**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K/A**

 

[ X  ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended SEPTEMBER 24, 2005**

 

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transition period from ______ to ______**

 

Commission file No.**0-15338**

 

**PHOTOWORKS, INC.**

(Exact name of registrant as specified in its charter)

 

|   |           **Washington**         |           **91-0964899**           |  
 

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

 

 

**1260 16th Avenue West, Seattle,  WA**

**98119**

 
 

(Address of principal executive offices)

(Zip Code)

 

 

Registrant's telephone number, including area code:

**(206) 281-1390**

 

 

Securities registered pursuant to Section 12(b) of the Act:

**None**

 

Securities registered pursuant to Section 12(g) of the Act: **Common Stock, par value $.01 per share** 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  

Yes:  [  

]  

No:  [ X  ]

 
 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes:  [  

]  

No:  [ X  ]

 
 

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:  [   ]   No:  [ X  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [   ]   

 

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  

Yes:  [  

]  

No:  [ X ]

 
 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes:  [  

]  

No:  [ X ]

 
 

As of January 19, 2005, the aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was $1,476,150 based on the last sale price of the Registrant’s Common Stock as reported by the Over the Counter Bulletin Board Market.  

 

As of January 20, 2006, there were issued and outstanding 19,794,672  shares of Common Stock, par value $.01 per share.

 

Page 1 of  15

 

1

 

 

 

**PART III**

 

**ITEM 10.  Directors and Executive Officers of the Registrant.**

 

**I**nformation on the Company's executive officers can be found in Part I, "Business", of the Form 10-K.

 

The Board of Directors of the Company currently consists of six directors classified into three classes.  The table below sets forth the name, age, class and expiration of the term of the current Board of Directors.

 

**Name**

**Age**

**Class**

**Expiration of Term**

Paul B. Goodrich

59

I

2007

Philippe Sanchez

41

I

2007

Edward C. Holl

46

II

2006

Mark Kalow

50

II

2008

Matthew A. Kursh

40

III

2006

Joseph Waechter

52

III

2006

 

 

**Paul B. Goodrich**became a director in February 2000.  Mr. Goodrich is a Managing Director of Madrona Venture Group, L.L.C., an early-stage venture capital firm focused on the Internet economy in the Northwest.  Mr. Goodrich****was formerly the Seattle Partner for a Chicago-based venture capital firm and a Partner with Perkins Coie, a Seattle law firm.  He is a director of Sharebuilder Corporation.  

 

**Philippe Sanchez** has been the President and Chief Operating Officer since October 2003.  From 2001 to 2003, Mr. Sanchez was senior Vice President of Marketing at Getty Images, a leading imagery company, where he managed worldwide strategic brand initiatives.  From 1995 to 2001, Mr. Sanchez worked for Nike, Inc. serving in various general management, product marketing and merchandising roles in Europe, Asia and the Americas.  From 1993 to 1995, Mr. Sanchez served as a licensing manager for Disney's Consumer Products Europe and Middle East out of the company's European headquarters in Paris.

 

**Edward C. Holl**became a director of the Company in October 2005.  He currently serves as President of California Atlantic Limited Inc., and Managing Member of Matinicus Capital Management LLC, both private investment firms. He also serves in various adversary roles to private companies in which he invests as a private investor.  Prior to this, Mr. Holl served as senior executive of Merchants Group International, a California based private equity firm.  Mr. Holl has 25 years experience in the financial industry having held various executive and non-executive positions since 1982. He started his career with Bateman Eichler Hill Richard Inc. of Los Angeles, where he co-founded the firm’s first investment management group which accumulated over $1 Bullion in assets after three year of launch between 1986 and 1989.  Mr., Holl was a Senior Vice President with ShearsonLehman Brothers between 1990 and 1993 and later on Chairman and CEO of two smaller broker dealers in northern California. Mr. Holl has held a variety of board and advisory positions since 1982. Mr. Holl received a BA from Occidental College in Los Angeles, a C.E.P. from the**Institut D'Études Politiques de Paris in France and an MBA from the Anderson Graduate School of Management at the University of California, Los Angeles.

