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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER: 000-23747
GETTY IMAGES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 98-0177556
(STATE OR JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
701 N. 34TH STREET,
SUITE 400,
SEATTLE, WASHINGTON 98103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(206) 268-2000
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 for 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 $972.9 million as of March 1, 2001 based upon
the closing price of $26.25 on the Nasdaq National Market reported on such date.
As of March 1, 2001, the registrant had 50,991,925 shares of Common Stock,
$0.01 par value, outstanding.
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 (to be
filed) for the Annual Meeting of Stockholders to be held May 8, 2001.
An Index to Exhibits appears at pages Part IV, Item 14, 33 - 36 herein
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GETTY IMAGES, INC.
FORM 10-K
DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related 18
Stockholder Matters.........................................
Item 6. Selected Consolidated Financial Data........................ 19
Item 7. Management's Discussion and Analysis of Financial Condition 20
and Results of Operations...................................
Item 7A. Quantitative and Qualitative Disclosures About Market 30
Risk........................................................
Item 8. Financial Statements and Supplementary Data................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting 31
and Financial Disclosure....................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 32
Item 11. Executive Compensation...................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and 32
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 32
8-K.........................................................
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PART I
ITEM 1. BUSINESS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made by or on behalf of Getty Images, Inc. This
Annual Report on Form 10-K and the documents incorporated herein by reference
contain forward-looking statements based on current expectations, estimates and
projections about Getty Images, Inc.'s industry, management's beliefs, and
certain assumptions made by management. All statements, trends, analyses and
other information contained in this report relative to trends in sales, gross
margin, anticipated expense levels and liquidity and capital resources, as well
as other statements including, but not limited to, words such as "anticipate,"
"believe," "plan," "estimate," "expect," "seek," "intend" and other similar
expressions, constitute forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. Accordingly, actual
results may differ materially from those anticipated or expressed in such
statements. Potential risks and uncertainties include, among others, those set
forth herein under "Factors That May Affect the Business," as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Except as required by law, the Company undertakes no obligation to
update any forward-looking statement, whether as a result of new information,
future events or otherwise. Readers, however, should carefully review the
factors set forth in other reports or documents that the Company files from time
to time with the Securities and Exchange Commission.
In this Annual Report, "Getty Images," "the Company," "we," "us," and "our"
refer to Getty Images, Inc. and its consolidated subsidiaries, unless the
context otherwise dictates.
A. OVERVIEW
Getty Images, Inc. was founded in 1995 and is a leading e-commerce provider
of visual content and related products and services to businesses worldwide,
distributing products digitally via the Internet and on CD-ROMs, as well as in
film transparency form. We pioneered the solution to aggregate and distribute
visual content and, since 1995, have brought many of the visual content
industry's leading brands under one centralized corporate structure. We work
with more than 4,500 active, contributing photographers and an estimated 850
cinematographers and film producers to obtain or create our content. We control
an estimated 70 million still images and an estimated 30,000 hours of film
footage.
We provide our high quality, relevant imagery to creative professionals at
advertising agencies, graphic design firms, corporations and broadcasting
companies; press and editorial customers involved in newspaper, magazine, book,
CD-ROM and online publishing; business users and small office/home office (SOHO)
users. By aggregating the content of our various leading brands on the Internet
and partnering with third-party providers, we offer a comprehensive and
user-friendly solution for our customers' imagery and related product needs. We
seek to leverage our internally developed search and e-commerce technology to
enhance our position as a leader in the visual content industry.
