNATIONS TO THE PREMISES. NEVERTHELESS, Tenant shall not, without - --------------------------------------------- Landlord's prior written consent, make any alterations, improvements, or additions in, on, or about the Premises, except for non structural alterations not exceeding TWENTY FIVE One Thousand Dollars ($25,000) ($1,000) in cost. As a ----------- --------- condition to giving such consent, Landlord may require that Tenant remove any such alterations, improvements, additions or utility installations at the expiration of the term, and to restore the Premises to their prior condition. (b) Before commencing any work relating to alterations, additions and improvements affecting the Premises (none of which are required or requested by Landlord, nor any obligation of Tenant under this Lease), Tenant shall notify Landlord in writing of the expected date of commencement thereof. Landlord shall then have the right at any time and from time to time to post and maintain on the Premises such notices as Landlord reasonably deems necessary to protect the Premises and Landlord from mechanic's liens, materialmen's liens, or any other liens. In any event, Tenant shall pay, when due, all claims for labor or materials furnished to or for Tenant or for use in the Premises. Tenant shall not permit any mechanic's or materialmen's liens to be levied against the Premises for any labor or material furnished to Tenant or claimed to have been furnished to Tenant or 3 to Tenant's agents or contractors in connection with work of any character performed or claimed to have been performed on the Premises by or at the direction of Tenant. (c) Unless Landlord requires their removal, as set forth in Article 7.5(a), all alterations, improvements, or additions which may be made on the Premises shall become the property of Landlord and remain upon and be surrendered with the Premises at the expiration of the term. Notwithstanding the provisions of this Article 7.5(c), Tenant's machinery, equipment and trade fixtures, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, shall remain the property of Tenant and may be removed by Tenant subject to the provisions of Article 7.3. TENANT MAY HOWEVER, REMOVE ANY MACHINERY, EQUIPMENT OR TRADE FIXTURES PROVIDED - ------------------------------------------------------------------------------ THE PREMISES ARE RESTORED TO BUILDING STANDARDS. - ------------------------------------------------ 8. INSURANCE INDEMNITY. ------------------- 8.1 INSURING PARTY. As used in this Article 8, the term "insuring -------------- party" shall mean the party who has the obligation to obtain the insurance required hereunder. The insuring party in this case shall be the Landlord. Tenant shall reimburse Landlord for the cost of the insurance, as additional rent, upon fifteen (15) days advance written notice. 8.2 LIABILITY INSURANCE. Tenant shall obtain and keep in force ------------------- during the term of this Lease a policy of comprehensive public liability insurance insuring Landlord and Tenant against all liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be in an amount of not less than One Million Dollars ($1,000,000) for injury or death of any person in any one accident or occurrence. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least Five Hundred Thousand Dollars ($500,000). The limits of said insurance shall not, however, limit the liability of Tenant hereunder. In the event that the Premises constitute a part of a larger property said insurance shall have a Landlord's Protective Liability endorsement attached thereto. If Tenant shall fail to procure and maintain said insurance Landlord may, but shall not be required to, procure and maintain the same, but at the expense of Tenant. 8.3 PROPERTY INSURANCE. The insuring party shall obtain and keep in ------------------ force during the term of this Lease a policy or policies of insurance covering loss or damage to the Premises, in the amount of the full replacement value thereof, or as required by any lender, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk) and sprinkler leakage as well as earthquake and flood. Said policy may include a deductible, the cost of said deductible shall be borne in accordance with Articles 7.1 and 7.2. In addition thereto, insuring party shall maintain (i) full coverage plate glass insurance on the Premises, and (ii) INSURANCE OF air conditioning equipment, and ------------- other pressure vessels systems located in, on, or about the Premises with limits of not less than One Hundred Thousand Dollars ($100,000) per occurrence and (ii) rent loss insurance in favor of Landlord insuring Landlord against any loss of rental from damage or destruction of the premises for a period of least twelve (12) months from the date of such damage or destruction. Said insurance shall provide for payment for loss thereunder to Landlord or to the holder of a first mortgage or deed of trust on the Premises. If the insuring party shall fail to procure and maintain said insurance, the other party may, but shall not be required to, procure and maintain the same, but at the expense of the Tenant. 8.4 INSURANCE POLICIES. Insurance required hereunder shall be in ------------------ companies rated A1, AAA or better in "Best Insurance Guide". The insuring party shall deliver prior to possession, to the other party, copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with loss payable clauses satisfactory to Landlord. No such policy shall be cancelable or subject to reduction of coverage or other modification except after ten (10) days prior written notice to Landlord. If Tenant is the insuring party, Tenant shall, within ten (10) days prior to the expiration of such policies, furnish Landlord with renewals thereof, or Landlord may order such insurance and charge the cost thereof to Tenant, which amount shall be payable by Tenant upon demand. Tenant shall not do or permit to be done anything which shall invalidate the insurance policies referred to in Article 8.3. Tenant shall forthwith, upon Landlord's demand, reimburse Landlord for any additional premiums attributable to any act or omission or operation of Tenant causing such increase in the cost of insurance. If Landlord is the insuring party, and if the insurance policies maintained hereunder cover other 4 improvements in addition to the Premises, Landlord shall deliver to Tenant a written statement setting forth the amount of any such cost increase and showing in reasonable detail the manner in which it has been computed. 