 

**Matthew A. Kursh** became a director of the Company in April 2000.  Mr. Kursh started his career as president and co-founder of Clearview Software, which he sold to Apple Computer in 1989.  Mr. Kursh then co-founded and was CEO of eShop Corporation, one of the first companies to offer platforms and services for online shopping.  eShop's customers included such leading companies as AT&T, Tower Records, Spiegel, 1-800-Flowers and the Good Guys.  eShop was later acquired by Microsoft where Mr. Kursh ran Sidewalk, 

 

2

 

 

HomeAdvisor and MSN.com.  Mr. Kursh left Microsoft in 1999 to focus on creative projects and work with start-up companies.

 

**Mark Kalow** became a director of the Company in May 2004.  Mr. Kalow co-founded and served as COO and CFO at Live Picture Inc in 1993.  He also served as Interim CEO to sell Live Picture to MGI Software (transaction closed in June, 1999).  More recently, Mr. Kalow co-managed the U.S. venture capital activities of a major Japanese strategic software and services investor, Trans Cosmos USA.  His experience also includes management positions in finance, product management and marketing at IBM, and as vice president of telecommunications for two years at Chase Manhattan Bank.  Mr. Kalow also serves on the board and Audit Committee of ACD Systems, a publicly traded company on the Toronto Stock Exchange.

 

**Joseph Waechter**became a director of the Company in October 2005.  He is managing partner of California Pacific Capital, LLC and President of Sunra Capital Holdings Limited. In 1972, Waechter joined DHL Worldwide Express where he held a number of positions including president and Chief Executive Officer from 1983 to 1987. He joined Air Micronesia, Inc. where he served as president and CEO from 1989 through 1997. He also served as Chairman and CEO of United Micronesia Development Association, Inc. and from 1994 to 1997, was Chairman and CEO of Danao International Holdings, a developer of golf, hotel, and resort projects in Vietnam.  He was a director of Merchants Group International from 1998 through 2002.

 

**Section 16(a) Beneficial Ownership Reporting Compliance**

 

Section 16(a) of the Exchange Act requires directors, certain officers and greater-than-10% shareholders (“Reporting Persons”) of all publicly-held companies to file certain reports (“Section 16 Reports”) with respect to beneficial ownership of such companies’ equity securities.  Based solely on its review of the Section 16 Reports furnished to the Company by its Reporting Persons and, where applicable, any written representation by them that no Form 5 was required, all Section 16(a) filing requirements applicable to the Company’s Reporting Persons during and with respect to fiscal 2005 have been complied with on a timely basis, except that Sunra Holdings Ltd. had one late Form 4 filing.

 

**Code of Ethics**

 

We have adopted the PhotoWorks Finance Code of Professional Conduct (the code of ethics for senior financial officers), a code of ethics that applies to our Chief Executive Officer, Chief Accounting Officer and Controller.  A copy of the Code of Professional Conduct may be obtained without charge from the Company by request to Werner Reisacher at the Company's offices.

 

**Information Regarding the Company's Audit Committee**

 

The Board of Directors has an Audit Committee which consists of Messrs. Holl and Kalow.****As defined by the rules of the Nasdaq Stock Market, Mr. Kalow is an independent director. Mr.  Holl  is not independent due to his position with Matinicus L.P., an affiliate of the Company.  The Board of Directors has determined that Mr. Kalow is an audit committee financial expert as defined by the rules of the Securities and Exchange Commission.  Mr. Holl was elected to the Audit Committee on October 28, 2005.  During fiscal 2005 and until his resignation from the Board of Directors on October 15, 2005, Mr. Ross Chapin was a member of the Audit Committee.

 

**ITEM 11.  Executive Compensation.**

 

The following table sets forth certain information concerning the compensation paid by the Company for services rendered during fiscal years 2005, 2004 and 2003 to any person who served as Chief Executive Officer during fiscal 2005, and executive officers of the Company whose total salary and bonus exceeded $100,000 in fiscal 2005 (the “Named Executive Officers”):

 

3

 

 

 

 

 

**Summary Compensation Table**

 

 

 

**Annual Compensation**

 

**Long-term Compensation Awards**

 

 
**Name and****Principal Position**

**Fiscal Year**

 

**Salary**

**Bonus**

 

**Securities Underlying Options**

**All Other Compensation(1)**

Philippe Sanchez (2)President/CEO, and Director

2005

2004

 

$251,681

209,540

$67,500

0

 