B. BACKGROUND
Getty Images is a Delaware corporation that was incorporated September 4,
1997 under the name of Getty Communications (USA), Inc. The Company's name was
changed to Getty Images, Inc. on October 6, 1997. Getty Images, Inc. succeeded
to the business of a predecessor U.K. corporation, Getty Communications plc as a
result of the acquisition of PhotoDisc, Inc. on February 9, 1998. Getty
Communications plc commenced operations on March 14, 1995, with the acquisition
of Tony Stone Images (now "Stone"), one of
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the world's leading providers of contemporary stock photography. Subsequent
major acquisitions are listed below:
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DATE ACQUIRED COMPANY DESCRIPTION
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April 1996 Hulton Deutsch Collection Limited One of the world's largest commercially
available collections of archival
photography
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March 1997 Liaison Agency A provider of imagery to the
photojournalism market
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February 1998 PhotoDisc, Inc. A provider of royalty-free imagery and
a provider of imagery on the Internet
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February 1998 Allsport Photographic plc A provider of worldwide sports
photography
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May 1999 Art.com, Inc. A provider of framed and unframed art
and art-related products on the
Internet
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August 1999 EyeWire Partners, Inc. A provider of royalty-free photography,
video, audio, typefaces, software and
other design resources to creative
professionals and business users
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August 1999 Online USA, Inc. An agency specializing in the sourcing
and distribution of celebrity imagery
over the Internet
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October 1999 Newsmakers L.L.C. A digital news agency covering current
events, news and celebrity photography
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November 1999 The Image Bank A provider of visual content to the
advertising, design, publishing,
corporate, broadcast and editorial
markets
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March 2000 Visual Communications Group (VCG) An international provider of stock
photography, specialty image
collections and news and feature
photography
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In March 2000, we issued $250.0 million of 5% convertible subordinated
notes due 2007, the proceeds of which were used to finance the acquisition of
VCG and for working capital and general corporate purposes.
In the fourth quarter of 2000, Art.com, a subsidiary, did not meet its
revenue targets and incurred a larger than expected loss, which led the Company
to believe an impairment of long-lived assets may exist at December 31, 2000.
After performing a cash flow analysis of Art.com and a related business that
operates as a division of Art.com, the Company determined that the long-lived
assets were impaired. As a result, the Company wrote off $53.4 million of
Art.com goodwill, reducing the carrying value of the remaining long-lived assets
to their estimated fair value, as determined by a third-party estimate. In the
first quarter of 2001, the Company took steps to significantly reduce costs at
Art.com, including a workforce reduction of over 50 employees, and to evaluate
strategic alternatives for the future of the businesses, including a potential
sale.
C. CUSTOMERS, PRODUCTS AND SERVICES
We offer our customers an estimated 70 million still images, approximately
30,000 hours of film footage and related products through our Websites, CD-ROMs,
catalogs and our international distribution network of Company-operated offices
in 30 cities and agents and distributors in approximately 50 countries. The
following
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chart sets forth information regarding the brands and imagery products that
serve our broad range of customers:
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CUSTOMERS BRANDS IMAGERY PRODUCTS
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Creative Professionals: Allsport, Artville, Bavaria, Contemporary stock photography,
advertising, graphic design, gettyone.com, EyeWire, FPG, licensed and royalty-free
broadcasting, Website PhotoDisc, Pix, Stone, images and illustrations and
design, marketing and Telegraph Colour Library, The stock film footage
corporate communications Image Bank
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Press and Editorial: Allsport, Liaison Agency, Sports, news and features,
newspapers, magazines, Newsmakers, Colorific, Online celebrity and archival
publishers USA, Hulton Archive photography
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Business Users: graphic Gettyworks.com Royalty-free imagery, software,
design, in-house creative typefaces and other design
services and business owners resources
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Creative Professional Customers
We supply images to advertising and design agencies, broadcasting
companies, Website designers and marketing and corporate communications
specialists. Our images cover a wide variety of contemporary subjects including
lifestyles, business, science, health and beauty, sports, transportation and
travel. These customers usually have a commercial, advertising or editorial
message they are trying to convey and, consequently, are typically looking for a
specific conceptual image. Image quality and relevance are important factors in
the customer's decision. Creative professional customers need to access imagery
as part of their everyday working life. Their workflow is becoming increasingly
digital, which we believe will spur further demand for our images and services
in this market.
The following branded products are targeted primarily to our creative
professional customers:
EyeWire is one of the largest providers of royalty-free imagery.