8.5 WAIVER OF SUBROGATION. Tenant and Landlord each waive any and --------------------- all rights of recovery against the other, or against the officers, employees, agents and representatives of the other, for loss of or damage to such waiving party or its property or the property of others under its control, where such loss or damage is insured against under any insurance policy in force at the time of such loss or damage provided that this waiver of subrogation shall not in any manner absolve Tenant of its obligations to make repairs pursuant to Article 7.2 or its obligation to indemnify Landlord pursuant to Article 8.6. Tenant and Landlord shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 8.6 HOLD HARMLESS. Tenant shall indemnify, defend and hold Landlord ------------- harmless from any and all claims arising from Tenant's use of the Premises or from the conduct of its business or from any activity, work or things which may be permitted or suffered by Tenant in or about the Premises and shall further indemnify, defend and hold Landlord harmless from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the provisions of this Lease or arising from any negligence of Tenant or any of its agents, contractors, employees or invitees and from any and all costs, attorney's fees, expenses and liabilities incurred in the defense of any such claim or action or proceeding brought thereon. Tenant hereby assumes all risk of damage to property or injury to persons in or about the Premises from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, excepting where said damage arises out of negligence of Landlord. 8.7 EXEMPTION OF LANDLORD FROM LIABILITY. Tenant hereby agrees that ------------------------------------ Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or from damage to the goods, wares, merchandise or other property of Tenant, or about the Premises, nor, unless through its negligence, shall Landlord be liable for injury to the person of Tenant, Tenant's employees, agents, contractors and invitees, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water, or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said damage or injury results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Landlord or Tenant. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the building in which the Premises are located. 9. DAMAGE OR DESTRUCTION. Partial damage is defined as not greater than --------------------- forty percent (40%) of the total rentable square feet improved building area within the Tenant space. 9.1 PARTIAL DAMAGE - INSURED. Subject to the provisions of Article ------------------------ 7.1, if the Premises are damaged and such damage was caused by a casualty covered under an insurance policy required to be maintained pursuant to Article 8.3, Landlord shall, at Landlord's expense, repair such damage as soon as reasonably possible, and this Lease shall continue in full force and effect. 9.2 DAMAGE - UNINSURED. In the event the Premises may be damaged or ------------------ destroyed by a casualty which is not covered by fire and extended coverage insurance carried by Landlord, the Landlord shall restore same, provided that if the damage or destruction is to an extent greater than ten FIFTEEN percent (10%) ------- (15%) of the then replacement cost of improvements on the Premises (exclusive of - ----- Tenant's trade fixtures and equipment and exclusive of foundations) then Landlord may elect not to restore and to terminate this Lease. Landlord must give Tenant written notice of its election not to restore within thirty (30) days from the date Landlord received notice of such damage and, if not given, Landlord shall be deemed to have elected to restore and in such event shall repair any damage as soon as reasonably possible. In the event Landlord elects to give such notice of Landlord's intention to cancel and terminate this Lease, Tenant shall have the right within ten (10) days after receipt of such notice to give written notice to Landlord of Tenant's intention to repair such damage at Tenant's expense, without reimbursement from Landlord, in which event this Lease shall continue in full force and effect and Tenant shall proceed to make such repairs as soon as reasonably possible. If Tenant does not give such 5 notice within such ten (10) day period, this Lease shall be canceled and terminated as of the date of the occurrence of such damage. 9.3 TOTAL DESTRUCTION. If at any time during the term hereof the ----------------- Premises are totally destroyed to an extent greater than forty percent (40%) of rentable square feet from any cause whether or not covered by the insurance required to be maintained by the insuring party pursuant to Article 8.3 (including total destruction required by any authorized public authority), this Lease shall automatically terminate as of the date of such total destruction, unless Landlord elects to repair per Paragraph 9.1. 9.4 DAMAGE NEAR END OF TERM. If the Premises are partially destroyed ----------------------- or damaged during the last twelve (12) months of the term of this Lease, Landlord may, at Landlord's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Tenant of Landlord's election to do so within thirty (30) days after Landlord receives notice of occurrence of such damage. 9.5 ABATEMENT OF RENT. ----------------- (a) If the Premises are partially destroyed or damaged and Landlord or Tenant repairs or restores them pursuant to the provisions of this Article 9, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Tenant's reasonable use of the Premises is substantially impaired. Except for abatement of rent, if any, Tenant shall have no claim against Landlord for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Landlord shall be obligated to repair or restore the Premises under the provisions of this Article 9 and shall not commence such repair or restoration within ninety (90) days after such obligations shall accrue, Tenant may, at Tenant's option, cancel and terminate this Lease by giving Landlord written notice of Tenant's election to do so at any time prior to the commencement of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. Any abatement in rent shall be computed as provided in Article 9.5(a). 