873,400

200,000

$2,390

2,029

Thomas Kelley,  Vice President/Chief Marketing Officer( 3)

2005

2004

 

$168,75050,135

00

 

200,00040,000

$1,866467

Gerald R. Barber, Vice President/Chief Information Officer (4)

2005

2004

 

$160,268

$25,500

 

235,00055,000

$1,866557

Michael F. Lass Vice President-Operations

2005

20042003

 

$162,295

162,310175,362

0

036,450

 

0

045,000

$1,866

1,6227,123

___________________________

(1)  These amounts represent Company contributions to the PhotoWorks 401(k) Plan and   payments for term life insurance, short-term disability insurance and long-term disability insurance. 

(2)  Mr. Sanchez was appointed President/CEO and Director on October 20, 2003.

(3)  Mr. Kelley joined the Company in June 2004.

(4)  Mr. Barber joined the Company in May 2004

 

**Employment Agreements**

 

The Company and Mr. Philippe Sanchez are parties to an employment agreement dated October 3, 2003 (the “agreement”). Under terms of the agreement, Mr. Sanchez will receive a base annual salary of $225,000. Upon certain conditions, Mr. Sanchez’s salary will increase to $300,000 per year. Mr. Sanchez will also participate in a performance bonus program of up to 60% of base salary. The performance bonus plan provides financial incentives based on the Company’s results compared to financial and other metrics established by the Compensation Committee and approved by the Board of Directors.

 

As a hiring incentive, Mr. Sanchez received a stock option grant of 150,000 shares of Common Stock at an exercise price equal to the fair market value of the shares on the date the option was granted with a vesting period equal to four years. In addition, Mr. Sanchez received a stock option grant for 50,000 shares of Common Stock at an exercise price of $0.01. These shares vested in full at the one-year anniversary of the grant date. Vesting of the stock options is subject to continued employment with PhotoWorks.  Vesting may accelerate in certain instances.  

 

**Option Grants in Last Fiscal Year**

 

The Company has stock option plans pursuant to which options to purchase Common Stock are granted to officers and key employees of the Company.  The following tables show stock option grants and exercises pertaining to the named Executive Officers of the Company during fiscal 2005, and the year-end potential realizable value of all their outstanding options. The vesting of options may be accelerated at the discretion of the administrator of the option plans.  

 

4

 

 

 

 

 

**Number of**

**Securities**

**Underlying**

**Options**

**Granted (1)**

**Individual Options Granted**

**Potential Realizable**

**Value at Assumed**

**Annual Rates of Stock****Price Appreciation For****Exercise Expiration (3)**

 
**% of Total Options Granted to Employees in Fiscal Year**

**Exercise Price (2)**

**Expiration Date**

**5%**

**10%**

Philippe Sanchez

873,400

30.9%

$.071

8/31/15

$960,740

$1,458,578

 
Thomas Kelley

200,000

7.1%

$.071

8/31/15

220,000

334,000

 
Gerald R. Barber

185,000

6.5%

$0.71

8/31/15

203,500

308,950

 
Michael F. Lass

141,000

5.0%

$.071

8/31/15

155,100

235,470

 
____________________________

 

(1)

The Company's stock option plans are administered by the Compensation Committee of the Board of Directors, which determines to whom options are granted, the number of shares subject to each option, the vesting schedule and the exercise price.  Options granted to officers or directors of the Company from the Company’s 2005 Stock Incentive Compensation Plan may be exercised for a period of three months following termination of employment.

 

(2)

All options are granted with an exercise price equal to the fair market value of the Company’s Common Stock on the date of grant.  The exercise price may be paid by delivery of shares already owned by the option holder with a market value equal to the aggregate exercise price.  With the permission of the Compensation Committee, the exercise price may also be paid by withholding shares that would otherwise be received by the option holder.

 

(3)

Potential realizable value is based on the assumption that the stock price of the Common Stock appreciates at the annual rate shown (compounded annually) from the date of grant until the end of the five year option term.  These values are calculated based upon requirements of the Securities and Exchange Commission and do not reflect the Company’s estimate or projection of future stock price performance.  The actual value realized may be greater or less than the realizable value set forth in this table.