EyeWire also offers related content and services, which allows customers to
produce professional quality work incorporating imagery, typefaces and
other design elements. EyeWire's non-imagery products include
productivity-enhancing visual and audio content, online software tools and
design resources.
PhotoDisc is a pioneer in the development and marketing of digital
stock photography products and electronic delivery of images. Its products
are offered on a royalty-free basis, which allows customers to pay a
one-time fee to use an image on a perpetual, non-exclusive basis for almost
any purpose.
Stone is a leading worldwide provider of contemporary stock
photography and is recognized as being on the cutting edge of stock
photography. Stone offers rights to use images on a per-use basis and
provides customers with the option to reserve the rights to an image for a
particular type of publication, for a specified period of time, in a
particular geographic area or in a specific industry. This rights-control
system is critical in allowing us to grant the right to use the same image
multiple times, thus maximizing the return per image.
The Image Bank is a leading provider of contemporary and archival
stock photography, film footage and illustrations worldwide. Its products
are offered through a worldwide network of Company-operated offices and
franchisees.
VCG is a leading provider of contemporary and archival stock
photography, film footage and illustrations worldwide, operating under the
brand names of FPG (North America), Bavaria (Germany), Pix (France) and
Telegraph Colour Library (U.K.). These brands offer products through a
worldwide network of Company-operated offices and agents.
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Press and Editorial Customers
We supply images to a customer base of professional image users who are
involved in the publication of newspapers, books and magazines, both online and
in traditional media, as well as the production of documentaries, and other
editorial media. The imagery that is provided to these customers ranges from
contemporary news, celebrity and feature material and sports imagery, to
archival imagery covering major political, social and sporting events since the
beginning of photography in the early nineteenth century. These customers are
looking for imagery that conveys information to illustrate the story they are
covering and often requires the imagery to be delivered rapidly after the event
has occurred.
The following branded products are targeted primarily to our press and
editorial customers:
Allsport is a leading provider of sports photography worldwide, with
an archive of an estimated five million still images from sporting events
around the world dating from 1896, and includes visual content that is both
specialist and generalist, most of which is wholly owned by Allsport.
Allsport is a commissioned photographer for the International Olympic
Committee and the U.S. Olympic Committee marketing partners, Major League
Baseball, Major League Soccer and the WTA Tour. Allsport works with more
than 45 contributing photographers, the majority of which are full-time
Getty Images employees.
Colorific/Online USA specializes in the sourcing and distribution of
celebrity imagery over the Internet.
Hulton Archive is one of the largest privately owned collections of
archival photography in the world. This vast archive, totaling more than 18
million still images, has been collected from all over the world and
consists of significant events, people and places from the nineteenth and
twentieth centuries, and vintage prints by renowned photographers such as
Man Ray, Bill Brandt, Alfred Eisenstadt and Robert Capa.
Liaison Agency is a provider of news and reporting photography that
serves North America. Liaison Agency receives material from an estimated
800 photographers worldwide and its library contains photographs covering
the major events, personalities and entertainment of the last 30 years.
Newsmakers is a New York-based online news photography service that
provides real-time news photography from around the world in digital format
for use by newspapers, magazines, Websites and publishers.
Business User Customers
In February 2001, we launched www.gettyworks.com, a comprehensive Website
for creating a wide range of business communication materials, including
reports, newsletters, stationery, Websites and presentations. Gettyworks.com
offers a wide variety of images, presentation and document templates, and
step-by-step instructions, articles and tips. Customers may pay a modest
membership fee for one year of access to gettyworks.com or individually purchase
and download photos, illustrations, clip art, cartoons, fonts, Web art images,
movies and sounds.
D. IMAGE CREATION
Image Creation and Editing
For our creative customers, we have creative teams in London, Los Angeles,
Munich, Paris, Seattle and New York that analyze customer requests and buying
behavior and perform research in key markets in order to target and source
images. We work with more than 4,500 active contributing photographers to serve
the creative professional, including highly respected, internationally renowned
professional photographers representing a variety of styles, specialties and
backgrounds.