10. REAL PROPERTY TAXES. ------------------- 10.1 PAYMENT OF TAXES. Tenant shall pay all real property taxes, as ---------------- additional rent, upon fifteen (15) days advance written notice, applicable to the Premises during the term of this Lease including reasonable costs for attorneys or tax experts secured by Landlord in seeking reduction of the taxes assessed on the Premises. If any such taxes shall cover any period of the time prior to or after expiration of the term hereof, Tenant's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year during which this Lease shall be in effect. 10.2 DEFINITION OF "REAL PROPERTY TAXES". As used herein, the term ----------------------------------- "real property tax" shall include any form of assessment, license fee, tax on rent, levy, penalty, or tax (other than INCOME inheritance or estate taxes) ------ imposed by any authority having the direct or indirect power to tax, including city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement district thereof, as against any legal or equitable interest of Landlord in the Premises or in the real property of which the Premises are a part, as against Landlord's right to rent or other income therefrom, or as against Landlord's business of leasing the Premises, and Tenant shall pay any and all charges and fees which may be imposed by the EPA or other similar governmental regulations or authorities. 10.3 PERSONAL PROPERTY TAXES. ----------------------- (a) Tenant shall pay prior to delinquency all taxes assessed against and levied upon leasehold improvements, fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises or elsewhere. Tenant shall cause said leasehold improvements, trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Landlord. 6 (b) If any of Tenant's personal property shall be assessed with Landlord's real property, Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days after receipt of a written statement setting forth the taxes applicable to Tenant's property. 11. EXTERIOR PARKING AND LANDSCAPE AREAS. During the term of this Lease, ------------------------------------ Tenant shall manage and maintain the exterior parking lot areas, sidewalks and landscape areas so that they are clean and free from accumulation of debris, filth, rubbish and garbage. Landscape maintenance shall include pruning, fertlization, maintenance of the irrigation system (if any) and/or watering, weeding and rebarking of the landscaped areas. 12. UTILITIES. Tenant shall pay for all water, gas, heat, light, power, --------- telephone and other utilities and services supplied to the Premises, together with any taxes thereon. 13. ASSIGNMENT AND SUBLETTING. ------------------------- 13.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not voluntarily or by --------------------------- operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Tenant's interest in this Lease or in the Premises without Landlord's prior written consent, which Landlord shall not unreasonably withhold. Any attempted assignment, transfer mortgage, encumbrance, or subletting without consent shall be void and shall constitute a breach of this Lease. Any transfer of Tenant's interest in this Lease or in the Premises from Tenant by merger, consolidation, or liquidation, or by any subsequent change in the ownership of thirty percent (30%) or more of the capital stock of Tenant or thirty percent (30%) or more partnership interest of Tenant shall be deemed a prohibited assignment within the meaning of this Article 13. Notwithstanding any provisions to the contrary contained in this Lease, this Lease may be assigned, or the Premises may be sublet, in whole or in part, without the consent of Landlord and without payment of any charge to Landlord in connection with such assignment or subletting to any corporation into or with which Tenant may be merged or consolidated or to any corporation or other entity which shall be an affiliate, subsidiary, parent or successor of Tenant, or of a corporation into or with which Tenant may be merged or consolidated. Under no circumstances shall a sale or transfer of a majority or more of the common stock of Tenant on any stock exchange be deemed an assignment pursuant to the terms and provisions of this Lease. Additionally, the public sale or transfer of the common stock of Tenant or Tenant's parent shall not constitute an assignment under this Lease,. AS TO ANY ASSIGNMENT OR SUBLEASE, the following conditions must be met: (a) - --------------------------------- Tenant shall not then be in default under this Lease beyond any applicable notice and cure periods; (b) the assignment or subletting shall in no manner relieve Tenant of ANY nay of the obligations undertaken by it under this Lease; --- (c) the assignee or subtenant shall assume in writing all the conditions, obligations and agreements contained in this Lease; (d) the assignment or subletting shall not be binding on Landlord until a fully executed copy of the document effecting such assignment or subletting and the assumption by the assignee or sublessee shall be delivered to Landlord; (e) the net worth of the succeeding entity immediately following such assignment shall not be less than the net worth of Tenant as of the date hereof; and (f) the Premises shall continue to be operated solely for the use specified herein. For purposes of this section "subsidiary" or "affiliate" of Tenant shall mean the following: (a) An "affiliate" shall mean any corporation which, directly or indirectly, controls or is controlled by or is under common control with Tenant. For this purpose, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities or by contract or otherwise; (b) a "subsidiary" shall mean any corporation not less than fifty percent (50%) of whose outstanding stock is, and which continues to be, owned directly or indirectly by Tenant. No option to extend, if any, may be assigned by Tenant and no subtenant shall have any right to exercise any such option. 13.2 NO RELEASE OF TENANT. Regardless of Landlord's consent, no -------------------- subletting or assignment shall release Tenant of Tenant's obligation to pay the rent and to perform all other obligations to be performed by Tenant hereunder for the term of this Lease. The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting, shall not be deemed consent to any subsequent assignment or subletting. 