Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER: 000-23747
------------------------
GETTY IMAGES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 98-0177556
(State or Juridsiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2013 FOURTH AVENUE 101 BAYHAM STREET
FOURTH FLOOR LONDON, ENGLAND
SEATTLE, WASHINGTON 98121 NW1 0AG
(Addresses of Principal Executive Offices)
(Zip Code)
Registrant's Telephone Numbers, including Area Code:(206)441-9355
(01144171)544-3456
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 $0.01 PER SHARE
(Title of Class)
------------------------
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 registrant
was required to file such reports) and (2) has been subject to such filing
requirements of the past 90 days. Yes /X/ No / /
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. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $312,946,056 as of March 26, 1998, based upon the
closing price of $24 on the Nasdaq National Market reported on such date. Shares
of Common Stock held by each executive officer and director and by each person
who beneficially owns more than 5% of the Outstanding Common Stock have been
excluded in that such persons may under certain circumstances be deemed to be
affiliates. This determination of executive officer and affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 26, 1998, the number of shares of Common Stock outstanding was
30,817,433.
DOCUMENTS INCORPORATED BY REFERENCE: Information required by Part III of
this document is incorporated by reference to certain portions of the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders (to be
filed).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GETTY IMAGES, INC.
FORM 10-K
DECEMBER 31, 1997
PAGE
-------
PART I
Item 1. Business..................................................... 1
Item 2. Property..................................................... 18
Item 3. Legal Proceedings............................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................ 19
Item 6. Selected Consolidated Financial Data......................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 21
Item 8. Financial Statements and Supplementary Data.................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant........... 31
Item 11. Executive Compensation....................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 31
Item 13. Certain Relationships and Related Transactions............... 31
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K........................................................ 31
PART I
ITEM 1: BUSINESS
A. GETTY IMAGES
OVERVIEW
Getty Images, Inc. (the "Company" or "Getty Images"(1)) is one of the
leading visual content providers worldwide(2). The Company is a combination of
Getty Communications plc ("Getty Communications") and PhotoDisc, Inc.
("PhotoDisc") and was formed pursuant to a scheme of arrangement (the "Scheme of
Arrangement") and a merger (the "Merger") that were completed on February 9,
1998.
The Company combines the broad spectrum of high quality, branded content and
extensive international distribution network of Getty Communications with
PhotoDisc's brand name and expertise in the digitization and electronic delivery
of images over the Internet and its royalty-free licensing model. Through this
commercial combination of high quality visual content and diverse delivery
systems and methods, Getty Images believes that it is well-positioned to satisfy
the visual content needs of existing, emerging and new market segments in the
visual content industry.
The principal strengths of Getty Images are (i) the breadth and depth of its
branded high-quality content across all content categories, (ii) its ability to
offer its customers a comprehensive range of options to meet their creative
needs, from full-service to self-service access, from rights-protected licensing
to royalty-free licensing, and from physical delivery of transparencies to
electronic delivery of digital images, (iii) its extensive international
distribution network and electronic distribution capabilities and (iv) its
experience in the application of technology in the visual content industry.
Getty Images believes that these strengths will allow it to take advantage of
both the increasing demand for visual content and the opportunities arising in
the rapidly changing visual content industry.
BACKGROUND
Getty Communications commenced operations on March 14, 1995 with the
acquisition of Tony Stone Images, one of the world's leading providers of
contemporary stock photography. In April 1996, the Company broadened its visual
content product offerings with the acquisitions of Hulton Getty, one of the
world's largest privately owned collections of archival photography, and
Fabulous Footage, a leading North American provider of contemporary stock
footage. In November 1996, the Company strengthened its distribution network in
Belgium, Denmark, Holland and Sweden with the acquisition of World View, its
former agent in these territories. In March 1997, Getty Communications acquired
Gamma Liaison, a well-established leading company in the photojournalism market.
In July 1997, Getty Communications acquired Energy Film Library, one of the
leading international providers of contemporary stock footage to the
advertising, television, feature film, corporate communications and multimedia
markets. In August 1997, Getty Communications strengthened its position in the
Asia Pacific market with the acquisition of Profile Photo Library, its former
agent in Hong Kong.
- ------------------------
(1) As used in this Annual Report on Form 10-K, unless the context requires
otherwise, the term the "Company" or "Getty Images" refers to Getty Images,
Inc. and its consolidated subsidiaries.
(2) Certain statements included herein under "Item 1. Business", "Item 3. Legal
Proceedings" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations", including without limitation, those
concerning (i) the Company's strategy and competitive strengths, (ii) the
Company's expectations and plans regarding digitization, and (iii) the
Company's expansion plans, contain certain forward-looking statements
concerning the visual content industry and the Company's operations,
economic performance and financial condition. Because such statements
involve risks and uncertainties, actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not limited to, those
discussed under "--H. Business Risk Factors".
1
Getty Images was formed in February 1998 with the completion of the Scheme
of Arrangement and the Merger with PhotoDisc.
Pursuant to the Scheme of Arrangement, each issued ordinary share, nominal
value one pence per share ("Getty Ordinary Shares"), of Getty Communications
(including Getty Ordinary Shares underlying Getty Communications' American
Depositary Shares ("Getty Communications ADSs")) was transferred to the Company,
the holders of Getty Ordinary Shares were issued one share of common stock, par
value $0.01 per share ("Getty Images Common Stock"), of the Company for every
two Getty Ordinary Shares (one share of Getty Images Common Stock for each Getty
Communications ADS) held of record by such holders, and Getty Communications
became a wholly owned subsidiary of the Company.
In addition to the Scheme of Arrangement, the Company also completed the
Merger with PhotoDisc, on February 9, 1998. Pursuant to the Merger, PhotoDisc
was merged with and into Print Merger, Inc., a Washington corporation and a
wholly owned subsidiary of Getty Images ("Merger Sub"), and each then
outstanding share of common stock, par value $0.01 per share, of PhotoDisc was
converted into the right to receive the amount of cash and the number of shares
of Getty Images Common Stock as specified in the Merger Agreement dated as of
September 15, 1997 (the "Merger Agreement") among Getty Communications, the
Company, PhotoDisc and Merger Sub.
As a result of these transactions, Getty Images became the successor to
Getty Communications. Trading in Getty Communications ADSs on the Nasdaq
National Market was terminated upon commencement of trading in shares of Getty
Images Common Stock on the Nasdaq National Market (NASDAQ:GETY).
Also on February 9, 1998, the Company issued an aggregate of 1,518,644
shares of Getty Images Common Stock to Getty Investments L.L.C. for an aggregate
consideration of $28 million and on February 10, 1998, it completed the
acquisition of all of the issued and outstanding shares of Allsport Photographic
Plc ("Allsport"). Allsport is a leading sports photographic agency, whose
customers include major newspaper groups worldwide, publishers, sports governing
bodies and sponsors. See "--D. Allsport".
B. GETTY COMMUNICATIONS
OVERVIEW
Getty Communications is one of the leading international providers of visual
content to a diverse range of professional users of images, including
advertising and design agencies, magazines, newspapers, broadcasters, production
companies and traditional and new media publishers. Getty Communications markets
rights to images and footage through its international network of wholly owned
offices in London, Chicago, New York, Los Angeles, Toronto, Munich, Hamburg,
Paris, Amsterdam, Brussels, Copenhagen, Stockholm, Vienna, Barcelona and Hong
Kong and dedicated agents in 18 other countries. Getty Communications has sought
to differentiate itself through its commitment to the highest level of quality
in the creation, selection and production of relevant images, its focus on
customer service, the quality and breadth of its content, its strong brand
names, its worldwide distribution network and its continuing investment in
value-added systems and technologies.
VISUAL CONTENT COLLECTIONS
Getty Communications' visual content collections are: (i) Tony Stone Images,
one of the world's leading providers of contemporary stock photography; (ii)
Hulton Getty, one of the two largest privately owned collections of archival
photography in the world; (iii) Gamma Liaison, a leading North American news and
reportage agency; and (iv) Energy Film Library, one of the world's leading stock
footage companies.
2
CONTEMPORARY STOCK PHOTOGRAPHY--TONY STONE IMAGES
Tony Stone Images is one of the world's leading providers of contemporary
stock photography, based on revenues and the quality of its images, and supplies
images to a customer base of principally professional users. The images cover a
wide variety of contemporary subjects, including lifestyles, families, business,
science, health and beauty, sports, transportation, travel and the environment.
The customer base includes advertising and design agencies, local and
international design consultants, magazine, newspaper, book and news media
publishers, poster and calendar manufacturers, and travel companies.
Tony Stone Images is dedicated to providing high-quality images relevant to
the needs of its customers by focusing on a relatively small number of images.
Its core collection (the "Dupe Master Collection") contained approximately
57,000 images as of December 31, 1997 and accounted for approximately 80 percent
of Getty Communications' sales in 1997. The Dupe Master Collection is a tightly
edited, relevant and manageable collection that is designed to meet the needs of
all major customer segments and achieve greater sales efficiently with superior
levels of customer service. The Dupe Master Collection is complemented by the
mainstock collection, which comprises more than one million images that have
been selected for their subject matter or the demand in a particular market.
Getty Communications believes that Tony Stone Images is a world leader in
offering stock photography equal in creative and technical aspects to
commissioned work. Throughout the creation, selection and production processes,
Tony Stone Images focuses on producing images of the highest technical and
aesthetic quality of the subjects or concepts that are in demand, and on
anticipating future trends and customer needs. Tony Stone Images has creative
teams in London, Los Angeles, Seattle, Paris and Munich that analyze customer
requests and buying behavior and perform research in key markets in order to
target and source images.
The skill and creativity of Tony Stone Images' contributing photographers
are fundamental to the success of its business. Contributing photographers
include highly respected, internationally renowned professional photographers
representing a variety of styles, specialties and backgrounds. Tony Stone Images
currently contracts with approximately 700 active photographers.
Tony Stone Images has established in-house teams of skilled digital artists
that retouch, enhance and manipulate images to improve their salability. This
team also designs and creates images digitally, including composites of separate
photographs, illustrations, digital graphics and text.
ARCHIVAL PHOTOGRAPHY--HULTON GETTY
Hulton Getty is one of the largest privately owned collections of archival
photography in the world, based on the number of photographs in its collection.
Its archive consists of approximately 300 separate collections totalling
approximately 15 million images, including vintage prints by renowned
photographers such as Man Ray, Bill Brandt, Alfred Eisenstadt and Robert Capa,
dating back to the beginning of photography. Hulton Getty also incorporates the
special image collections of Ernst Haas and Slim Aarons. The Hulton Getty
collection includes images from all over the world and covers significant
events, people and places from the nineteenth and twentieth centuries. Key
collections within the archive include:
- The Picture Post Collection (1938-1957): images of everyday life, social
conditions, sport, politics and entertainment by leading international
photojournalists from the Picture Post magazine, a U.K. magazine similar
in style and content to LIFE magazine or Paris Match.