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We continue to systematically select our most widely used images for
digitization. All digitized images are available for search, selection and
immediate download from their respective Websites 24 hours a day, seven days a
week.
For customers seeking film footage, we maintain and license a growing
library of an estimated 30,000 hours of commercially desirable cinematography
covering a broad range of contemporary and archival subject matter. Our film
business represents imagery from an estimated 850 cinematographers and film
producers, which is cataloged on computer for quick access and retrieval in
film, tape and digital formats.
For our press and editorial customers, our ability to source imagery from
events taking place as they occur and make them immediately available to
customers is critical to our success. To this end, we have production hubs in
New York, Los Angeles, London and Sydney to which photographers can submit
imagery at any time. To serve our press and editorial customers, we employ
approximately 50 staff photographers and have contractual relationships with an
estimated 1,000 additional photographers. In addition to topics that we believe
will be of interest perennially, we seek to identify upcoming events that will
generate demand for particular archival images. We also offer in-depth research
services for more extensive projects that our customers may have or imagery they
may require immediately. We digitize thousands of images per week and make them
available through a proprietary online subscription service and over the
Internet. By using digital technologies, we are able to have new images online
within fifteen minutes of creation from major events such as The World Series or
The Academy Awards. In addition, we continually review our existing analog
collections and select imagery for digitization, which we anticipate will be
requested by customers.
E. MARKETING, SALES AND DISTRIBUTION
Marketing
We reach our customers through a diverse set of marketing methods, such as
Websites and printed catalogs. We believe that these methods create brand
awareness and, in many cases, act as sales tools in the selection of image
products for license. We also serve our international markets by producing
localized marketing materials where appropriate.
Online Marketing. Our Websites act as marketing tools as well as sales
tools, making the images of each collection available for research and selection
online. For example, our press and editorial brands regularly provide a summary
of the latest breaking stories to their respective Websites where customers can
see, purchase and download available imagery.
Printed Catalogs and Direct Mail. We use catalogs to market the
contemporary photography of our creative professional and press and editorial
brands. We believe that our catalog quality contributes to our strong reputation
and the catalogs drive demand for our images both to our Websites and into our
customer service centers.
Demonstration Reels. We market our film footage through demonstration reels
sent directly to our existing and potential customers. These demonstration reels
contain samples of available footage.
Sales and Distribution
While we are focused on directing our customers to the e-commerce
environment, we continue to support and serve our customers who wish to receive
our branded content products through traditional analog means, which involves
the physical distribution of imagery on duplicate film transparencies. In many
instances, we serve customers through a combination of e-commerce and more
traditional methods of customer service.
Digital Sales and Distribution. We actively sell and promote digital
distribution of imagery and related products and services through the Internet.
We believe this offers our customers advantages in terms of convenience, speed
and cost efficiency, and enables us to achieve greater economies of scale. All
of our stock photography brands can be accessed through www.gettyimages.com,
www.gettyone.com or, in most cases, through individual brand Websites. For our
press and editorial customers, we distribute through individual
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brand Websites as well as an ISDN Point-to-Point network, the Photo Stream
satellite network maintained by the Associated Press, and a number of other
third-party provided digital transmission methods.
Traditional Analog Sales and Distribution. We also provide images through
our broad international distribution network of company-operated offices and
agents and distributors in approximately 50 countries. We believe that control
of our outlets results in more focused sales and marketing activities and better
brand maintenance. A direct sales force and key account management team targets
advertising, publishing and communications companies, as well as other high
volume users of images. Our direct sales force focuses on reaching image
purchasers who are generally responsible for large order purchases. In order to
assist our customers in using the images, our sales force includes technical
support staff and training personnel who provide training to customers. These
consultants have expertise in digital image applications, design tools and photo
manipulation methodologies.