 

**Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values**

 

The following table sets forth certain information as of September 24, 2005, regarding options to purchase Common Stock held as of September 25, 2004, by each of the Named Executive Officers, as well as the exercise of such options during the fiscal year ended September 24, 2005.  In addition, the following table reports the values for in-the-money options, which values represent the positive spread between the exercise price of such options and the fair market value of the Company’s Common Stock as of September 24, 2005.

 

 

**Shares Acquired Upon Exercise**

**Value Realized (1)**

**Number of Securities Underlying Unexercised Options at September** **24, 2005 (2)**

 

**Value of Unexercised In-the-Money Options at September** **24, 2005 (3)**

**Exercisable**

**Unexercisable**

 

**Exercisable**

**Unexercisable**

 
Philippe Sanchez

0

$0

493,350

580,050

 

$30,500

0

Thomas Kelley

0

$0

114,166

125,834

 

0

0

Gerald R. Barber

0

$0

146,250

93,750

 

8,550

0

Michael F. Lass

0

$0

91,500

108,500

 

500

0

____________________________

 

(1)

Value realized is calculated by subtracting the exercise price of the option from the market value of a share of the Company’s Common Stock on the date of exercise and multiplying the difference thereof by the number of shares purchased.

 

5

 

 

 

 

(2)

Future exercisability is subject to vesting and the option holder remaining employed by the Company.

 

(3)

Value is calculated by subtracting the exercise price of the option from the market value of a share of the Company's Common Stock as reported on the Over The Counter Bulletin Board (OTCBB) on September 24, 2005 and multiplying the difference thereof by the number of shares.

 

**Ten Year Option Repricings**

 

On August 9, 2005, the Board of Directors authorized the repricing of certain outstanding stock options of the Company.  The Company has not previously repriced any options. The table below provides information regarding the effect of such repricing on all persons who were executive officers of the Company during the last ten fiscal years.

 

**Name**

**Date**

**# of Securities Underlying Options Repriced**

**Market Price of Stock at Time of Repricing**

**Exercise Price at Time of Repricing**

**New Exercise Price**

**Length of Original Option Term Remaining at Date of Repricing**

Philippe Sanchez

August 31, 2005

150,000

$.071

$2.75

$0.71

5 years

 
Thomas Kelley

August 31, 2005

40,000

0.71

2.10

0.71

6 years

 
Gerald R. Barber

August 31, 2005

40,000

0.71

2.50

0.71

6 years

 
Michael F. Lass

August 31, 2005

25,000

0.71

3.30

0.71

2 years

 
 

Upon completion of the Company’s recapitalization plan in July 2005, the Board of Directors granted additional options to management to reflect the effects of the dilution caused by the recapitalization plan and to provide meaningful equity incentives to senior management.   In determining the size of these additional grants, the Board of Directors reviewed the existing options held by senior management and the exercise prices of those grants.  Since many options held by management had exercise prices substantially higher than the current market value, the Board of Directors decided to reprice those options to current market value and to reduce the number of additional options that management was awarded.  This had the effect of reducing the total number of options outstanding and of reserving additional authorized options for future grant.

 

 

*Compensation Committee of the Board of Directors*

 

 

Paul B. Goodrich

 

Matthew Kursh

 
 

 

**Compensation Committee Interlocks and Insider Participation**

 

During the fiscal year ended September 24, 2005, the Compensation Committee consisted of Messrs. Goodrich and Kursh.  None of these individuals has served at any time as an officer or employee of the Company or is an executive officer at any company where an executive officer of the Company serves on the Compensation Committee

 

**ITEM 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters**

 

 

6

 

 

 

The following table sets forth information, as of January 20, 2006, with respect to all shareholders known by the Company who beneficially own more than five percent (5%) of the Company’s Common.  Except as noted below, each person or entity has sole voting and investment power with respect to the shares shown.

 

**Name and Address**

**Amount  and Nature****of Beneficial Ownership**

**Percent  of********Class**

**Common Stock**

 

 

California Pacific Capital L.L.C. (1)

Sunra Holdings, Ltd.