- The Keystone Collection (1900-1980s): incorporating the files of three
major London reportage agencies comprising Keystone Press, Fox Photos and
Central Press and an important U.S. archive, Three Lions.
3
- London Evening Standard & Express Collections (1927-1989): extensive news
and feature libraries formed by one of the world's largest newspaper
groups.
- London Stereoscopic Company (1854-c.1910): approximately 100,000 original
glass plate negatives, vintage prints and daybooks of 3-D views, celebrity
portraits, travel photography and illustrated books from one of the
world's first commercial photography firms.
- Henry Guttman Collection (1800-1940s): specializing in modern and
historical European affairs, crime, early cinema and photography and
including old catalogs, books and book plates, prints and engravings.
Traditionally, the Hulton Getty collection has been used solely by
professional users, predominantly magazine, news and book publishers in the
United Kingdom. Since the acquisition of the Hulton Getty collection, there has
been an on going process of selecting, digitizing and indexing the most
marketable images of the collection to enhance the accessibility and appeal to a
broader customer base. Selected images are available for search and review
through the Hulton Getty Web site, which presently comprises 160,000 images.
NEWS AND REPORTAGE--GAMMA LIAISON
Gamma Liaison, Inc. ("Gamma Liaison") is a leading North American news and
reportage agency, based on its worldwide sales and the size of its images
database. Gamma Liaison sources stories worldwide and distributes images to
magazines, newspapers and book publishers, as well as advertising and design
agencies and other creative professionals. Gamma Liaison's library contains
several million photographs covering the major events, personalities and
entertainment of the last 30 years. Gamma Liaison receives material from
approximately 3,500 photographers worldwide. Since 1986, every image accepted by
the agency has been indexed using key words, creating one of the largest
databases in the industry.
Gamma Liaison currently has a relationship with Gamma Presse Images ("Gamma
Presse"), an independent Paris-based news and reportage agency, for the foreign
distribution and production of news and reportage imagery. Gamma Liaison has the
responsibility for the production of news and reportage imagery in North
America, South America, the Far East and the southern parts of Africa, while
Gamma Presse is responsible for production of photographs in Europe, the Middle
East and the central and northern parts of Africa. Sales are handled by Gamma
Liaison in the United States, by Gamma Presse in France and by agents managed by
Gamma Presse in other countries.
CONTEMPORARY STOCK FOOTAGE--ENERGY FILM LIBRARY
Energy Film Library is one of the leading international providers of
licensable motion imagery (often referred to as stock footage) to the
advertising, television, feature film, corporate communications and new media
markets. Energy Film Library's footage has been used in major feature films such
as "Independence Day", "Jerry Maguire", "Volcano" and "Men in Black", among
others. Getty Communications believes that the breadth and magnitude of Energy
Film Library's collection, together with the revenue generated by the
collection, have established Energy Film Library as a leader in the stock
footage segment.
Energy Film Library, which now includes the archives of the previously
acquired Fabulous Footage, maintains and licenses a growing library of over
9,500 hours of commercially desirable cinematography covering a broad range of
contemporary and archival subject matter. The collection of Energy Film Library,
which is generally licensed in short clips of 10 to 20 seconds, includes
material covering landscapes, cityscapes, wildlife, scenics, business, sports
and lifestyle.
The Energy Film Library is known for the breadth of its imagery and the high
resolution of its content.
It is catalogued on computer for quick access and retrieval, and master elements
are available in film,
4
tape and digital formats. Energy Film Library represents imagery from over 400
leading cinematographers and film producers.
Energy Film Library has formed strategic alliances with technology and
telecommunications companies to develop on-line and Internet services. With the
assistance of strategic partners, Energy Film Library has converted a selection
of its most popular imagery into digital formats. It has strategic relationships
with Silicon Graphics and Intel, and it recently co-developed a visual search
software application for media asset management with IBM. In an ongoing project
with Avid Technology, Energy Film Library has developed an Avid-ready digital
film library that would allow customers to preview, via an on-line service or on
CD-ROM, digital clips for downloading directly onto an Avid or other editing
system.
MARKETING
Getty Communications primarily markets its still images through catalogs to
professional users of images such as advertising and design companies,
magazines, newspapers, broadcasters, production companies and news media
publishers, as well as corporate users involved in marketing and communication.
Catalogs are the "shop window" of the Company and it believes its catalog
quality leads the industry and is an important contributor to its reputation.
PRINTED CATALOGS
To date, Tony Stone Images has published 17 general catalogs covering a wide
range of subjects and concepts. Typically, general catalogs are published
annually, with 19 language variations corresponding to Tony Stone Images' most
important geographic markets, with an aggregate print run currently of over
200,000 copies. Tony Stone Images has published six specialist catalogs--VISIONS
OF NATURE, BUSINESS & INDUSTRY, SPORTS & RECREATION, HULTON GETTY SEVEN AGES OF
MAN, INTERPRETATIONS and PORTRAITS. The INTERPRETATIONS catalog, launched in May
1997, represented a major innovation in catalog design, with a conceptual theme
assisting clients to use photo imagery in a more creative way.
CD-ROM CATALOGS
Tony Stone Images also produces CD-ROM catalogs, and was one of the first
stock photography agencies to produce an electronic catalog in digital format.
CD-ROM catalogs enable customers to select from a wide range of images on-screen
at their offices. Although CD-ROM catalogs are significantly less expensive to
produce than printed catalogs, a substantial majority of customers currently
prefer to select images from printed catalogs. It is the Company's intention to
provide a CD-ROM version of all printed catalogs for distribution with the
printed catalog, as well as producing focused stand-alone CD-ROMs covering
specialized subjects.
GETTY-IMAGES.COM
The web site was launched in 1997 allowing customers from anywhere in the
world to request images from the Tony Stone collection or order catalogs and
CDs. In addition, some 160,000 images from the Hulton Getty collection are
currently available for on-line selection. New images have been continually
added to the on-line site during the year.
During 1998, the Tony Stone Dupe Master Collection will be made available on
the web for search and selection by and digital delivery to the client. The move
to digital delivery is a critical element of the Company's future strategy and
it is anticipated that the application of PhotoDisc's digital know-how will
allow the Company to accelerate its move to digital delivery of the Tony Stone
Dupe Master Collection.
5
GAMMA LIAISON
Gamma Liaison markets its news and reportage photographs principally through
direct mail advertising on a quarterly basis.
ENERGY FILM LIBRARY
Energy Film Library markets its stock footage through demonstration reels
sent directly to its customers and potential customers. These demonstration
reels contain samples of available footage.
SALES AND DISTRIBUTION
SALES AND RESEARCH
Each of the Company's wholly owned offices has a sales force organized by
customer and industry group. The sales force assists customers in developing
selection requests ("briefs"), which are then passed on to a researcher
responsible for putting together a selection of images that respond to the
brief. Image researchers use their knowledge of the image collection, of either
still or moving imagery, to respond efficiently and creatively to the customer's
brief.
Since April 1997 the Company's Hulton Getty sales outlets have utilized the
Hulton On-Line collection to assist in the research and sales process, and to
allow customers to search for images. In 1997, the Company's United Kingdom and
North American sales outlets for Tony Stone Images began using COMPASS, a
proprietary keyword-based search and retrieval system developed by the Company,
to assist in the internal sales and research process. The Company is now
completing German and French versions of COMPASS. The Company believes that
these systems will, along with access for customers via the Internet, increase
the efficiency of the Company's sales and research operations in the future.
RIGHTS-PROTECTED LICENSING AND RIGHTS CONTROL
All of the images of Tony Stone Images and Hulton Getty are individually
marketed for specific customer applications. Licenses typically impose
restrictions on the permissible number of copies that can be made, the medium of
reproduction or publication, uses by other parties and other factors, including
the geographic area, duration and purpose of use. To ensure that their customers
can realize the full benefit of their negotiated licenses by allowing them to
negotiate exclusive rights, Tony Stone Images and Hulton Getty have developed a
computerized rights-protection system that monitors the licensing of images
throughout its global network of wholly owned offices and dedicated agents. The
system also enables Getty Communications to maximize revenue per image by
permitting multiple sales of the same image, without allowing the same rights to
be granted to different customers for conflicting uses. A central database
records image usage and its corresponding sales value, information that can then
be used in the targeting of popular subjects and the creation of new images of
the most salable subjects. Energy Film Library also uses a computerized
rights-protection system.
DISTRIBUTION NETWORK
Getty Communications markets images through an international distribution
network of wholly owned offices in 15 cities around the world and agents in 18
countries. The Company's policy is to own offices in major markets and to work
closely with agents in other markets in an exclusive relationship in almost all
cases. Management believes that control of its outlets results in more focused
marketing activities and better brand maintenance, which leads to higher sales
and market share.
6
Agents are selected on the basis of management expertise and shared values
for high quality and service. Many agents have represented the Company for over
five years. The Company provides agents with products and marketing material and
assists with marketing initiatives and brand positioning. It initiates programs
to develop its agents' local operations, including library enhancement, staff
training and business development. By contract, the Company requires its agents
to spend a certain amount on marketing activities, to pay for catalogs and
duplicate transparencies ("dupes") and to report financial information in a
uniform manner. Agents are encouraged to develop their own complementary
collections.
The distribution network was strengthened by the acquisition of the
Company's agents in Hong Kong in 1997 and Barcelona, Spain in 1998 and by the
establishment of new agents in Poland, South Africa, Singapore, Malaysia and
Indonesia.
C. PHOTODISC
OVERVIEW
PhotoDisc is one of the leaders in the development and marketing of digital
stock photography products and electronic delivery of images. PhotoDisc's
products are offered on a royalty-free basis, which allows customers to pay a
one-time fee to use an image on a non-exclusive basis for almost any purpose. As
a pioneer in the royalty-free segment, PhotoDisc has established itself as a
leader in terms of customer recognition and revenues generated.
PhotoDisc markets its products to professional users of images such as
graphic designers and advertising agencies; corporate users, such as managerial
and sales professionals within an organization; and small office/home office
users ("SOHO"), such as owners and employees of small businesses. PhotoDisc has
coupled the benefits of advanced technologies with its royalty-free licensing
model to make stock photography more widely usable by professional users, while
at the same time making stock photography more accessible to users in emerging
markets, such as corporate users and SOHO users, and, potentially, consumers.
PHOTODISC IMAGE COLLECTION
The PhotoDisc Image Collection, currently consisting of more than 60,000
feature-enhanced photographic images digitized at a variety of resolutions, has
been developed specifically to support the digital royalty-free licensing model.