Product Rights. We maintain ownership or control of our products at all
times. Customers may purchase the rights, on an exclusive or non-exclusive
basis, to use single images, video and film clips or CD-ROM products containing
multiple images. Customers may also purchase rights to our press and editorial
products on a subscription basis. Ownership of the images never passes to the
customer.
F. OPERATIONS AND TECHNOLOGY
We have implemented a broad range of technology, systems and services to
enable customers to search, select, purchase and download digital content. These
systems span multiple operational activities, including customer interaction,
transaction processing, order fulfillment, invoicing and customer relationship
management. We use a set of software applications for:
- Categorizing digital content and embedding appropriate keywords and
search data (metadata);
- Searching large information databases (across languages and linguistic
context);
- Presenting detailed information related to specific digital content
elements;
- Managing online e-commerce transactions for the purchase of digital
content;
- Managing invoice generation and accounts receivable from customers; and
- Tracking a broad range of intellectual property rights and permissions.
These services and systems use a combination of our proprietary
technologies and commercially available, licensed technologies. We focus our
internal development efforts on creating and enhancing the specialized,
proprietary software that is unique to our business. We intend to continue to
investigate, qualify and develop technology and internal systems that support
key areas of our business to enhance the online and offline experience for our
customers. In particular, we have implemented and continue to develop a flexible
infrastructure that will facilitate the sale and distribution of third-party
digital content through our online e-commerce systems.
Our image search, image selection, rights management, customer interaction,
order collection, fulfillment and back-end systems are proprietary. Our online
platform architecture is primarily based on Microsoft technologies. These
systems were designed to provide reliable e-commerce connectivity and responsive
online customer interaction. Our systems infrastructure is hosted internally at
multiple locations and externally at Exodus Communications. Both internal and
external hosting centers provide 24-hour monitoring, power generators and
limited back-up systems.
G. COMPETITION
The market for visual content and related products and services is highly
competitive. We believe that the principal competitive factors are name
recognition, company reputation, the quality, relevance and diversity of the
images, the quality of contributing photographers and cinematographers under
contract with a company, effective use of developing technology, customer
service, pricing, accessibility of imagery, distribution capability and speed of
fulfillment. Our current or potential competitors include: other large visual
content
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providers such as Corbis Corporation, Index Stock Photography and Zefa Visual
Media; specialized visual content companies that are well established in their
local, content or product-specific markets such as Reuters News Service, the
Associated Press and Agence France Presse; stock film footage businesses such as
Sekani, Inc.; and commissioned photographers. There are also thousands of very
small stock photography and film footage agencies throughout the world. In
addition to competitors and competitive factors applicable to the visual content
industry as a whole, our individual brands are subject to competitors and
competitive factors specific to each brand.
Please see "Factors That May Affect the Business" for more information
about the competitive conditions in the visual content industry.
H. INTELLECTUAL PROPERTY
Most of the images distributed by us under our various brands are obtained
from independent photographers and cinematographers on an exclusive basis.
Professional photographers and cinematographers prefer to retain ownership of
their work. As a result, copyright to an image remains with the contributing
photographer or cinematographer in most cases, while we obtain the exclusive
right to market the image on behalf of the photographer or cinematographer for a
period of time (generally a minimum of five to seven years, which we believe to
be the useful life of contemporary images). A substantial portion of the images
of Allsport and Hulton Archive, and certain images of our other brands, are
owned by us or are in the public domain.
We also own numerous trademarks that are important to our business.
Depending upon the jurisdiction, trademarks are valid as long as they are in use
and/or their registrations are properly maintained and they have not been found
to have become generic. Registrations of trademarks generally can be renewed
indefinitely as long as the trademarks are in use (please see below at Item 1.
Business -- I. "Factors That May Affect the Business -- Our Right to Use The
Getty Trademarks Is Subject to Forfeiture in The Event We Experience a Change of
Control" for more information about certain of our trademarks).
I. FACTORS THAT MAY AFFECT THE BUSINESS
IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K, THE
FOLLOWING IMPORTANT FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING OUR
COMPANY BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY HAVE A
SIGNIFICANT IMPACT ON OUR BUSINESS, PROSPECTS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. THE FOLLOWING LIST IS NOT INTENDED TO BE EXHAUSTIVE.