13.3 ASSIGNMENT FEE. In the event that Landlord shall consent to a -------------- sublease or assignment under Article 13.1, Tenant shall pay to Landlord reasonable fees not to exceed Five Hundred Dollars ($500) incurred in connection with giving such consent. 7 All rent received by Tenant from its subtenants in excess of the rent payable by Tenant to Landlord under this Lease shall be paid to Landlord, or any sums to be paid by an assignee to Tenant in consideration of the assignment of this Lease shall be paid to Landlord. 13.4 ASSIGNMENT BY LANDLORD. Landlord shall be permitted freely to ---------------------- assign all of its rights and obligations hereunder, and upon such assignment of its obligations, Landlord shall no longer be liable under this Lease. Tenant hereby agrees to attorn to any assignee of Landlord's interest hereunder, whether such assignment is voluntary or by operation of law. 13.5 REASONABLE CONSENT. In aid to the Landlord's determination ------------------ whether to consent to any assignment, transfer or subletting but without limiting reasons for which such consent may be withheld, Tenant, at Landlord's request, shall submit in writing to Landlord: (1) the name and legal composition of the proposed subtenant, assignee or transferees, and the nature of the transaction contemplated and purposes of it; (2) the nature of the proposed subtenant's business to be carried on in the Premises; (3) the terms and provisions of the proposed sublease, assignment or transfer; and (4) current financial statements of the subtenant or assignee and such other reasonable financial information as Landlord may request concerning the proposed transaction and the proposed subtenant, assignee or transferee without limiting the authority of the Landlord to withhold reasonably its consent, Landlord may require any assignee or subtenant to assume all of the obligations of the Tenant with respect to this Lease, but such assumption shall not release the Tenant. 14. DEFAULTS; REMEDIES. ------------------ 14.1 DEFAULTS. The occurrence of any one or more of the following -------- events shall constitute a default and breach of this Lease by Tenant: (a) The vacation or abandonment of the Premises by Tenant for a period of thirty (30) days or more. (b) The failure by Tenant to make any payment of rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of ten (10) days. (c) The failure by Tenant to observe or perform any of the covenants, conditions, or provisions of this Lease to be observed or performed by Tenant, other than described in Paragraph (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant provided, however, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commenced such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (d) (i) The making by Tenant of any general assignment, or general assignment for the benefit of creditors; (ii) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises AND of Tenant's --- interest in this Lease, where such seizure is not discharged within thirty (30) days. 14.2 REMEDIES IN DEFAULT. In the event of any such default or breach ------------------- by Tenant, Landlord may, SUBJECT TO APPLICABLE LAW, at any time thereafter, with ----------------------------- or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have by reason of such default or breach: (a) Terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from tenant all damages incurred by Landlord by reason of Tenant's default, including but not limited to: (i) the cost of recovering possession of the Premises; and (ii) expenses of reletting, including necessary renovation and alteration of the Premises; and (iii) reasonable attorney's 8 fees, and any real estate commission actually paid applicable to the unexpired term of this Lease; and (iv) the worth at the time of award determined by the court having jurisdiction thereof, of the unpaid rent that had been earned at the time of termination of this Lease; and (v) any other amount, and court costs necessary to compensate Landlord for all detriment proximately caused by Tenant's default. In the event Tenant shall have abandoned the Premises, Landlord shall have the option of (1) retaking possession of the Premises, taking possession of all personal property remaining in the Premises and recovering from Tenant the amount specified in this Article 14.2(a) and 14.2(d), or (2) proceeding under Article 14.2(b). As used in this Paragraph, the term "the worth at the time of award" is to be computed by discounting the total rent payable by the amount of the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). (b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event, Landlord shall be entitled to all of Landlord's rights and remedies under this Lease including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Premises are located. (d) Any rent or other charge that is not paid when due shall bear interest from the date due until paid at the rate of sixteen (16%) per annum; provided, however, that in no event shall such rate to be charged Tenant exceed the rate otherwise permitted by law. 14.3 DEFAULT BY LANDLORD. Landlord shall not be in default unless ------------------- Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event later than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises, where name and address shall have theretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligation; provided, however, that the nature of the Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performances within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 14.4 LATE CHARGES. Tenant hereby acknowledges that late payment by ------------ Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the term of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sums due from Tenant shall not be received by Landlord or Landlord's designee within ten (10) days after said amount is due then Tenant shall pay to Landlord a late charge of ten percent (10%) of such overdue amount, per each monthly period, but not any interest thereon. ON THE FIRST TWO OCCASIONS OF A RENT DELINQUENCY, LANDLORD ---------------------------------------------------------- WILL VERBALLY NOTIFY TENANT. IN THE EVENT THAT TENANT ISSUES PAYMENT WITHIN - ---------------------------------------------------------------------------- FIVE (5) DAYS FROM NOTIFICATION, LANDLORD AGREES TO WAIVE THE LATE CHARGE - ------------------------------------------------------------------------- ALLOWED IN THE LEASE. THEREAFTER, LANDLORD SHALL BE ENTITLED TO ALL COLLECTION - ------------------------------------------------------------------------------- REMEDIES AND CHARGES PROVIDED FOR UNDER THE LEASE. In no event shall any late - --------------------------------------------------- charge be required in violation of any law. Further, the parties agree that a Twenty-Five Dollar ($25.00) charge shall be paid by Tenant to Landlord for any returned check. The parties hereby agree that such late charge represents a fair and reasonable estimate of the cost Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. 