The standard license agreement employed by PhotoDisc historically has permitted
multiple uses for almost any purpose, except for use in products for resale in
quantities greater than 100,000, packaging for music, video or software
products, book jackets or unlawful use. On April 1, 1998, PhotoDisc will release
a new license that will permit broader use.
CD-ROM PRODUCTS
As of March 31, 1998, PhotoDisc offered approximately 26,000 images via six
product lines consisting of more than 140 thematically related CD-ROM products,
each containing between 100 and 336 images. PhotoDisc's CD-ROM product lines
include: Volumes (images organized by themes such as "Business and Industry" and
"Weekend Living"); Object Series (images of individual objects isolated against
a transparent background); Background Series (images to be used as a palette on
which other design elements may be placed); Fine Art Series (historic and
contemporary paintings and illustrations); Signature Series (photographs taken
by renowned photographers and unique interpretations of popular themes); and
Animation Series (images from the Object Series incorporating motion and sound
for electronic uses).
Each CD-ROM includes customized searching and browsing software utilities
that allow users to conduct a search using keywords and to locate a particular
image with ease. In addition, each CD-ROM
7
includes various editing functions and capabilities. For example, the Clipping
Paths-Registered Trademark- feature makes it easier for the user to drag and
drop images into print and digital presentations. The images are available to
the customer in several file sizes depending upon the product and distribution
method.
PHOTODISC.COM
All 60,000 images in the PhotoDisc Image Collection are available for
immediate license and download for a fixed price through PhotoDisc's award
winning (e.g., PC WEEK, 1997, Top 10 Sites for Electronic Commerce, and First
Place Award Online Marketing--The 1997 Software Summit Awards) Web site. The
site offers its visitors 14 categories of images, including "Business &
Industry", "Education", "Lifestyle & Culture", "Science and Technology" and
"Wildlife and Animals". In addition, to enhance the search process, PhotoDisc
offers a combination of browsing, promotion and spotlight sections that
merchandise new images and CD-ROM products newly available on the PhotoDisc Web
site.
A primary feature of the PhotoDisc Web site is the ability of the customer
to search the PhotoDisc library by employing the search method most comfortable
and efficient for the customer. PhotoDisc provides simple search tools to locate
images via keyword or image number, and more complex search tools that employ
natural language, boolean logic or queries based on visual image attributes such
as color, composition, structure, texture or some combination thereof. Search
results return thumbnail images that can be enlarged for viewing purposes by
users prior to purchase.
Customers can immediately download free, low-resolution samples for use in
preliminary layouts or may license and download high-resolution images for use
in final projects. Customers can also search for different CD-ROM products, view
their contents, and place orders on-line. PhotoDisc also offers certain
value-added features via the PhotoDisc Web site and workflow oriented tools,
such as Lightbox-SM-, which enables customers or multiple groups working on the
same project in different locations to view images simultaneously, make notes
and add additional images to folders for individual or group viewing or
discussion. PhotoDisc believes that the ease of use of its Web site, coupled
with its recognition within the industry, has established PhotoDisc as the
leader in the electronic delivery of images.
MARKETING
Historically, PhotoDisc has used its print catalogs as the primary means of
marketing its products. These include the PhotoDisc Catalog and various smaller,
specialty catalogs that are published periodically and mailed to customers and
prospective customers worldwide, highlighting new CD-ROM products. PhotoDisc
also publishes Resource Books on a periodic basis, which serve as a reference
guide for users of PhotoDisc's CD-ROM titles by showing the images contained in
the most recent CD-ROM products released by PhotoDisc. Each Resource Book also
contains a CD-ROM "comping disc" and an Image Finder CD. The Image Finder, a new
tool released in February 1998, allows customers to search for images across all
PhotoDisc products and product lines using a single local database. The comping
disc allows a customer to utilize a low-resolution version of the images in
preliminary layouts before licensing a high-resolution image for use in the
final product, either by purchasing the applicable CD-ROM or downloading the
images from the Web. The PhotoDisc StarterKit is an introductory product
designed to familiarize new customers with the PhotoDisc system. It is comprised
of a Starter Book that features disc products that are anticipated to be popular
with new users and a corresponding comping CD of the images featured in that
book.
The print catalogs and Resource Books are supplemented by Internet and print
advertising, direct mail, trade and business public relations activities, trade
shows, co-marketing activities, sampler bundling with complementary software and
hardware products, electronic merchandising initiatives and customer loyalty
programs. PhotoDisc places advertisements on various high-profile and
high-traffic
8
Web sites such as Yahoo and HotBot (WIRED's Web site) and in specialized and
general circulation magazines.
In addition to its domestic marketing activities, PhotoDisc is involved in
marketing activities internationally. Catalogs and other marketing materials are
translated in up to seven languages and PhotoDisc is in the process of creating
localized Web sites for various overseas markets, including the United Kingdom,
Japan, Germany, France and Australia, to address anticipated growing demand in
these countries. PhotoDisc has had an office in the London area since 1995 and
has recently opened foreign sales offices in Hamburg, Sydney and Tokyo.
SALES AND DISTRIBUTION
PhotoDisc licenses its products by direct telephone sales, on-line sales,
third-party distributors and direct field sales to key accounts.
INBOUND TELEPHONE SALES
The majority of PhotoDisc's domestic licensing revenues are generated by
orders received through PhotoDisc's inbound call center. Customers can order
PhotoDisc CD-ROM products by reviewing PhotoDisc's collection appearing in
PhotoDisc's catalogs, PhotoDisc Resource Books or Starter Kits and on the
PhotoDisc Web site.
WEB SALES
The PhotoDisc Web site gives PhotoDisc's customers the flexibility to
purchase an image immediately by downloading the image off the PhotoDisc Web
site or by reviewing the images and then making a telephone order. From the
PhotoDisc Web site, customers can access a variety of on-line services ranging
from image and CD-ROM search and purchase areas to image reviews, promotions,
on-line community features and personalized services areas. Approximately 5% and
19% of PhotoDisc's revenues in 1996 and 1997, respectively, were derived from
licensing and downloading transactions made solely through the PhotoDisc Web
site.
Upon approval of the user's credit card or login information, the selected
image is available for immediate download from the PhotoDisc Web site.
Compressed high-resolution 10 megabyte images (the most popular file size
offered) take approximately seven minutes to download with a standard 28.8 kbps
modem and less than 60 seconds to download with a T-1 access line.
CHANNEL SALES
PhotoDisc also sells its products through third-party distributors. This
distribution method is more widely utilized internationally due to PhotoDisc's
desire to minimize overhead while at the same time providing broad exposure in
the local markets. As of March 31, 1998, PhotoDisc had relationships with
approximately 200 domestic third parties to sell or bundle PhotoDisc's products
with their offerings in the United States and Canada. In addition, as of March
31, 1998, PhotoDisc had more than 50 international distributors covering most
major world markets. PhotoDisc also promotes its products through U.S.-based
catalog resellers.
KEY ACCOUNTS
PhotoDisc's key accounts sales force targets leading advertising and
publishing companies, and other high volume users of images, such as
communications companies. The key accounts sales force focuses on reaching art
directors and enterprise-wide image purchasers who are generally responsible for
large order purchases. PhotoDisc maintains domestic direct sales offices in
Seattle and New York.
9
The key accounts sales force also includes technical support staff and trainers
who assist with both pre-and post-sales support.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
PhotoDisc believes that its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases
depends, in part, on the strength of its customer service and technical support
teams. PhotoDisc's customer service and technical support center is based out of
its Seattle headquarters and consists of a team of consultants with broad
knowledge of the PhotoDisc Image Collection, as well as expertise in digital
image applications, design tools and photo manipulation methodologies.
PhotoDisc's customer service and technical support group provides assistance in
six languages--English, Spanish, French, German, Japanese and Chinese--and
offers support via telephone, electronic mail, facsimile and the Internet.
TECHNOLOGY
The principal technologies utilized by PhotoDisc are those related to the
digitization of images, the enhancement and compression of digitized images, the
organization and management of PhotoDisc's database of digitized images and
customer profiles and technologies associated with customer interaction with the
PhotoDisc Web site including search functions, transaction-processing and
downloading of images. PhotoDisc's on-line commerce systems can manage a large
number of concurrent customer searches, as well as the process of accepting,
authorizing and charging customer credit cards. PhotoDisc uses a combination of
its own proprietary technologies and commercially available equipment and
licensed technologies. PhotoDisc's current strategy is to license commercially
available technology whenever possible rather than seek internally developed
solutions. PhotoDisc has focused its internal development efforts on creating
and enhancing the specialized software and processes related to enhancement and
delivery of digitized images.
A group of system administrators and network managers monitors and operates
PhotoDisc's Web site, network operations and transaction-processing systems.
PhotoDisc uses the services of two Internet service providers, Verio and
WorldCom, to obtain connectivity to the Internet. The main site is hosted by a
45 megabit dedicated T-3 connection and several T-1 connections.
Each image added to the PhotoDisc Image Collection is scanned using
state-of-the-art drumscanners and techniques. PhotoDisc is currently scanning
approximately 250 images per day and has the capacity to increase production.
D. ALLSPORT
On February 10, 1998, the Company completed the acquisition of Allsport. The
Company acquired Allsport for a total consideration of approximately $28 million
in cash and the issuance of approximately 1.1 million new shares of Getty Images
Common Stock.
Allsport is a world leading sports photography agency, with an archive of
more than four million images from sporting events around the world dating from
1896. Its visual content is both specialist and generalist, serving the sports
journalism market and the broader market for stock photography used by
advertisers and sports promoters. Its main customers are the news media, sports
brand manufacturers and sponsors, sports governing bodies and committees, and
commercial publishing and merchandising businesses.
Allsport employs approximately 25 staff photographers and has contractual
relationships with 40 prominent sports photographers. Allsport owns the
copyrights to approximately 85% of its archived photographs and has exclusive,
permanent rights of usage over an additional 10% of its photographs.
10
Of its four million images, approximately 150,000 photographs have been
digitized and the Company is currently digitizing up to 5,000 additional images
per week.
Allsport distributes images via its digital on-line archive, an ISDN
Point-to-Point Network, the PhotoStream satellite network that is maintained by
the Associated Press, and numerous other Internet and digital transmission
methods. It has offices in London and Los Angeles and a network of 30 agents
providing representation in approximately 40 countries.
E. INTELLECTUAL PROPERTY
The Company obtains most of the images in its contemporary collections,
including the Tony Stone Images Collection and the PhotoDisc Collection, from
independent photographers on an exclusive basis. Professional photographers and
cinematographers strongly prefer to retain ownership of their work. As a result,
copyrights to an image remains with the contributing photographer in most cases,
while the Company obtains the exclusive right to market the image on behalf of
the photographer for a period of time (generally a minimum of five to seven
years, which management believes to be the useful life of contemporary images).