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE COMPANIES WE ACQUIRE, INCLUDING
VISUAL COMMUNICATIONS GROUP (VCG) AND THE IMAGE BANK (TIB), OUR BUSINESS COULD
BE ADVERSELY AFFECTED.
As a result of the acquisition strategy we have pursued since our inception
in 1995, our senior management has focused significant attention on integrating
acquired businesses. Our future performance will largely depend on our ability
to integrate the operations of acquired companies, particularly VCG (acquired in
March 2000) and TIB (acquired in November 1999). These acquisitions create risks
such as:
- disruption of our ongoing business;
- difficulty assimilating the operations, including financial and
accounting functions, sales and marketing procedures, technology and
other corporate administrative functions of the combined companies;
- diversion of attention of our senior management from existing operations
and other potential business opportunities;
- challenges associated with converting content from the analog format to
digital format, particularly the core collections of TIB and VCG;
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- problems combining personnel of the acquired companies with our existing
personnel; and
- problems retaining key employees from the acquired companies.
We cannot guarantee that we will successfully integrate VCG or TIB or any
other acquired companies with our business.
FAILURE TO MANAGE CHANGE MAY ADVERSELY AFFECT OUR BUSINESS.
The changes that have occurred, and that we anticipate may continue to
occur, in our industry and operations have and may continue to place a
significant strain on our resources, particularly in light of the fact that we
conduct business around the world. To manage this change, we are implementing
new operational and financial systems and procedures and controls, are
attempting to train and upgrade our employee base, and are working to ensure
close coordination among our technical, accounting, finance, marketing, sales
and editorial staffs.
WE MAY LOSE CUSTOMERS IF WE ARE UNABLE TO DETERMINE CURRENT OR FUTURE TRENDS AND
MAINTAIN UP-TO-DATE CONTENT IN OUR COLLECTIONS.
Our future performance depends on our ability to review and refresh our
collections based on current and future trends in order to provide our customers
with the most up-to-date content. Many of our customers are sensitive to the
latest trends and require new and fashionable content to meet their needs. If we
are unable to determine such trends and add new imagery, or fail to do so in a
timely manner, customers requiring such content may use other visual content
providers to obtain imagery.
ACQUISITION-RELATED CHARGES AND RESTRUCTURING COSTS COULD HAVE AN ADVERSE IMPACT
ON OUR OPERATING RESULTS.
Our operating results and earnings in future periods may be adversely
affected as a result of acquisition-related charges, including:
- significant goodwill amortization charges;
- transaction costs; and
- other related restructuring and integration charges.
We 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 an impairment
in value. For example, in the fourth quarter of 2000, the Company determined
that long-lived assets were impaired and wrote off $53.4 million of Art.com
goodwill. Future acquisitions by us, if any, could generate goodwill and other
intangibles that could result in similar charges to be amortized against our
future earnings.
We incurred net integration and restructuring costs of $41.6 million during
1998, 1999 and 2000 following the plans to integrate all our businesses and to
otherwise restructure and reorganize our business to try to best serve our
customers and develop our business. Further integration of our existing
businesses and businesses we may acquire in the future may result in similar or
greater integration and restructuring costs, which will negatively affect our
future earnings.
OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE.
Historical trends and quarter-to-quarter comparisons of our operating
results may not be good indicators of our future performance. It is possible
that some future quarterly results may be below the expectations of public
market analysts and investors. In this event, the trading prices of our
subordinated notes and our
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common stock may fall. Our revenues and operating results are expected to vary
from quarter-to-quarter due to a number of factors, including:
- demand for our products;
- our ability to continue to move customers to the digital distribution of
imagery;
- changes in sales mix, including the mix of sales of analog and digital
imagery, wholly-owned and licensed imagery, and the geographic and brand
distribution of such sales;
- our ability to attract visitors to our Websites and the frequency of
repeat purchases by our customers;
- shifts in the nature and amount of publicity about us, our competitors or
the visual content industry;
- changes in the growth rate of Internet commerce;
- our ability to enhance our technology to accommodate any future growth in
our operations or customers;
- changes in our pricing policies or the pricing policies of our
competitors;
- changes in government regulation;
- costs related to potential acquisitions of technology or businesses;
- changes in U.S. and global financial and equity markets; and
- changes in U.S., global or regional economic and political conditions.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OUR EXISTING OR POTENTIAL
COMPETITORS.