14.5 CURE BY LANDLORD. Landlord, at any time after Tenant ---------------- commits a default, may cure the default at Tenant's cost. If Landlord at any time by reason of Tenant's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord at the time the sum is paid shall be due from Tenant to Landlord, and if paid at a later date shall bear interest at the rate of sixteen percent (16%) per annum from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest shall be deemed additional rent hereunder. 9 15. CONDEMNATION. If the Premises or any portion thereof are taken under ------------ the power of eminent domain, or sold by Landlord under the threat of the exercise of said power (all of which is herein referred to as "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession; whichever occurs first. If more than twenty-five percent (25%) of the floor area of any building on the Premises, or more than twenty-five percent (25%) of the land area of the Premises not covered with buildings, is taken by condemnation, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes possession by notice in writing of such election within twenty (20) days after Landlord shall have notified Tenant of the taking, or, in the absence of such notice, then within twenty (20) days after the condemning authority shall have taken possession. If this Lease is not terminated by either Landlord or Tenant, then it shall remain in full force and effect as to the portion of the Premises remaining, provided the rental shall be reduced in proportion to the floor area of the buildings taken within the Premises as bears to the total floor area of all buildings located on the Premises. In the event this Lease is not so terminated, then Landlord agrees, at Landlord's sole costs, as soon as reasonably possible, to restore the Premises to a complete unit of like quality and character as existed prior to the condemnation. All awards for the taking of any part of the Premises or any payment made under the threat of the exercise of power of eminent domain shall be the property of Landlord, whether made as compensation for diminution of value of the leasehold or for the taking of the fees or as severance damages; provided, however, that Tenant shall be entitled to any award for loss of or damage to Tenant's trade fixtures and removable personal property. 16. GENERAL PROVISIONS. ------------------ 16.1 ESTOPPEL CERTIFICATE. -------------------- (a) Tenant shall, at any time, upon not less than ten (10) days prior written notice from Landlord, execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent, security deposit, and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any , which are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. (b) Tenant's failure to deliver such statement within such time period shall be conclusive upon Tenant that (i) this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) there are not uncured defaults in Landlord's performance, and (iii) not more than one (1) month's rent has been paid in advance. (c) If Landlord desires to finance or refinance the Premises, or any part thereof, Tenant hereby agrees to deliver to any lender designated by Landlord such financial statements of Tenant as may be reasonably required by such lender. Such statements shall include the past three (3) years' financial statements of Tenant. All such financial statements shall be received by Landlord in confidence and shall be used only for the purposes herein set forth. Tenant shall execute any estoppel certificate, subordination agreement, and/or attornment agreement submitted to Tenant by Landlord for purposes of said financing; provided however, that Tenant shall be allowed the quiet use and enjoyment of the Premises as long as Tenant is not in default under the terms of this Lease. 16.2 LANDLORD'S INTEREST. The term "Landlord" as used herein shall ------------------- mean only the owner or owners at the time in question of the fee title, vendee's interest under a real estate contract, or a tenant's interest in a ground lease of the Premises. In the event of any transfer of such title or interest, Landlord herein named (and in case of any subsequent transfers, the then grantor) shall be relieved from and after the date of such transfer of all liability as respects Landlord's obligations thereafter to be performed ACCRUING, provided that any funds in the hands of Landlord or the then grantor - -------- at the time of such transfer, in which Tenant has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Landlord shall, subject to aforesaid, be binding upon Landlord's successors and assigns, only during their respective periods of ownership. 10 16.3 SEVERABILITY. The invalidity of any provision of this Lease, as ------------ determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 16.4 INTEREST ON PAST DUE OBLIGATIONS. Except as expressly herein -------------------------------- provided, any amount due to Landlord not paid when due shall bear interest at sixteen percent (16%) per annum from the due date. Payment of such interest shall not excuse or cure any default by Tenant under this Lease. 16.5 TIME OF ESSENCE. Time is of the essence. --------------- 16.6 CAPTIONS. Article and Paragraph captions are not a part hereof. -------- 16.7 INCORPORATION OF PRIOR AGREEMENT; AMENDMENTS. This Lease -------------------------------------------- contains all agreements of the parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any such matter shall be effective. This lease may be modified in writing only, signed by the parties in interest at the time of modification. 