Due to the archival nature of the Hulton Getty collection (some images are
owned and some are in the public domain), commissions are not payable on a
substantial portion of the collection. Some of the other collections contain
images produced by photographers and cinematographers on a work for hire basis.
PhotoDisc, Energy Film Library and Allsport own the copyrights to approximately
10 percent, 25 percent and 85 percent, respectively, of their image or
cinematography collections.
F. COMPETITION
The market for non-commissioned visual content is characterized by strong
competition. The principal competitive factors in the non-commissioned sectors
of the visual content industry are company reputation, the quality, relevance
and diversity of the images, the quality of contributing photographers and
cinematographers under contract to an agency, customer service, pricing, ease of
purchase and use, accessibility, distribution capability and speed of
fulfillment. In addition, the Company also faces competition from commissioned
imagery.
The principal competitors of Tony Stone Images include (i) small libraries
generally operating on a local basis; (ii) specialist libraries focusing on
particular subjects such as transport, architecture or natural history; (iii)
medium-sized general libraries operating primarily in their home market; (iv)
regional agencies headquartered in a large market such as the United States,
Germany, the United Kingdom and France and which often have non-exclusive agents
in other markets; and (v) two international competitors, The Image Bank, Inc.
("The Image Bank"), a wholly owned subsidiary of Eastman Kodak Company, and
Visual Communications Group ("Visual Communications"), a wholly owned subsidiary
of United News and Media Group plc. Royalty-free stock photography agencies, of
which PhotoDisc is a leading example, have also emerged as an alternative to
rights-protected stock photography agencies for applications where
rights-protection and other services are not customer requirements.
The Hulton Getty collection competes with specialized archival collections
and regional stock photography agencies with archival content in their
collections, including the Bettman Archive, owned by Corbis Corporation
("Corbis"), a company controlled by Bill Gates, the Chairman of Microsoft
Corporation, and other privately owned and public domain collections.
In the news and reportage industry in the United States, Gamma Liaison
competes with a number of agencies that produce and distribute similar material.
Energy Film Library competes with small specialized footage providers and
The Image Bank.
11
PhotoDisc competes with other royalty-free stock photography agencies,
including Adobe Systems Incorporated and its subsidiary, Image Club, Inc.,
Digital Vision, and Digital Stock, a wholly owned subsidiary of Corbis.
Allsport competes with Reuters and Associated Press for news wire coverage
and for magazine and commercial sales competes with Duomo Photography Inc.,
small specialized sports image providers and freelancers.
G. STRATEGY
Getty Images aims to provide high quality, relevant imagery across all
categories of the visual content market to the broadest range of customers in
existing, emerging and new markets, in ways that most appropriately meet their
needs. In order to achieve this aim, Getty Images pursues the following core
strategies:
- EMPHASIZE CONTENT QUALITY AND RELEVANCE. Getty Images believes that
content quality and relevance are critical for long-term success in the
visual content industry. Getty Images focuses on identifying its
customers' needs throughout the creation, selection and production
processes to create high quality branded imagery relevant to the needs of
its customers in each geographic region and market. Getty Images combines
excellence in creativity and image professionalism with expertise in
scanning and image enhancement to provide the highest quality images to
its customers.
- OFFER COMPREHENSIVE RANGE OF BRANDED CUSTOMER SOLUTIONS. Getty Images
offers its customers a comprehensive range of options to meet their
commercial and creative needs, from full-service to self-service access,
from rights-protected licensing to royalty-free licensing, and from
physical delivery of transparencies to electronic delivery of digital
images.
- PROMOTE AND IMPROVE BRAND IDENTITIES. Getty Images believes that Tony
Stone Images, Hulton Getty, Gamma Liaison, Energy Film Library, PhotoDisc
and Allsport represent pre-eminent brand names in their respective visual
content categories. Getty Images will continue to enhance the quality,
value and accessibility of these collections to reinforce their
international brand identities and to create new brands in these and other
visual content categories.
- LEVERAGE TECHNOLOGICAL EXPERTISE. To leverage its technological expertise,
Getty Images created a new division responsible for making Getty Images
content collections available in digital format and accessible on-line, as
well as developing and integrating new products, services and delivery
mechanisms. An example of a technological service feature is PhotoDisc's
Lightbox(SM), which enables multiple parties in different locations to
view images simultaneously. Getty Images also believes that it can realize
internal operating efficiencies through increasing the use of technology.
With this focus on digital delivery of images and use of technology, Getty
Images intends to provide the best products and service to its existing
and future customers.
- ENHANCE COMPREHENSIVE DISTRIBUTION NETWORK. Getty Images believes that it
has one of the most comprehensive distribution networks in the visual
content industry with the combination of its worldwide network of wholly
owned offices and dedicated agents and its Internet distribution
capabilities. In order to enlarge its available customer base and further
penetrate its existing customer base, Getty Images will continue to
strengthen its distribution capabilities by enhancing on-line access to
its visual content collections, by establishing wholly owned offices in
additional key territories and by developing agent relationships in new
markets.
12
- DEVELOP NEW MARKETS, PRODUCTS AND CUSTOMER TYPES. Getty Images believes
that the increasing use of imagery in communications and the emergence of
advanced technologies has resulted in opportunities to develop products
and services targeted at emerging and new and potentially larger segments
of the potential customer base and to further penetrate existing market
segments. Getty Images expects to develop products and services for the
corporate and SOHO markets and believes that it will be positioned to
enter other potential new markets, including the consumer market.
- PURSUE STRATEGIC ACQUISITIONS. The visual content industry is currently
very fragmented with a few international players, a number of regional
players and a large number of small businesses that specialize in a
particular content type or geographical area. Getty Images believes that
the fragmented nature of the industry offers significant growth
opportunities through the consolidation of smaller independent businesses
that lack sufficient resources to compete in a rapidly changing
environment. Getty Images will target companies that offer one or more of
the following features: (i) complementary visual content; (ii) a presence
in a geographic market where Getty Images is under-represented; and (iii)
access to new technologies.
H. BUSINESS RISK FACTORS
Set out below is a description of certain factors that may affect the
Company's business and results of operations from time to time.
DEVELOPMENTAL NATURE OF THE VISUAL CONTENT INDUSTRY
The Company's future growth and profitability will depend in large measure
upon growth in demand for visual content. A visual content industry with
identifiable categories and growth characteristics is a relatively recent
development. The visual content industry is fragmented across all categories and
is experiencing significant structural and technological changes, including
substantial consolidation. To the extent that the visual content industry, or
any sector of that industry in which the Company operates, does not develop as
the Company anticipates, the value of the Company or its results of operations
or financial condition may be adversely affected.
RAPID TECHNOLOGICAL CHANGE
The success of Getty Images will depend, in part, on its ability to adapt to
new technological developments in the visual content industry and to develop new
services and technology that address the increasingly sophisticated and varied
needs of its customers and prospective customers on a cost-effective and timely
basis. In response to technological changes, Getty Images has invested, and will
continue to invest, in new technologies to keep pace with new developments, such
as advances in producing digital images and in delivering digital images
on-line. Getty Communications believes that during 1997 market demand for images
increasingly shifted towards digital search, selection and fulfillment of
images, particularly in the more developed markets of the United Kingdom and the
United States. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview". Getty Images will rely on third
parties for a substantial portion of the hardware, software and software tools
that it will use in its businesses, including, in particular, the hardware,
software and software tools that enable customers and potential customers to
access, search and license images through its Web sites. If suppliers fail to
upgrade or support such systems, the business, financial condition or results of
operations of Getty Images could be adversely affected. There can be no
assurance that Getty Images will successfully use new software and other
technologies effectively or adapt its third-party technology and systems to
customer requirements or emerging industry standards.
13
SIGNIFICANT COMPETITION
The visual content industry is characterized by strong competition. Getty
Images competes with a number of large and small visual content providers,
including The Image Bank, Visual Communications and Corbis.
Some of the Company's competitors, including The Image Bank, Visual
Communications and Corbis, may have access to greater financial, marketing and
other resources than Getty Images. Getty Images also competes locally or with
respect to certain content or products with a number of general and specialized
content companies, many of which are well-established in their local or content
or product specific markets. Royalty-free stock photography agencies have also
emerged as an alternative to rights-protected stock photography businesses for
applications where rights-protection and other services are not customer
requirements. In addition, Getty Images competes indirectly with commissioned
work in contemporary stock photography and footage. New entrants into the visual
content industry could increase if technological advances make archiving,
searching and digital delivery systems more affordable, which could result in
lower average sales prices. There can be no assurance that Getty Images will be
able to compete successfully against current or future competitors or that
competitive pressures faced by Getty Images will not have a material adverse
effect on the business, financial condition or results of operations of Getty
Images. See "--F. Competition".
POTENTIAL DIFFICULTIES IN INTEGRATING OPERATIONS AND IN MANAGING GROWTH AND
EXPANSION
Getty Images was formed by the integration of companies that have previously
operated independently. The process of coordinating and integrating the
organizations will require substantial attention from management and could cause
the interruption of, or a loss of momentum in, the activities of any of the
companies' businesses, which could have a material adverse effect on their
combined operations, at least in the near term. The diversion of management
attention and any difficulties encountered in the integration of the businesses
could have a material adverse effect on the revenues and operating results of
Getty Images. The significant goodwill amortization charges and one-time
transaction costs will also adversely affect the reported operating results of
Getty Images and may result in reported net income in future periods being
negative.
In addition, each of Getty Communications, PhotoDisc and Allsport has grown
rapidly in recent years. The ability of Getty Images to compete effectively and
to manage future growth, if any, will require Getty Images to monitor and
upgrade as appropriate its financial and management controls, to reorient
management of recently acquired businesses to the operating philosophy of Getty
Images, to develop and expand management information systems and to recruit and
train personnel. If Getty Images is unable to manage such recent growth and any
future growth and expansion successfully, its financial condition and results of
operations could be adversely affected.
RISKS RELATED TO GETTY IMAGES' ACQUISITION STRATEGY
As part of its business strategy, Getty Images pursues the acquisition of
complementary visual content and other product lines, assets or technologies
that will complement or expand its business. Getty Images believes that the
recent increase in the level of demand for visual content and a trend toward
consolidation in the visual content industry, have increased the valuations of
visual content businesses and collections and are likely to have an adverse
impact on Getty Images' ability to make acquisitions and on its ability to
realize appropriate returns on such acquisitions. Acquisitions also involve a
number of other risks that could adversely affect the business, financial
condition or results of operations of Getty Images, including the diversion of
management's attention, the assimilation of the operations and personnel of the
acquired companies and the potential loss of key employees. No assurance can be
given that Getty Images will be able to identify any suitable acquisition
candidates or to make any acquisitions or that any acquisition by Getty Images
will not adversely affect the business,
14
financial condition and results of operations of Getty Images or that such
acquisitions will enhance the business of Getty Images.