The visual content industry is highly competitive. We compete directly with
a number of large and small visual content companies and commissioned
photographers to provide imagery to businesses and consumers.
We believe that the principal competitive factors in the visual content
industry are name recognition, company reputation, the quality, relevance and
diversity of the images, the quality of the contributing photographers and
cinematographers under contract with a company, effective use of developing
technology, customer service, pricing, accessibility of imagery, distribution
capability and speed of fulfillment.
Some of our existing and potential competitors may have significantly
greater financial, marketing and other resources or greater name recognition
than we have. Some of these competitors may be able to respond more quickly to
new or expanding technology and devote more resources to the development or
promotion of their services than we can. In addition, possible new entrants into
the visual content industry could increase if technological advances make
archiving, searching and digital delivery systems more affordable.
We cannot guarantee that we will be able to compete successfully against
existing or potential competitors.
WE MAY NOT BE ABLE TO TAKE ADVANTAGE OF THE GROWTH OF NEW MARKETS.
Our strategy depends largely on our ability to attract customers to our
Websites and to encourage and take advantage of the growth of new markets. We
will continue to seek strategic alliances and acquisitions to create new
markets, products and services. We believe that our ability to facilitate market
acceptance of our imagery, related products and services and our brands, and
enhance our sales and marketing capabilities depends on our ability to develop
and maintain Internet-related strategic alliances and acquisitions. The market
for Internet-related alliances and acquisitions can be competitive and we cannot
guarantee that we will be successful in negotiating additional alliances or
acquisitions on favorable terms, if at all. We also cannot be sure that any such
alliances or acquisitions will assist us in attaining our goals.
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THE SUCCESS OF OUR BUSINESS DEPENDS ON THE GROWTH IN DEMAND FOR THE DIGITAL
DOWNLOAD OF VISUAL CONTENT.
The success of our business depends on the continued and increasing
acceptance of the digital download method for purchasing visual content. The
growth and market acceptance of digital download is subject to a number of
factors, including:
- the availability of sufficient network bandwidth to enable purchasers to
rapidly download images;
- the number of relevant images available for purchase through digital
download as compared to those available through traditional methods;
- the level of customer comfort with the process of downloading visual
content;
- the relative ease of the downloading process;
- concerns about the security of online transactions; and
- specific customer requirements that dictate the continued reliance on
analog imagery.
Our strategy is based in part on increasing acceptance of the Internet as a
method for distributing images. We may not overcome future technical challenges
associated with electronically delivering visual content reliably on a long-term
basis.
WE MAY NOT SUCCEED IN ESTABLISHING THE "GETTY IMAGES" BRAND.
Historically, we have marketed each Getty Images' brand as its own
collection. We have begun marketing certain of our images using the "Getty
Images" brand. Successful positioning of the "Getty Images" brand will largely
depend on the success of our advertising and promotional activities and our
ability to provide customers with high quality products and strong customer
service. We believe that a favorable customer reception of this brand is
important to our future success. If our brand enhancement strategies are
unsuccessful, we may be unable to realize potential benefits of "Getty Images."
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR EXECUTIVE CHAIRMAN AND
CHIEF EXECUTIVE OFFICER.
Our future success depends, in part, on the continued service of Mr. Mark
Getty, our Executive Chairman, and Mr. Jonathan Klein, our Chief Executive
Officer. Mr. Getty and Mr. Klein are each party to an employment agreement with
us for a minimum period of two and three years, respectively, commencing in
February 1998 and June 1999, respectively. We do not have "key person" life
insurance policies covering either Mr. Getty or Mr. Klein.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO IDENTIFY, ATTRACT, RETAIN AND
MOTIVATE HIGHLY SKILLED EMPLOYEES.