Joseph Waechter

Suite 1500

50 California Street

San Francisco, CA 94111

 

6,468,271

31.75

 
Matinicus LP (2)

Edward Holl

John P. Zinn51 West 95th Street

New York, NY 10025

 

4,590,143

 

22.63

 

 
The Tahoma Fund, L.L.C. (3)Orca Bay Capital CorporationOrca Bay Partners, L.L.C.Stanley McCammonJohn E. McCaw, Jr.Ross ChapinP.O. Box 21749Seattle, WA 98111

 

2,766,248

 

13.97

 

 
Madrona Venture Fund I-A, L.P. (4)Madrona Venture Fund I-B, L.P.Madrona Managing Director Fund L.L.C.Madrona Investment Partners L.L.C.Paul Goodrich1000 2nd Avenue – Suite 3700Seattle, WA 98104

 

1,383,124

 

6.99

 

 
 

 

(1)

The registered holder of these securities is Sunra Holdings, Ltd.  California Pacific Capital controls Sunra and Joseph Waechter controls California Pacific Capital.  The amount shown includes warrants to purchase 580,952 shares of common stock.

 

(2)

Mr. Holl and Mr. Zinn are the managers of entities that control Matinicus LP.  The amounts shown include warrants to purchase 487,142 shares of common stock.

 

(3)

Orca Bay Partners, L.L.C., (“Orca Bay”) is the Manager of The Tahoma Fund, L.L.C., (“Tahoma”). Orca Bay Capital Corporation (“OBCC”), Stanley McCammon (“McCammon”), John E. McCaw, Jr. (“McCaw”), and Ross Chapin (“Chapin”) are all affiliates of Orca Bay. 

 

7

 

 

 

 

(4)

Madrona Investment Partners, L.L.C., (“Madrona”) is the Manager of the Madrona Venture Fund I-A, L.P. , Madrona Venture Fund I-B, L.P. , and Madrona Managing Director Fund, L.L.C. Mr. Goodrich is an affiliate of Madrona.

The following chart indicates ownership of the Company’s Common Stock and of options and warrants that are currently exercisable or exercisable within 60 days of January 20, 2006 by each director of the Company, each Named Executive Officer, and by all directors and executive officers as a group, all as of January 20, 2006.

**Directors:**

**Age**

**Common****Stock**

**Options and****Warrants**

**Percent of****Class**

Philippe Sanchez

41

0

494,350

2.44

Edward C. Holl (1)

46

4,103,000

487,142

22.63

Paul B. Goodrich (2)

59

1,383,124

0

6.99

Matthew A. Kursh 

40

0

21,250

*

Mark Kalow 

50

0

0

*

Joseph Waechter  (3)

52

5,887,319

580,952

31.75

**Additional Named Executives**:

 

 

 

 

Thomas Kelley  

36

0

114,166

*

Gerald R. Barber 

54

95,336

146,250

1.21

Michael F. Lass 

50

0

91,500

*

All current directors and named executive officers  as a group (10 persons) 

 

11,468,779

1,315,094

60.56

                                    

***** Percent of class is less than 1%

 

(1)

Shares and warrants are owned by Matinicus LP, of which Mr. Holl is a controlling person.  

 

(2)

Shares are owned by funds of which Mr. Goodrich is a controlling person.

 

(3)

Shares and warrants are owned by Sunra Holdings, Ltd., of which Mr. Waechter is a controlling person

 

**Equity Compensation Plan Information**

 

In millions (except

per share amounts)

    

 

    

 

    

 

 
**Plan category**
 

**Number** **of** **securities to be issued upon exercise** **of** **outstanding options, warrants and** **rights**
 

**Weighted-average exercise price of outstanding options, warrants and rights**
 

**Number** **of** **securities remaining available for future issuance under equity compensation plans** **(excluding** **securities reflected** **in** **column** **(a))**
 

    

**(a)**

    

**(b)**

    

**(c)**

 
 

 

8

 

 

 

 

Equity compensation plans approved by security holders

    

2,606,357

 

.71

 

1,649,550

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders

    

150,000

 

.71

 

0

 

 

2,756,357

 

 

 

1,649550

Total

    

 

 

 

 

 

 

*1999 Employee Stock Option Plan.*In October 1999, the Company’s board of directors adopted the 1999 Employee Stock Option Plan, or 1999 Employee Plan, which provides for discretionary grants of non-qualified stock options to non-officer employees and other service providers.  A total of 160,000 shares of common stock have been reserved for issuance under the 1999 Employee Plan.  As of September 24, 2005, all of the options available under the 1999 Employee Plan had been granted.