RISKS RELATED TO GOODWILL RECOGNITION
The PhotoDisc and Allsport acquisitions generated approximately $300 million
of goodwill that will result in a substantial annual charge to be amortized
against the earnings of the Company in future periods. Management considers that
an average period of around twenty years is a reasonable period over which to
amortize this goodwill. Getty Images could be required to write-down the
unamortized value of such goodwill in the future at an accelerated rate in the
event that it suffers a permanent dimunition in value.
INFLUENCE OF PRINCIPAL STOCKHOLDERS
Two groups of stockholders own substantial percentages of the outstanding
shares of Getty Images Common Stock and as a result are in a position to exert
significant influence in the election of the directors of Getty Images and other
corporate actions that require shareholder approval. Getty Investments L.L.C.,
Mr. Mark Getty, Mr. Jonathan Klein, Crediton Limited (a company of which the
sole beneficiary is Mr. Klein) and the October 1993 Trust (a trust established
by Mr. Getty) (collectively, the "Getty Group") own approximately 31 percent of
the outstanding shares of Getty Images Common Stock and PDI, L.L.C., Mr. Mark
Torrance, Ms. Wade Torrance and certain of their family members (collectively,
the "Torrance Group") own approximately 18 percent of the outstanding shares of
Getty Images Common Stock. Pursuant to the Stockholders' Agreement among the
Company, the Getty Group and the Torrance Group, none of the members of the
Getty Group or the Torrance Group may transfer such stockholder's shares of
Getty Images Common Stock except pursuant to the terms of such agreement. In
addition to ownership of Getty Images Common Stock, certain members of each of
the Getty Group and the Torrance Group will have management roles with Getty
Images that will increase their influence over the Company and certain members
of each group will have other rights and relationships with the Company.
DEPENDENCE UPON KEY PERSONNEL
Getty Images believes that its performance depends, to a significant extent,
upon the services of its senior management and other key personnel, including,
in particular, Mr. Mark Getty, Co-Chairman of Getty Images, Mr. Mark Torrance,
Co-Chairman of Getty Images, and Mr. Jonathan Klein, Chief Executive Officer of
Getty Images. The loss of the services of any of Messrs. Getty, Torrance and
Klein could materially adversely affect the future prospects of the Company.
Messrs. Getty, Torrance and Klein entered into an Employment Agreement with
Getty Images for a minimum period of three years commencing as of February 9,
1998.
The future success of Getty Images will also depend upon its ability to
identify, attract, hire, train, retain and motivate highly skilled technical,
managerial, editorial, merchandising, marketing and customer service personnel.
Competition for such personnel is intense, and there can be no assurance that
Getty Images will be able to successfully attract, hire, assimilate or retain
sufficiently qualified personnel. The failure to retain and attract the
necessary technical, managerial, editorial, merchandising, marketing and
customer service personnel could have a material adverse effect on the business,
financial condition or results of operations of Getty Images.
INCREASED LEVELS OF INDEBTEDNESS
Getty Images borrowed approximately $33 million from Midland Bank to finance
the cash consideration paid in the Merger. Such borrowings require Getty Images
to make substantial principal and interest payments during the next few years,
which may limit the payment of cash dividends (although
15
Getty Images has no present intention to pay cash dividends in the foreseeable
future), and to maintain certain financial ratios, which may have the effect of
restricting the ability of Getty Images to incur additional indebtedness and
limiting other activities of Getty Images. There can be no assurance that the
need to utilize free cash flow to service these obligations may not limit the
ability of Getty Images to take advantage of other business opportunities which
may arise in the future. Such borrowings currently bear interest at floating
rates, causing Getty Images to be significantly more sensitive to prevailing
U.K. interest rates than was historically the case for Getty Communications or
PhotoDisc prior to completion of the Merger.
RISKS RELATED TO ELECTRONIC IMAGE DELIVERY SYSTEMS
The Company's future growth in sales and profitability depends in part upon
the increased acceptance and use of the Internet and other on-line services as
an effective medium of commerce. Rapid growth in the use of and interest in the
Internet, the Web and on-line services is a recent phenomenon, and there can be
no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of users and prospective users of digital images will
adopt, and continue to use such on-line services as a medium of commerce. In
addition, such on-line services may not be accepted as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements.
A significant barrier to on-line commerce and communications is the secure
transmission of confidential information over public networks. Getty Images
relies on encryption and authentication technology licensed from third parties
to provide the security and authentication necessary to effect secure
transmission of confidential or proprietary information, such as customer credit
card numbers or digital images. There can be no assurance that advances in
computer capabilities or other events or developments will not result in a
compromise or breach of the algorithms used by Getty Images to protect customer
transaction data. Concerns over the security of the Internet and other on-line
transactions and the privacy of users may also inhibit the growth of the
Internet and other on-line services generally, and the Web in particular,
especially as a means of conducting commercial transactions. The success of the
on-line operations of Getty Images will also depend in part upon the efficient
and uninterrupted operation of its computer and communications hardware systems.
Such systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and similar
events. While the Company has implemented disaster recovery plans, the Company
could suffer significant delays in implementing a backup system if a major
interruption were to occur. In addition, despite the implementation of network
security measures, the Company's servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of customer data or the inability to accept and
fulfill on-line customer orders.
IMPACT OF CHANGES IN FOREIGN EXCHANGE RATES
Getty Images publishes its consolidated financial statements in U.S. dollars
and conducts a portion of its business in currencies other than U.S. dollars,
particularly the pound sterling, German mark and French franc. As a result,
Getty Images is exposed to changes in the value of currencies against the U.S.
dollar. Fluctuations in the values of currencies against the U.S. dollar could
affect the translation of the results of non-U.S. based operations into U.S.
dollars for inclusion in the consolidated financial statements of Getty Images.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview".
POTENTIAL LOSS OF RIGHTS TO GETTY TRADEMARKS
Getty Images (through its subsidiaries) owns trademarks and trademark
applications in respect of the names Getty Communications and Hulton Getty, and
derivatives thereof (including the name "Getty
16
Images") and the related logo (together, the "Getty Trademarks"). In the event
that Getty Images becomes controlled by a third party or parties not affiliated
with the Getty family, Getty Investments L.L.C. has the right to call for an
assignment to it, for a nominal sum, of all rights to the Getty Trademarks. Upon
such assignment, Getty Images will have 12 months in which it will be permitted
to continue to use the Getty Trademarks and thereafter will have to cease such
use. Although the primary brands used by Getty Images are Tony Stone Images,
Hulton Getty, Gamma Liaison, Energy Film Library, PhotoDisc and Allsport, Getty
Images is used as a corporate identity for certain of its subsidiaries and
Hulton Getty is a Getty Trademark. There can be no assurance that the exercise
by Getty Investments L.L.C. of its right to cause an assignment of the Getty
Trademarks would not have a material adverse effect on the business, financial
condition or results of operations of Getty Images. Further, there can be no
assurance that the existence of the right of Getty Investments L.L.C. to cause
such an assignment would not have a negative impact on the amount of
consideration a potential acquirer would be willing to pay to acquire Getty
Images Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE; FUTURE SALES OF SUBSTANTIAL NUMBERS OF GETTY
IMAGES SHARES COULD HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF GETTY IMAGES
SHARES
Prior to the completion of the Merger and the Scheme of Arrangement on
February 9, 1998, there had been significant volatility in the market for Getty
Communications ADSs since the initial public offering of Getty Communications
ADSs in July 1996. Since the closing of the Merger and Scheme of Arrangement on
February 9, 1998, there has been significant volatility in the market for Getty
Images Common Stock.
Sales, or the possibility of sales, of substantial numbers of shares of
Getty Images Common Stock in the public market could adversely affect prevailing
market prices of shares of Getty Images Common Stock. Certain stockholders of
Getty Images have the right, pursuant to various registration rights agreements,
to request that Getty Images register certain shares of Getty Images Common
Stock for resale under the Securities Act and certain outstanding options to
purchase Getty Ordinary Shares became immediately exercisable for shares of
Getty Images Common Stock at the closing of the Scheme of Arrangement pursuant
to the laws of the United Kingdom. In addition, employees of Getty Images hold a
significant number of options to purchase shares of Getty Images Common Stock,
many of which are presently exercisable. Many employees may exercise their
options and sell shares shortly after such options become exercisable,
particularly if they need to raise funds to pay for the exercise of such options
or to satisfy tax liabilities that they may incur in connection with exercising
their share options. Additional issuances or market sales of Getty Images Common
Stock could have an adverse effect on the market price of Getty Images Common
Stock prevailing from time to time.
ANTI-TAKEOVER CONSIDERATIONS
The Board of Directors of the Company has the authority, without stockholder
approval, to issue up to 5,000,000 shares of preferred stock and to fix the
rights, preferences, privileges and restrictions of such shares without any
further vote or action by the stockholders of Getty Images. This authority,
together with certain provisions of the Amended and Restated Certificate of
Incorporation of Getty Images (the "Getty Images Certificate of Incorporation"),
may have the effect of making it more difficult for a third party to acquire, or
discouraging a third party from attempting to acquire, control of the Company,
even if stockholders of the Company consider such change in control to be in
their best interests. In addition, the concentration of beneficial ownership of
Getty Images Common Stock by the Getty Group and the Torrance Group and certain
provisions of Delaware law may have the effect of delaying, deterring or
preventing a hostile takeover of the Company.
17
I. EMPLOYEES
At February 28, 1998, the Company had 1,266 employees. Of these, 690 were
located in North America, 425 in the United Kingdom, 137 in the rest of Europe
and 14 in the rest of the world. The Company believes that it has satisfactory
relations with its employees.
J. RECENT DEVELOPMENTS
Stephen Mayes, Senior Vice President, Creative of Getty Images, and Michele
Vitucci, Managing Director, Tony Stone Images/Hulton Getty Europe, have resigned
from their positions at Getty Images, effective as of April 10, 1998 and June
30, 1998 respectively.
On March 31, 1998 Carlton Communications BV ("Carlton") confirmed the sale
of all of the shares of Getty Images Common Stock held by Carlton. Such sale is
scheduled to be completed on April 3, 1998.
ITEM 2: PROPERTY
The Company's principal offices are in Camden, London, England and Seattle,
Washington. The Company utilizes approximately 33,000 square feet of office
space at its office in Camden, London pursuant to two separate leases. One lease
covers approximately 15,000 square feet and will expire in 2015. The other lease
covers approximately 18,000 square feet of office space and will expire in 2010.