16.8 WAIVERS. No waiver by Landlord of any provision hereof shall be ------- deemed a waiver of any other provision hereof or of any subsequent breach by Tenant of the same or any other provision. Landlord's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant. The acceptance of rent hereunder by Landlord shall not be a waiver of any preceding breach by Tenant of any provision hereof, other than the failure of Tenant to pay the particular rent so accepted regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 16.9 RECORDING. Tenant shall not record this Lease without Landlord's --------- prior written consent, and such recordation shall, at the option of Landlord, constitute a noncurable default of Tenant hereunder. Either party shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 16.10 HOLDING OVER. If Tenant remains in possession of the Premises ------------ or any part thereof after the expiration of the term hereof without the express written consent of Landlord, such occupancy shall be a tenancy from month to month at a rental in the amount of 150 125% of the last monthly rental plus all --- other charges payable hereunder, and upon the terms hereof applicable to month to month tenancy. 16.11 CUMULATIVE REMEDIES. No remedy or election hereunder shall be ------------------- deemed exclusive, but shall wherever possible, be cumulative with all other remedies at law or in equity. 16.12 COVENANTS AND CONDITIONS. Each provision of this Lease ------------------------ performable by Tenant shall be deemed both a covenant and a condition. 16.13 BINDING EFFECT; CHOICE OF LAW; PRORATION. Subject to any ---------------------------------------- provisions hereof restricting assignment or subletting by Tenant and subject to the provision of Article 13.2, this Lease shall bind the parties, their representatives, successors and assigns. This Lease shall be governed by the laws of the state where the Premises are located. All prorations shall be on the basis of a thirty (30) day month. 16.14 SUBORDINATION. ------------- (a) This Lease, at Landlord's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any hypothecation for security now or hereafter placed upon the real property of which the Premises are a part and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Tenant, this Lease shall be 11 deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust or ground lease, or the date of recording thereof. (b) Tenant agrees to execute and deliver any documents required to effectuate such subordination or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be, and failing to do so within ten (10) TWENTY (20) days after written demand, does hereby make, ----------- constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact and in Tenant's name, place and stead, to do so. 16.15 ATTORNEYS' FEES. If either party named herein brings an action --------------- to enforce the terms hereof or declare rights hereunder the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court. 16.16 LANDLORD'S ACCESS. Landlord and Landlord's agents shall have ----------------- the right to enter the Premises at reasonable times for the purpose of inspecting the same, showing the same to prospective tenants, purchasers or lenders, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part as Landlord may deem necessary or desirable. Landlord may at any time place on or about the Premises any ordinary "For Sale" or "For Lease" signs, and Landlord may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "FOR LEASE" signs all without rebate or rent or ----------- liability to Tenant. 16.17 SIGNS. Tenant shall not place any sign upon the Premises ----- without Landlord's prior written consent, WHICH CONSENT SHALL NOT BE ---------------------------- UNREASONABLY WITHHELD. All signs installed by Tenant shall be removed upon - --------------------- termination of this Lease with the sign location restored to its former state. 16.18 MERGER. The voluntary or other surrender of this Lease by ------ Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subtenancies, or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. 16.19 CORPORATE AUTHORITY. If Tenant is a corporation, each ------------------- individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the ARTICLES AND bylaws of ------------- said corporation, and that this Lease is binding upon said corporation in accordance with its terms. 16.20 LANDLORD'S LIABILITY. If Landlord is a joint venture or -------------------- limited partnership, the liability of the partners of Landlord pursuant to this Lease shall be limited to assets of the partnership, and Tenant, its successors and assigns, hereby waive all rights to proceed against any of the partners, or the officers, shareholders, or directors of any corporate partner of Landlord, except to the extent of their interest in the partnership. As used in this Article, the term "Landlord" shall mean only the owner or owners at the time in question of the fee title, vendee's interest under a real estate contract, or its interest in a ground lease of the Premises, and in the event of any transfer of such title or interest, Landlord herein named (and in case of any subsequent transfers the then grantor) shall be relieved from and after the date of such transfer, and any funds in the hands of Landlord or the obligations thereafter to be performed ACCRUING; provided that nay ANY funds in the hands of Landlord --------- ---- or the then grantor at the time of such transfer, in which Tenant has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Landlord shall, subject as aforesaid, be binding on Landlord's successors and assigns only during the respective period of ownership. 16.21 FINANCING. Tenant shall not execute any document purporting to --------- affect the Premises or any other property of which the Premises are a part, including, without limitation; any financing statement, without prior written consent of Landlord, which may be withheld or conditioned in Landlord's sole discretion. 16.22 INABILITY TO PERFORM. This Lease and the obligations of the -------------------- Tenant hereunder shall not be effected or impaired because the Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, force majeure, weather and acts of God, or any other cause beyond the reasonable control of the Landlord, and Landlord shall not be liable for any such delay. 