 

Options under the 1999 Employee Plan expire between five and seven years from the grant date and each option has an exercise price of not less than the fair market value of the Company’s stock on the date the option is granted.  The options granted under the 1999 Employee Plan generally vest over three to four years.  In the event of termination of an optionee’s employment with the Company, vesting of options will stop and the optionee may exercise vested options for a specified period of time after the termination.  Upon certain changes in control of the Company, options may vest as determined by the Plan Administrator, or unless the acquiring company assumes the options or substitutes with comparable options. 

 

*Option Grant-Philippe Sanchez.*On**October 17, 2003, the Company’s board of directors granted 150,000 options as a one-time grant to recruit the Company’s President and Chief Executive Officer.  The options granted to Mr. Sanchez vest over four years and expire seven years from the grant date. The option has an exercise price of $2.75 which was the fair market value of the Company’s stock on the date the option was granted.  In the event of termination of an optionee’s employment with the Company, vesting of options will stop and the optionee may exercise vested options for a specified period of time after the termination.  Upon certain changes in control of the Company, options may vest as determined by the Plan Administrator. On August 9, 2005, the Board of Directors authorized the repricing of these optionseffective August 31, 2005 to a new exercise price of $0.71.

 

*2005 Equity Incentive Plan.*At the shareholders’ meeting held on June 28, 2005, the Company’s shareholders approved the creation of the 2005 Equity Incentive Compensation Plan (“2005 Plan”) and authorized the grant of options and restricted stock rights for 4,000,000 shares of common stock.  As of September 24, 2005, there were options to purchase 2,350,450 shares outstanding and 1,649,550 shares available for awards under the 2005 Plan.

 

For fiscal 2005, all options under the 2005 Plan expire ten years from the grant date and each option has an exercise price of not less than the fair market value of the Company’s stock on the date the option is granted.  The options granted under the 2005 Plan generally vest over three to four years.  In the event of termination of an optionee’s employment with the Company, vesting of options will stop and the optionee may exercise vested options for a specified period of time after the termination.  Upon certain changes in control of the Company, options may vest as determined by the Plan Administrator, or unless the acquiring company assumes the options or substitutes with comparable options.

 

**ITEM 13.  Certain Relationships and Related Transactions.**

 

The Company and Mr. Sanchez have entered into an employment agreement as more fully described under “Employment Agreements”.

 

 

9

 

 

 

Mr. Joseph Waechter, one of our directors, is the President of Sunra Capital Holdings, Ltd. (“Sunra”).  Sunra is a major stockholder of PhotoWorks, and was a party to the recapitalization transactions previously disclosed by PhotoWorks on Forms 8-K filed on February 23, 2005 and August 2, 2005 and Form 10-Q filed on August 11, 2005. Sunra purchased a subordinated convertible note on February 16, 2005 and received 3,734,566 shares of the Company’s common stock upon conversion of such note on July 27, 2005. Sunra also received a warrant to purchase 333,333 shares of the Company’s common stock at an exercise price of $1.05 per share in connection with its February 16, 2005 note investment.  On July 27, 2005, Sunra purchased an additional 2,411,874 shares of the Company’s common stock at a purchase price of $.539 per share for an aggregatepurchase price of $1,300,000.09 and received a warrant to purchase 247,619 shares of common stock at an exercise price of $1.05 per share.

 

On July 27, 2005, Andrew T. Waechter, the brother of Joseph Waechter, purchased 185,529 shares of common stock at a purchase price of $.539 per share for an aggregate purchase price of $100,000.14 and received a warrant to purchase 19,048 shares of common stock at an exercise price of $1.05 per share.

 