The Company utilizes approximately 70,000 square feet in its Seattle offices
pursuant to two separate leases. The Company leases approximately 37,000 square
feet of office space pursuant to an agreement between the Company and Mark
Torrance, the Co-Chairman of the Company; this lease expires in 2003. Under the
second lease, the Company utilizes 33,000 of square feet of office space; this
lease expires in 2004. Management believes that the Company's London and Seattle
facilities are suitable for the Company's current use and adequate for the
Company's operations for the foreseeable future. Operating subsidiaries of the
Company have leased office space throughout the world.
ITEM 3: LEGAL PROCEEDINGS
The Company has entered into a settlement agreement with Digital Stock
Corporation with respect to the previously disclosed complaint that had been
filed in September 1997. See Note 17 to the consolidated financial statements of
Getty Communications plc included in Item 14.
The Company has and may continue to be subject to legal claims from time to
time in the ordinary course of business, including those related to the alleged
infringement by the Company of the trademarks and other intellectual property
rights of third parties, such as failure to secure model releases. Presently,
there are no pending legal proceedings to which the Company is a party or to
which any of its property is subject which, either individually or in the
aggregate, are expected by the Company to have a material adverse effect on its
consolidated financial position or results of operations or its liquidity.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Getty Images Common Stock has been quoted on the Nasdaq National Market
under the symbol "GETY" since February 10, 1998. Prior to February 10, 1998, the
Getty Communications ADSs were quoted on the Nasdaq National Market under the
symbol "GETTY" since July 2, 1996. In connection with the Merger and the Scheme
of Arrangement that were completed on February 9, 1998, each previously
outstanding Getty Communications ADS was effectively converted into one share of
Getty Images Common Stock. See "Item 1. Business--A. Getty Images--Background".
The following table shows the high and low sales price for the Getty
Communications ADSs for the periods indicated:
HIGH LOW
------ ------
1996
Third Quarter (July 2, 1996 until September 30, 1996)........... $14.25 $10.00
Fourth Quarter.................................................. 16.75 13.50
1997
First Quarter................................................... 18.00 14.00
Second Quarter.................................................. 15.25 11.50
Third Quarter................................................... 19.50 10.75
Fourth Quarter.................................................. 18.25 13.00
On March 27, 1998, the last reported sales price of the Getty Images Common
Stock as reported on the Nasdaq National Market was $23.875 per share.
There were approximately 55 holders of record of the Getty Images Common
Stock as of March 26, 1998.
The Company has not paid or declared any dividends on its common stock since
its inception and anticipates that its future earnings will be retained to
finance the continuing development of its business. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, future earnings, the success of the Company's
business activities, regulatory and capital requirements, the general financial
condition of the Company and general business conditions. In addition, the
Company's loan agreements may restrict the Company's ability to pay future
dividends.
On March 14, 1997, Getty Communications issued an aggregate of 311,846 Getty
Class A Ordinary Shares as partial consideration for its purchase of Gamma
Liaison. On July 25, 1997, Getty Communications issued an aggregate of 617,762
Getty Class A Ordinary Shares as partial consideration for its purchase of
Energy Film Library. In each case, such shares were issued to the limited number
of the sellers of such businesses in a private placement not involving a public
offering pursuant to Section 4(2) of the Securities Act of 1933, as amended.
19
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of Getty Communications
are qualified by reference to and should be read in conjunction with Getty
Communications' consolidated financial statements and notes thereto included in
Item 14 and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7.
The following selected consolidated financial data does not reflect the
results of operations of PhotoDisc or Allsport, each of which were acquired by
Getty Images in February 1998, after the date of the most recent financial data
reflected in the following table.
TONY STONE IMAGES
(PREDECESSOR COMPANY) GETTY COMMUNICATIONS
------------------------- ------------------------------------
YEAR ENDED DECEMBER 31,
YEAR ENDED JANUARY 1 MARCH 14 -------------------------
DECEMBER 31, THROUGH THROUGH 1995(1) 1996 1997
-------------- MARCH 13, DEC. 31, ------- ------- -------
1994 --------- --------
1993 ------ 1995 1995 $ $ $
------ --------- --------
$
$ $ $
(IN THOUSANDS, EXCEPT PER (IN THOUSANDS, EXCEPT PER
SHARE AND PER ADS DATA) SHARE AND PER ADS DATA)
STATEMENT OF OPERATIONS DATA:
Sales....................................................... 27,559 42,052 9,498 53,523 63,021 85,014 100,797
Cost of sales............................................... 10,204 16,290 3,618 21,096 24,714 32,156 37,514
------ ------ --------- -------- ------- ------- -------
Gross profit................................................ 17,355 25,762 5,880 32,427 38,307 52,858 63,283
Selling, general and administrative expenses................ 13,297 19,140 4,918 22,737 27,655 37,250 43,936
Amortization of intangibles................................. 94 1,134 390 1,990 2,380 2,155 3,253
Depreciation................................................ 1,784 2,267 588 3,017 3,605 5,486 8,214
------ ------ --------- -------- ------- ------- -------
Operating income/(loss)..................................... 2,180 3,221 (16) 4,683 4,667 7,967 7,880
Net interest (expense)/ income.............................. (160) (218) (62) (1,406) (1,468) (1,951) 1,187
Exchange gains/(losses)..................................... (278) 247 119 (30) 89 (306) (198)
Legal settlement............................................ -- -- -- -- -- -- (974)
------ ------ --------- -------- ------- ------- -------
Income before income taxes.................................. 1,742 3,250 41 3,247 3,288 5,710 7,895
Income taxes................................................ (573) (1,556) (144) (1,873) (2,017) (2,982) (3,873)
------ ------ --------- -------- ------- ------- -------
Net income/(loss)........................................... 1,169 1,694 (103) 1,374 1,271 2,728 4,022
------ ------ --------- -------- ------- ------- -------
Net income per share(2)..................................... 0.06 0.05 0.10 0.11
-------- ------- ------- -------
-------- ------- ------- -------
Shares used in computing per share amount(2)................ 23,390 23,390 27,832 38,765
-------- ------- ------- -------
Net income per ADS(3)....................................... 0.12 0.11 0.20 0.21
-------- ------- ------- -------
OPERATING DATA:
EBITDA(4)................................................... 4,058 6,622 962 9,690 10,652 15,608 19,347
------ ------ --------- -------- ------- ------- -------
Ratio of earnings to fixed charges(5)....................... 6.42 8.53 1.15 3.93 3.38 3.79 6.69
------ ------ --------- -------- ------- ------- -------
Net cash provided by/(used in):
Operating activities...................................... 2,264 5,202 509 6,448 6,957 13,502 13,174
Investing activities...................................... (2,183) (5,296) (1,106) (23,583) (24,689) (25,528) (35,447)
Financing activities...................................... 229 (314) (38) 19,068 19,030 66,311 (3,052)
Exchange differences...................................... (34) 83 16 (34) (18) 2,755 (4,380)
------ ------ --------- -------- ------- ------- -------
Net increase/(decrease) in cash and cash equivalents........ 276 (325) (619) 1,899 1,280 57,040 (29,705)
------ ------ --------- -------- ------- ------- -------
20
TONY STONE IMAGES
(PREDECESSOR COMPANY) GETTY COMMUNICATIONS
------------------------- ------------------------------------------
AT AT
AT AT AT DECEMBER 31, DECEMBER 31,
DECEMBER 31, MARCH 13, DECEMBER 31, ------------ ------------
-------------- --------- ------------ 1996 1997
1994 1995 1995 ------------ ------------
1993 ------ --------- ------------
------ $ $
$ $ $
$ (IN THOUSANDS) (IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... 1,533 1,208 589 1,899 58,939 29,234
Total assets................................................ 14,975 25,334 26,064 71,024 163,504 171,638
Long-term debt, net of
current maturities........................................ 1,311 2,617 2,728 8,704 17,910 14,657
Total shareholders' equity.................................. 4,026 5,984 54 27,012 113,523 119,539
- ------------------------------
(1) Reflects the combination of the audited results of Tony Stone Images, the
predecessor of Getty Communications, for the period from January 1 through
March 13, 1995 with the audited results of Getty Communications for the
period from March 14 through December 31, 1995. Due to the nature of this
combination, the presentation of combined results for the two periods in
1995 does not conform with U.S. GAAP.
(2) Net income per share has not been computed for periods which relate to Tony
Stone Images as compared to Getty Communications. Amounts for the year ended
December 31, 1995 have been computed assuming the same number of shares
outstanding as determined for Getty Communications for the period March 14,
1995 through December 31, 1995.
(3) Net income per Getty Communications ADS is calculated by adjusting net
income per share data for the ratio of two Getty Class A Ordinary Shares per
Getty Communications ADS.
(4) "EBITDA" is defined as earnings before net interest, taxes, exchange
gains/(losses), depreciation, legal settlement costs and amortization. Thus,
EBITDA with respect to Getty Communications comprises sales less cost of
sales and selling, general and administrative expenses. Getty Communications
believes that EBITDA provides investors and analysts with a measure of
operating income unaffected by the financing and accounting effects of
acquisitions and assists in explaining trends in the operating performance
of Getty Communications. This was illustrated in 1995, when Getty
Communications' net income fell as a result of the financing and accounting
effects of the acquisition of Tony Stone Images with a consequent increase
in net interest expense and amortization of intangibles, while EBITDA rose
by approximately 61 percent over 1994. EBITDA should not be considered as an
alternative to operating income as an indicator of Getty Communications
operating performance or to cash flows as a measure of Getty liquidity. As
defined by Getty Communications, EBITDA may not be comparable to other
similarly titled measures used by other companies.
(5) Ratio of earnings to fixed charges means the ratio of net income (before
fixed charges and income taxes) to fixed charges, where fixed charges are
the aggregate of interest, amortization of the costs relating to debt and an
allocation of rental charges to approximate equivalent interest.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS OF GETTY COMMUNICATIONS AND THE NOTES THERETO, "SELECTED CONSOLIDATED
FINANCIAL DATA" AND OTHER FINANCIAL INFORMATION CONTAINED ELSEWHERE IN THIS
ANNUAL REPORT ON FORM 10-K. FOR PURPOSES OF THE FOLLOWING, 1995 AMOUNTS REFLECT
THE COMBINED RESULTS OF TONY STONE IMAGES AND GETTY COMMUNICATIONS FOR THE
ENTIRE CALENDAR YEAR, AS MANAGEMENT BELIEVES THAT THIS IS THE MOST MEANINGFUL
PRESENTATION FOR COMPARATIVE PURPOSES. SEE "BASIS OF PRESENTATION". IN THE
FOLLOWING DISCUSSION, THE "COMPANY" REFERS TO TONY STONE IMAGES IN 1994, GETTY
COMMUNICATIONS COMBINED WITH TONY STONE IMAGES FOR 1995, AND GETTY
COMMUNICATIONS IN 1996 AND 1997. ALL FINANCIAL DATA REFERRED TO IN THE FOLLOWING
MANAGEMENT'S DISCUSSION HAS BEEN PREPARED IN ACCORDANCE WITH U.S. GAAP.