12 17. COMPLETION BOND. At any time, Tenant either desires to or is --------------- required to make any repairs, alterations, additions, improvements or utility installations thereon, pursuant to Articles 7.5 or 9.2 herein or otherwise, Landlord may at its sole option, require Tenant, at Tenant's sole cost and expense, to obtain and provide to Landlord a lien and completion bond in an amount equal to one and one-half (1-1/2) times the estimated cost of such improvements, to insure Landlord against any liability for mechanic's and materialmen's liens and to insure completion of the work. 18. NOTICES. Wherever under this Lease provision is made for any demand, ------- notice or declaration of any kind, or where it is deemed desirable or necessary by either party to give or serve any such notice, demand or declaration to the other party, it shall be in writing and served either personally or sent by United States mail, postage prepaid, addressed to the address set forth herein below: To Landlord: SMITH COVE PARTNERSHIP, A WASHINGTON GENERAL -------------------------------------------- PARTNERSHIP -------------------------------------------- ROBERT M. CURLEY -------------------------------------------- GENERAL PARTNER -------------------------------------------- 2021 FIRST AVENUE , #E-6 -------------------------------------------- SEATTLE, WA 98121 -------------------------------------------- To Tenant: SEATTLE FILMWORKS, INC. -------------------------------------------- CASE H. KUEHN -------------------------------------------- 1260 16/TH/ AVENUE WEST -------------------------------------------- SEATTLE, WA 98119 -------------------------------------------- 19. HAZARDOUS AND TOXIC WASTE MATERIALS. Tenant shall be responsible for ----------------------------------- all expenses, damages, liabilities, including reasonable attorneys' fees, occurring as a result of Tenant's use or release of any hazardous and toxic waste materials as they may affect the leased premises. "Release" means any spill, visible leak, pumping, pouring, explosion, emission, discharge, injection, escape, dumping, disposing or other entering into the environment of any substance, chemical, material, pollutant or contaminant at, in, by, from or related to the leased premises. Tenant's obligations in this regard shall survive and extend beyond the termination date of this lease. Whereby the statute of limitation for any indemnification action shall not begin to run until Landlord has sustained damage. Landlord is entitled to indemnity under the terms of this Agreement. 20. SPECIAL ARTICLES. The following numbered articles are made a part ---------------- hereof, 21, 22, 23, and 24 and appear below or are shown on Exhibit(s) A -- - attached hereto. 21. REPAYMENT OF FREE RENT. If this Lease provides for a postponement of ----------------------- any monthly rental payments, a period of "free" rent or other rent concession, such postponed rent of "free" rent is called the "Abated Rent." Tenant shall be credited with having paid all of the Abated Rent on the expiration of the Lease Term only of Tenant has fully, faithfully, and punctually performed all of Tenant's obligations hereunder, including the payment of all rent (other than the Abated Rent) and all other monetary obligations and the surrender of the Property in the physical condition required by this Lease. Tenant acknowledges that its right to receive credit for the Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual performance of its obligations under this Lease. If Tenant defaults and does not cure within any applicable grace period, the Abated Rent shall immediately become due and payable in full and this Lease shall be enforced as if there were no such rent abatement or other rent concession. 21. Lease Termination. This Lease is conditioned upon executing a ----------------- satisfactory Lease Termination Agreement with Port Chatham Packing Company within fifteen (15) days of execution of this Agreement. If a Lease Termination Agreement is not fully executed by Port Chatham Packing Company and Smith Cove Partnership, this Lease Agreement shall be null and void and have no further effect. 22. Lease Renewal Options. --------------------- Option #1. Provided Tenant is not in default hereunder at the time --------- Tenant exercises the option provided for herein or at the time of commencement of the extension term, Tenant shall have the option to renew this Lease for an additional sixty (60) months commencing October 1, 2000 and continuing through September 30, 13 2005, by giving written notice of its intent to extend on or before January 1, 1999 2000. All provisions of this Lease shall apply during the extended term, ---- except that rental for the renewal period shall be mutually agreed by Landlord and Tenant, but in no event less than the last month's rental of this Lease. If after sixty (60) days from the date of written notice, rent is in dispute, then either party may by written notice delivered to the other party within five (5) days after the expiration of the 60 day period, request arbitration by a single arbitrator through the American Arbitration Association (in accordance with its rules) with the cost to be divided equally between the parties. Said arbitration shall be a "baseball type" arbitration (meaning Landlord and Tenant shall each submit to the arbitrator a written proposal for their estimate of fair market rental during the renewal period, and the arbitrator shall determine the rental closest to fair market rental for the renewal period by selecting one of the two proposals), which determination shall be binding upon both parties, and shall be completed prior to the commencement of the renewal term. If neither party gives notice of its desire to enter into arbitration within the five (5) day period, this option shall become null and void. Option #2. Provided Tenant is not in default hereunder at the time --------- Tenant exercises the option provided for herein or at the time of commencement of the extension term, Tenant shall have the option to renew this Lease for an additional sixty (60) months commencing October 1, 2005 and continuing through September 30, 2010, by giving written notice of its intent to extend on or before January 1, 