Edward Holl, one of our directors, is an affiliate of Matinicus LP (“Matinicus”).  Matinicus is a major stockholder of PhotoWorks and was a party to the recapitalization transactions the Company completed on July 27, 2005.  On such date, a subordinated convertible debenture held by Matinicus converted into 4,103,001 at a rate of $.55 per share.  Matinicus also received a warrant to purchase 409,436 shares of the Company’s common stock at an exercise price of $1.10 per share in connection with such debenture conversion. Mr. Holl is also the managing partner of H-Z Partners LLC (“H-Z Partners”). H-Z Partners is a stockholder of PhotoWorks and was a party to the recapitalization transactions the Company completed on July 27, 2005.  On such date, a subordinated convertible debenture held by H-Z Partners converted into 182,201 at a rate of $.55 per share.  H-ZPartners also received a warrant to purchase 18,182 shares of the Company’s common stock at an exercise price of $1.10 per share in connection with such debenture conversion.  Mr. Holl also serves as the sole director and an executive officer of California Atlantic Ltd. Inc. (“California Atlantic”).  In connection with the recapitalization transactions, California Atlantic was issued 74,212 shares of common stock on February 16, 2005, as well as a warrant to purchase 47,619 shares of common stock on February 16, 2005 at an exercise price of $1.05 per share.  On July 27, 2005, California Atlantic was also issued an aggregate of 18,553 shares of common stock and warrants to purchase an aggregate of 11,905 shares of common stock at an exercise price of $1.05 per share in connection with the recapitalization transactions.   

 

Mr. Paul Goodrich, one of our directors, is a managing director of Madrona Venture Group, LLC, which is the investment manager of Madrona Venture Fund I-A, L.P., Madrona Venture Fund I-B, L.P. and Madrona Managing Director Fund, LLC.  The Madrona funds are major stockholders of PhotoWorks and were parties to the recapitalization transactions the Company completed on July 27, 2005. Madrona Venture Fund I-A, L.P. exchanged 4,032 shares of Series A Preferred Stock for 1,115,352 shares of common stock in the recapitalization transaction, Madrona Venture Fund I-B, L.P. exchanged 465 shares of Series A Preferred Stock for 128,630 shares of common stock and Madrona Managing Director Fund, LLC exchanged 503 shares of Series A Preferred Stock for 139,142 shares of common stock.

 

 

**ITEM 14.  Principal Accountant Fees and Services**

 

The following table presents the fees for services rendered by Williams & Webster P.S. during fiscal 2005, and by Ernst & Young LLP during fiscal 2004.

 

.

2005

2004

 

 

10

 

 

 

 

Audit fees

$

70,000

$ 168,000

 
 

Audit-related fees

$  

0

$  

2,500

 

Tax fees

$  

0

$  

76,630

 
 

All other fees

$  

0

$  

0

 

The Audit Committee did consider whether the provision of non-audit services is compatible with the principal accountants’ independence and concluded that the provision of other non-audit services has been compatible with maintaining the independence of the Company’s external auditors.  All services provided by Williams & Webster P.S. to the Company must be pre-approved by the Audit Committee or a designated member of the Audit Committee.

 

11

 

 

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15 (d) 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.

 

 

**PHOTOWORKS, INC.**

 

(REGISTRANT)

 
 

DATED: January  23, 2006

By: /s/ Philippe Sanchez

 
 

Philippe Sanchez

 
 

President and Chief Executive Officer

 

(Principal Executive Officer)

 
 

 

12

 

 

 

**EXHIBIT 31.1**

**CERTIFICATION**

I, Philippe Sanchez,****certify that:

1.

I have reviewed this annual report on Form 10K/A of PhotoWorks, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 23, 2006

/s/ PHILIPPE SANCHEZ        

Philippe Sanchez

Chief Executive Officer and President

 

 

13

 

 

 

**EXHIBIT 31.2**

**CERTIFICATION**

I, Werner Reisacher,****certify that:

1.

I have reviewed this annual report on Form 10K/A of PhotoWorks, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  January 23, 2006

 

/s/ Werner Reisacher

 

Chief Financial Officer

 

 

14

 

 

 

**EXHIBIT 32**

 

**CERTIFICATION PURSUANT TO**

**18 U.S.C. SECTION 1350,**

**AS ADOPTED PURSUANT TO**

**SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

In connection with the Annual Report of PhotoWorks, Inc. (the "Company") on Form 10-K/A for the period ending September 24, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Philippe Sanchez, Chief Executive Officer of the Company, and Werner Reisacher, Chief Financial Officer certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, as of the date hereof, to the best of our knowledge and belief:

 (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the stated periods.

 

Signature: /s/ Philippe Sanchez

Signature: /s/ Werner Reisacher   

 
 

Philippe Sanchez  

Werner Reisacher

 
 

Chief Executive Officer

Chief Financial Officer

 

Dated:  January 23, 2006

Dated:  January 23, 2006

 

 

 

15

 

 

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