THE STATEMENTS IN THIS SECTION THAT ARE NOT HISTORICAL FACTS ARE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. GETTY IMAGES'
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING THOSE
SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
21
The following discussion does not reflect the results of operations of
PhotoDisc or Allsport, each of which were acquired by Getty Images on February
9, 1998, after the date of the most recent period discussed.
OVERVIEW
Getty Communications commenced operations on March 14, 1995 with the
acquisition of Tony Stone Images, one of the world's leading providers of
contemporary stock photography. In April 1996, the Company broadened its visual
content product offerings with the acquisitions of Hulton Getty, one of the
world's largest privately owned collections of archival photography, and
Fabulous Footage, a leading North American provider of contemporary stock
footage. In November 1996, the Company strengthened its distribution in Belgium,
Denmark, Holland and Sweden with the acquisition of World View, its former agent
in these territories. In March 1997, Getty Communications acquired Gamma
Liaison, a well-established leading company in the photojournalism market. In
July 1997, Getty Communications acquired Energy Film Library, one of the leading
international providers of contemporary stock footage to the advertising,
television, feature film, corporate communications and multimedia markets. In
August 1997, Getty Communications strengthened its position in the Asia Pacific
market with the acquisition of Profile Photo Library, its former agent in Hong
Kong.
During September 1997, Getty Communications entered into a merger agreement
with PhotoDisc, Inc. leading to the formation of Getty Images, Inc. and the
completion of the Merger in February 1998. PhotoDisc is the leader in the
development and marketing of digital stock photography products. Also in
February 1998, the Company acquired Allsport Photographic Plc, a leading sports
photographic agency.
Getty Communications' sales are primarily derived from the marketing of
image reproduction and broadcasting rights to a range of business customers.
Historically, approximately 91 percent of the Company's sales have been
generated through its wholly owned offices, with the remainder through its
international network of agents. Sales generally comprise a large number of
relatively small transactions, priced in the range of $150 to $750. Prices are
determined primarily by the customer's intended use of the image or clip and
vary significantly across geographic markets and customer groups.
Getty Communications' cost of sales consists primarily of payments to
contributing photographers and cinematographers. These suppliers are generally
under contract with one of the wholly owned offices, and generally receive as
payment: (i) 50 percent of the sales generated by their images in the same
territory as the office to which they are contracted ("in-territory sales") and
on revenues received from agents; and (ii) 30 percent of the sales generated by
their images outside of the territory of the office to which they are contracted
("out-of-territory sales"). Minimal payments are due for sales of Hulton Getty's
archival imagery as most of these images are free of any requirement to pay
commission.
Getty Communications' selling, general and administrative expenses include
salaries and related staff costs, premises and utility costs, and marketing and
catalog costs. The recent increases in these costs have been driven primarily by
acquisitions and by the volume of image transactions.
Getty Communications amortizes goodwill and other intangibles acquired and
depreciates the cost of the investment in image duplicates ("dupes"), digital
files, the archival picture collection, computer systems and other fixed assets
over their expected useful lives. The Merger with PhotoDisc and the acquisition
of Allsport will generate a significant amount of goodwill that will be
amortized over future periods. See "Item 1. Business--H. Business Risk
Factors--Risk related to Goodwill Recognition".
Throughout 1997, the Company saw a progressive slowing down in the rate of
growth of the core analog business of Tony Stone Images. The Company expects
this trend to continue into 1998 as more customers move towards digital search,
selection and fulfillment of images, particularly in the developed
markets of the United States and the United Kingdom. In recognition of this,
Getty Communications
22
made significant investment throughout 1997 in digitization, and in 1998 it is
anticipated that the Dupe Master Collection will be available for search,
selection and fulfillment by customers at high resolution on the web. The Merger
with PhotoDisc also represents a further significant development in Getty
Communications' digital strategy, and Getty Images is increasing related capital
expenditures in 1998. In order to increase the sales potential of the combined
business and to achieve synergies with PhotoDisc, Getty Communications expects
to incur certain one-time charges, including those, for example, in respect of
office consolidation and reorganization.
As a result of Getty Communications' various acquisitions and their
consequential financial and accounting effects on net income, Getty
Communications believes that EBITDA provides investors and analysts with an
appropriate measure to explain the operating performance of Getty
Communications. Getty Communications defines EBITDA as earnings before interest,
taxes, exchange gains/(losses), depreciation, legal settlement costs and
amortization.
BASIS OF PRESENTATION
Management's discussion and analysis of the 1995 results refers to the
combination of the audited consolidated results of Tony Stone Images for the
pre-acquisition period January 1, 1995 through March 13, 1995 and the audited
consolidated results of Getty Communications from the date of acquisition of
Tony Stone Images on March 14, 1995 through December 31, 1995. The 1996
discussion and analysis refers to the audited consolidated results of Getty
Communications for the year ended December 31, 1996 and includes the
post-acquisition results of Hulton Getty, Fabulous Footage and the World View
group of companies. Management's discussion and analysis of the results for 1997
refers to the audited consolidated results for the year ended December 31, 1997
and includes the post-acquisition results of Gamma Liaison and Energy Film
Library.
The presentation of the combined results of Tony Stone Images and Getty
Communications for 1995 and Getty Communications for 1996 and 1997 is considered
by management to provide the most meaningful basis for the following discussion
and analysis, as the Company had no operations prior to the acquisition of Getty
Communications. The only change in basis of the net assets of Tony Stone Images
resulting from the acquisition was the creation of goodwill and other
intangibles. Due to the nature of this combination, the presentation of combined
results for the two periods in 1995 does not conform with U.S. GAAP.
Getty Communications had previously adopted pounds sterling as its reporting
currency. Getty Images has adopted U.S. dollars as its reporting currency. To
facilitate comparison of the future results of Getty Images with the historical
results of Getty Communications, the historical results of Getty Communications
have been translated into U.S. dollars using the exchange rates set out below
and as explained in Note 2 to the consolidated financial statements of Getty
Communications included in Item 14.
23
EXCHANGE RATES
The table below sets forth, for the periods and dates indicated, certain
information concerning the Noon Buying Rates for pounds sterling expressed in
U.S. dollars per pound sterling.
PERIOD AVERAGE RATES:
JANUARY 1 MARCH 14 YEAR ENDED DECEMBER
YEAR ENDED THROUGH THROUGH 31,
DECEMBER 31, MARCH 13, DECEMBER 31, --------------------
1994 1995 1995 1996 1997
- -------------- ------------ ------------ ------ ------
1.5319 1.5801 1.57801 1.5606 1.6389
PERIOD END RATES:
AT AT AT DECEMBER 31,
DECEMBER 31, MARCH 13, ----------------------------------
1994 1995 1995 1996 1997
- -------------- ---------- ------ ------ ------
1.5645 1.5914 1.5526 1.7113 1.6430
RESULTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
The following table sets forth selected statement of operations and
operating data of the Company and such data as a percentage of sales for each of
the three years ended December 31, 1997.
STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
PERCENT PERCENT PERCENT
OF OF OF
SALES SALES SALES
1995(1) % 1996 % 1997 %
-------- ------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT NET INCOME PER ADS AND PERCENTAGES)
Sales....................................................... $ 63,021 100 $ 85,014 100 $100,797 100
Gross profit................................................ 38,307 61 52,858 62 63,283 63
Operating income............................................ 4,667 7 7,967 9 7,880 8
Net income.................................................. 1,271 2 2,728 3 4022 4
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
Net Income per ADS.......................................... $ 0.11 $ 0.20 $ 0.21
OPERATING DATA:
EBITDA(2)................................................... 10,652 17 15,608 18 19,347 19
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
Net cash provided by/(used in):
Operating activities...................................... 6,957 13,502 13,174
Investing activities...................................... (24,689) (25,528) (35,447)
Financing activities...................................... 19,030 66,311 (3,052)
Translation differences................................... (18) 2,755 (4,380)
-------- -------- --------
-------- -------- --------
Net (decrease)/increase in cash and cash equivalents........ 1,280 57,040 (29,705)
-------- -------- --------
-------- -------- --------
- ------------------------------
(1) Reflects the combination of the audited results of Tony Stone Images, the
Company's predecessor, for the period from January 1 through March 13, 1995,
with the audited results of Getty Communications for the period from March
14 through December 31, 1995.
(2) EBITDA should not be considered a substitute for net income as a measure of
the Company's operating results or for cash flows as a measure of liquidity.
24
SALES
The Company's sales (including the Company's share of sales by agents) for
1995, 1996 and 1997 were $63.0 million, $85.0 million and $100.8 million,
respectively, representing increases of 35 percent in 1996 and 19 percent in
1997 over the respective previous year. Movements in currencies during 1997
adversely effected the sales reported in U.S. dollars of non-U.S. operations.
Had the equivalent 1996 exchange rate been applied, 1997 sales would have been
$104.6 million in 1997, 23% higher than 1996.
This increase arose from continued growth in the core business which, in
management's opinion, is attributed to continuing increases in the breadth of
Getty Communications' imagery and improvement in the distribution network. The
increase was also attributable in part to $11.1 million in sales from the
acquisitions in 1997.
VOLUME. The number of images and clips licensed in 1995, 1996 and 1997 was
approximately 105,000, 143,000 and 192,000, respectively. This represents growth
of 36 percent in 1996 and 34 percent in 1997 over the respective previous year.
The main source of the industry's growth in the three years has been a
continuing increase in demand for imagery from both traditional markets and new
markets such as multimedia uses, combined with an increasing share of the market
being fulfilled through stock imagery.
In 1997, sales of images from the Tony Stone Images' Dupe Master Collection
accounted for approximately 80 percent of the Company's sales. This contemporary
collection grew in number by approximately 19 percent in 1996 and 20 percent in
1997. Management intends to continue expanding the collection.
The Company published two Tony Stone Images' catalogs, one general and one
specialist, in 1996 and three Tony Stone Images' catalogs, one general and two
specialist, in 1997. The specialist PORTRAITS catalog, which included images
from the Liaison Stock Library, was a successful example of the opportunities of
leveraging the expertise of Tony Stone Images in image selection and catalog
design with recently acquired image libraries. In addition a specialist catalog
dedicated to Hulton Getty was launched in March 1997. In the second half of
1997, the Company published two CDs--"BUSINESS AND INDUSTRY" AND "INSTANTS". The
latter CD included 8,500 images in digital format from the Tony Stone Images and
Hulton Getty collections. The footage business issues sample tapes demonstrating
the quality and relevance of its library.
PRICING. Sales generally comprise a large number of relatively small
transactions in the range of $150 to $750. The image and clip licensing price is
determined primarily by the customer's intended use and the nature of the
product, and varies significantly across geographic markets and customer groups.