2004 2005. All provisions of this Lease shall apply during ---- the extended term, except that rental for the renewal period shall be mutually agreed by Landlord and Tenant, but in no event less than the last month's rental of Option #1. If after sixty (60) days from the date of written notice, rent is in dispute, then either party may by written notice delivered to the other party within five (5) days after the expiration of the 60 day period, request arbitration by a single arbitrator through the American Arbitration Association (in accordance with its rules) with the cost to be divided equally between the parties. Said arbitration shall be a "baseball type" arbitration (meaning Landlord and Tenant shall each submit to the arbitrator a written proposal for their estimate of fair market rental during the renewal period, and the arbitrator shall determine the rental closest to fair market rental for the renewal period by selecting one of the two proposals), which determination shall be binding upon both parties, and shall be completed prior to the commencement of the renewal term. If neither party gives notice of its desire to enter into arbitration within the five (5) day period, this option shall become null and void. 23. Right of Opportunity. If Landlord decides during the term of this -------------------- Lease Agreement to sell the Premises, it shall afford Tenant the opportunity to purchase the Premises upon THE terms and conditions established TO BE OFFERED by ---- -------------- Landlord, provided that Tenant is not then in default under any of the terms and conditions of this Lease Agreement. Tenant shall have ten (10) days after being notified of the terms and conditions imposed by Landlord upon sale of the Premises within which to notify Landlord of its election either to purchase said Premises or waive the right. Once having waived the right to purchase, the right granted Tenant hereunder shall terminate even though Landlord may thereafter desire to sell said Premises. 24. PAYMENT OF MANAGEMENT FEES. IN CONJUNCTION WITH MONTHLY RENT ------------------------------------------------------------- PAYMENTS, TENANT SHALL PAY AS ADDITIONAL RENT A MANAGEMENT FEE OF TWO HUNDRED - ----------------------------------------------------------------------------- DOLLARS ($200). - --------------- 14 The parties hereto have executed this Lease at the place and on the dates specified immediately adjacent to their respective signatures. Dated this 5th day of MARCH, 1997, ----- -- at Seattle, Washington. "Landlord": SMITH COVE PARTNERSHIP --------------------------------------------------- a WASHINGTON GENERAL PARTNERSHIP ------------------------------------------------- By: /s/ Robert M. Curley Robert M. Curley Title: General Partner --------------- Dated this 5th day of MARCH, 1997, ----- -- at Seattle, Washington. "Tenant": SEATTLE FILMWORKS, INC. ----------------------- a WASHINGTON CORPORATION ---------------------- By: /s/ Case H. Kuehn Case H. Kuehn Title: Vice President & Chief Financial Officer ---------------------------------------- 15
STATE OF WASHINGTON GENERAL PARTNERSHIP COUNTY OF KING } ss.
On this 5th day of March, A.D. 1997, before me personally appeared Robert M. Curley to me known to be the General Partner of Smith Cove Partnership, a Washington General Partnership that executed the within and foregoing instrument, and acknowledged the same instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal, the day and year first above written. /s/ Stephanie Bonsanti Notary Public in and for the State of Washington, residing at Kent, Washington. STATE OF WASHINGTON } CORPORATE ss. COUNTY OF KING On this 5th day of March, A.D. 1997, before me personally appeared Case H. Kuehn to me known to be the Vice President and Chief Financial Officer of Seattle FilmWorks, Inc., the corporation that executed the within and foregoing instrument, and acknowledged the same instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal, the day and year first above written. /s/ Linda Marie Clay Notary Public in and for the State of Washington, residing at Redmond, Washington. 16 EX-11 6 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 SEATTLE FILMWORKS, INC. COMPUTATION OF EARNINGS PER SHARE
Second Quarter Ended Six Months Ended ------------------------ ------------------------- March 29, March 30, March 29, March 30, 1997 1996 1997 1996 ======================================================================================================================== COMPUTATION OF PRIMARY EARNINGS PER SHARE: - ---------------------------------------------------- Weighted average shares outstanding 16,278,331 16,141,703 16,265,623 16,116,119 Net effect of dilutive stock options based on the treasury stock method using average market price 1,483,578 1,566,205 1,531,880 1,567,692 ---------- ---------- ---------- ---------- Total shares and equivalents 17,761,909 17,707,908 17,797,503 17,683,811 ========== ========== ========== ========== Net income $1,145,925 $503,461 $2,502,844 $1,454,172 ========== ========== ========== ========== PRIMARY EARNINGS PER SHARE $.06 $.03 $.14 $.08 ==== ==== ==== ==== COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE: - ------------------------------------------------ Weighted average shares outstanding 16,278,331 16,141,703 16,265,623 16,116,119 Net effect of dilutive stock options based on the treasury stock method using the higher of quarter-end market price or average market price 1,483,578 1,630,377 1,531,880 1,649,917 ---------- ---------- ---------- ---------- Total shares and equivalents 17,761,909 17,772,080 17,797,503 17,766,036 ========== ========== ========== ========== Net income $1,145,925 $503,461 $2,502,844 $1,454,172 ========== ========== ========== ========== FULLY DILUTED EARNINGS PER SHARE $.06 $.03 $.14 $.08 ==== ==== ==== ====
Note - All share data has been retroactively restated to reflect a three-for-two stock split effected in the form of a stock dividend on March 17, 1997. 49 of 49 EX-27 7 FINANCIAL DATA SCHEDULE
5 Seattle FilmWorks Inc. Second Quarter 1997 10Q 1,000 6-MOS SEP-27-1997 SEP-29-1996 MAR-29-1997 10,632 0 1,650 0 8,494 21,739 6,183 0 41,998 8,638 0 0 0 163 29,049 41,998 0 21,657 12,762 7,284 (148) 0 0 1,759 613 0 0 0 0 1,146 .06 .06 Asset values represent net amounts
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