For example, prices tend to be higher in the advertising and design markets than
in the publishing market, higher for footage and contemporary images than for
archival images and higher in North America and continental Europe than in the
United Kingdom. The average price of contemporary images grew marginally in
1996, but in 1997 decreased marginally on a currency neutral basis.
CURRENCY. In 1997, 50 percent of Getty Communications' sales were generated
in currencies other than U.S. dollars. Getty Communications' results of
operations are affected by fluctuations in exchange rates between the U.S.
dollar, in which a large minority of Getty Communications' sales and expenses
are recorded, and the other currencies in which a majority of its sales and
costs are recorded, particularly the pound sterling, the German mark and the
French franc. In general, appreciation of the U.S. dollar, relative to another
currency, has an adverse impact on Getty Communications' sales and profits while
depreciation of the U.S. dollar has a positive effect. Movement in currencies
during 1997 adversely effected the sales reported in U.S. dollars of non-U.S.
operations but did not materially affect sales in 1995 or 1996. See "Item 1.
Business--H. Business Risk Factors--Impact of Changes in Foreign Exchange
Rates".
25
SALES BY AGENTS. Agents remit to the Company 60 percent of the gross sales
they derive from licensing the Company's images. The Company's share of sales by
agents was $7.2 million, $8.6 million and $9.0 million in 1995, 1996 and 1997,
respectively, representing growth of 19 percent in 1996 and 5 percent in 1997
over the respective previous year. The growth in 1996 was primarily as a result
of the continuing growth of the market, especially in Europe, whilst in 1997
sales changed as a result of the acquisition of the Company's agents in Benelux
and Scandinavia in November 1996, and the Energy Film Library and Gamma Liaison
acquisitions in 1997.
COST OF SALES
The Company's cost of sales was $24.7 million, $32.2 million and $37.5
million in 1995, 1996 and 1997, respectively, with approximately 98 percent of
this cost comprising amounts payable to contributing photographers and
cinematographers. Other costs of sales include local image delivery and
reframing costs.
As a percentage of sales, contributing photographer and cinematographer
payments were 38.2 percent in 1995, 37.1 percent in 1996 and 37.2 percent in
1997. The decrease in 1996 costs, as a percentage of sales, is attributable to
the sales of archival images from Hulton Getty which, for the most part, do not
give rise to any payments to contributors. The margin is expected to continue to
improve as proportionately more archival images are sold, particularly following
the launch of the Hulton Getty catalog. The acquisition of Gamma Liaison in
March 1997 increased the commissions as a percentage of sales since contributors
normally received 50 percent of their total sales, although this was offset by
Energy Film Library where there is a high proportion of footage owned by the
Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $27.7 million, $37.2
million and $43.9 million in 1995, 1996 and 1997, respectively, representing
43.9 percent, 43.8 percent and 43.6 percent of sales in each respective year.
Key factors contributing to the increase in selling, general and administrative
expenses were the inclusion of costs associated with the operations of Hulton
Getty, Fabulous Footage, Gamma Liaison and Energy Film Library in the Company's
results and with the hiring of additional employees as a result of sales growth
over the period.
The slight decrease in selling, general and administrative expenses as a
percentage of sales was primarily attributable to operating efficiencies and
economies of scale achieved at Tony Stone Images and the merger of Hulton Getty
into Tony Stone Images, offset by higher operating costs attributable to Gamma
Liaison and Energy Film Library. At Tony Stone Images (including Hulton Getty),
selling, general and administrative expenses as a percentage of sales were 43.9
percent, 43.3 percent and 42.6 percent in 1995, 1996 and 1997, respectively.
SALARIES AND RELATED STAFF COSTS
Salaries and related staff costs totaled $15.3 million, $20.7 million and
$26.4 million in 1995, 1996 and 1997, respectively, representing 24.3 percent,
24.3 percent and 26.2 percent of sales in each respective year. Salaries and
related staff costs, which comprise salaries, bonuses, employment taxes and
benefits, are primarily a function of the average number of full-time equivalent
employees involved in selling, general and administrative activities, which was
376, 504 and 575 in 1995, 1996 and 1997, respectively. Salaries and related
staff costs have increased as a result of acquisitions and growth in the volume
of sales.
Since image research, selection and delivery are currently primarily
conducted manually, increased sales volumes require increased staffing.
Management expects that systems' enhancements and digitization will have an
important impact on the Company's required staffing levels in the future. During
1997, the digitized Dupe Master Collection, together with a keyword-based search
and retrieval system,
26
was installed in the Company's main North American and United Kingdom sales
outlets. This allows customer requests to be researched by computer, reducing
research time and cost. As customers demand more electronic delivery, the
replacement of dupes with digitized images is expected to continue to reduce the
Company's reliance on sales-related employees and hence reduce their cost as a
percentage of sales.
Selling, general and administrative costs also include premises and utility
costs, marketing, catalog costs and other costs. These have also increased as a
result of acquisitions and growth of Getty Communications. Marketing and catalog
costs accounted for 10 percent of selling, general and administrative costs in
both 1996 and 1997 and comprised direct mail, advertising, promotions, trade
shows, exhibitions and catalogs. Catalogs are Getty Communications' principal
shop window, costs for which are expensed over their useful lives, giving rise
to charges, net of photographer commissions of $1.5 million, $1.3 million and
$1.5 million in 1995, 1996 and 1997, respectively.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles amounted to $2.4 million, $2.2 million and $3.3
million in 1995, 1996 and 1997, respectively. Amortization of intangibles
includes amortization of goodwill and other intangibles that arose from
acquisitions in 1994 and the acquisition of Tony Stone Images in March 1995,
Fabulous Footage in April 1996, the World View group of companies in November
1996, Gamma Liaison in March 1997 and Energy Film Library in July 1997. The
merger with PhotoDisc and the acquisition of Allsport will result in a
substantial increase in intangible assets, and consequently a higher quarterly
amortization charge. See "Item 1. Business--H. Business Risk Factors--Risks
Related to Goodwill Recognition". A detailed allocation of the acquisition
purchase price to the seperable net assets of PhotoDisc and Allsport is to be
undertaken shortly.
DEPRECIATION
Depreciation amounted to $3.6 million, $5.5 million and $8.2 million,
respectively, for 1995, 1996 and 1997, of which depreciation of dupes amounted
to $2.2 million, $3.3 million and $3.8 million in each respective year. The
increase in depreciation of dupes is a result of higher image production and
duplication than in previous years. Tony Stone Images produced a total of 2.3
million, 1.8 million and 1.9 million dupes in total in 1995, 1996 and 1997,
respectively, at an average cost per dupe of $2.0, $2.1 and $2.2 in each
respective year. In 1997, the Company also invested significant capital
expenditure in the development of its digital strategy. The increase in the
depreciation of other fixed assets has arisen from the expansion of the
business, the implementation of new computer systems over the three-year period
and the inclusion of depreciation on the Hulton Getty archival picture
collection. The merger with PhotoDisc will provide the opportunity to accelerate
Getty Communications' digital strategy but will require additional substantial
expenditure in 1998. This will result in an increase in depreciation in 1998 and
future years.
NET INTEREST INCOME/EXPENSE
Net interest expense was $1.5 million and $2.0 million in 1995 and 1996,
respectively. In 1997, net interest income was $1.2 million. Net interest
expense increased substantially in 1995 due to $1.0 million of interest arising
on the financing of the acquisition of Tony Stone Images by Getty Communications
for which loan notes of $12.7 million were issued, and a term loan of $7.6
million was utilized.
Net interest expense in 1996 was affected by:
- the assumption of $19.2 million of debt, comprising a term loan of $9.5
million, a bridge loan of $7.6 million and $2.1 million of revolving
credit facilities, on the acquisition of Hulton Getty in April 1996;
27
- the raising of $29.3 million (net of costs) from the initial public
offering in July 1995, of which $21.8 million was used to repay the $7.6
million bridge loan, loan notes of $12.7 million and $1.5 million of
overdraft facilities; and
- the raising of $44.3 million from the placement of shares to Carlton and
Getty Investments in December 1996.
Net interest received in 1997 was due to the investment income received from
the cash balances that resulted from the share placements in December 1996. This
cash was reduced during 1997 following the Gamma Liaison and Energy Film Library
acquisitions.
In order to limit the impact of movements in interest rates on borrowings,
the Company has entered into interest rate swap agreements with third parties to
exchange, at specified intervals, the difference between fixed rate and floating
rate interest amounts calculated by reference to an agreed principal amount. The
effect of interest rate swaps on the Company's results for 1995, 1996 and 1997
was to increase net interest expense by $66,000, $131,000 and $102,000,
respectively. See Note 14 to the consolidated financial statements of Getty
Communications included in Item 14.
The merger with PhotoDisc and the acquisition of Allsport have resulted in
an additional $33 million of interest bearing debt which will result in higher
interest charges. See "Item 1. Business--H. Business Risk Factors--Increased
Levels of Indebtedness".
NET EXCHANGE GAINS/(LOSSES)
Getty Communications' results of operations are affected by exchange rate
fluctuations to the extent that it or a subsidiary has receivables or payables
that are denominated in a currency other than the local currency, as the
exchange gains or losses arising on the translation of these balances into
sterling or on the settlement of these transactions are recognized in the income
statement of the relevant company.
The Company's policy is to hedge a substantial majority of its contracted
net receivables and payables using a combination of forward exchange contracts
and foreign currency term loans. Exchange gains and (losses) were $(89,000),
$(306,000) and $(198,000) in 1995, 1996 and 1997, respectively. See Note 14 to
the consolidated financial statements of Getty Communications included in Item
14.
INCOME TAXES
The Company's effective tax rate was 61.4 percent, 52.2 percent and 49.1
percent in 1995, 1996 and 1997, respectively. The Company's effective tax rate
was higher than the statutory tax rate in its primary geographic markets in
1995, 1996 and 1997 due to the high levels of non-deductible amortization of
intangibles in those years.
Excluding the effect of amortization of intangibles, the Company would have
had effective tax rates of 35.6 percent, 37.9 percent and 34.7 percent in 1995,
1996 and 1997, respectively. The changes in the effective rate of tax, excluding
the impact of the amortization of intangibles, are due to variations in profit
mix and tax rates in the countries which Getty Communications operates.
NET INCOME
The Company's net income was $1.3 million, $2.7 million and $4.0 million in
1995, 1996 and 1997, respectively. Net income for 1997 included a $1 million
pre-tax charge as settlement for the litigation with Digital Stock. If this item
is excluded, net income would have been $5.0 million for 1997, 84 percent higher
than for 1996. This was a result of a 24 percent increase in EBITDA, plus
interest earned of $1.2 million compared to an interest charge of $2.0 million