Our future success will depend upon our ability to identify, attract,
retain and motivate highly skilled technical, managerial, new product
development, editorial, merchandising, sales, marketing and customer service
employees. Competition for qualified personnel is intense in the visual content
industry. We cannot guarantee that we will be successful in our efforts to
attract and retain such personnel.
Additionally, several members of our senior management team joined us in
2000. These individuals are currently becoming integrated with the other members
of our management team. We believe the successful integration of our management
team is critical to manage our operations effectively.
WE MAY EXPERIENCE SYSTEM FAILURES AND SERVICE INTERRUPTIONS ON OUR WEBSITES THAT
COULD RESULT IN ADVERSE PUBLICITY, CUSTOMER DISSATISFACTION AND REVENUE LOSSES.
A key component of our growth strategy is the increased digitization of our
imagery and the distribution of such imagery and related products and services
over the Internet. As a result, our revenues are, and will continue to be,
dependent on the ability of our customers to access our Websites. In the past,
we have experienced occasional system interruptions that made our Websites
unavailable or prevented us from
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efficiently fulfilling orders. While we have made improvements in this area over
the past eighteen months, we cannot be sure that we can prevent these
interruptions in the future. System failures or interruptions will inconvenience
our users and may result in negative publicity and reduce the volume of images
we license online and the attractiveness of our online products and services to
our customers.
We will need to add software and hardware and upgrade our systems and
network infrastructure to accommodate increased traffic on our Websites and
increased sales volume. Without these upgrades, we will face additional system
interruptions, slower response times, diminished customer service, impaired
quality and speed of order fulfillment, and delays in our financial reporting.
We cannot accurately project the rate or timing of any increases in traffic or
sales volume on our Websites and, therefore, the integration, timing and cost of
these upgrades are uncertain.
The computer and communications hardware necessary to operate our corporate
group and much of our e-commerce operations is located at facilities in the
Seattle, Washington metropolitan area. Our other businesses have systems in
other locations worldwide. Any of these systems and operations could be damaged
or interrupted by fire, flood, power loss, telecommunications failure,
earthquake and similar events. In addition, while we take steps to ensure the
security and integrity of our systems, computer viruses, physical or electronic
break-ins and similar disruptions could cause system interruptions or delays
that could temporarily prevent us from providing services and accepting and
fulfilling customer orders. We do not have full redundancy for all of our
computer and telecommunications facilities.
WE MAY NOT BE ABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGES RELATING TO THE
INTERNET.
To be successful, we must adapt to rapidly changing Internet technologies
by continually enhancing our products and services and introducing new services
to address the changing needs of our customers. We could incur substantial
development or acquisition costs if we are required to modify our services or
infrastructure to adapt to changes affecting companies providing services on the
Internet. If we are unsuccessful in adapting to these changes, or do not
sufficiently increase the features and functionality of our products and
services, our customers may ultimately switch to the product and service
offerings of our competitors. Our existing or potential competitors may develop
an improved method for distributing visual content through the Internet. If we
are unable to keep pace with the evolving technology of the Internet, the demand
for our imagery and related products and services may decrease.
CERTAIN OF OUR STOCKHOLDERS CAN EXERCISE SIGNIFICANT INFLUENCE OVER OUR BUSINESS
AND AFFAIRS AND MAY HAVE INTERESTS THAT ARE DIFFERENT THAN YOURS.
Some of our stockholders own substantial percentages of the outstanding
shares of our common stock.
The Getty Group collectively owned approximately 23.32% of the outstanding
shares of our common stock as of March 1, 2001, and comprises the following
persons and entities: Getty Investments L.L.C.; The October 1993 Trust; The JD
Klein Family Settlement; Mr. Mark Getty, our Executive Chairman; and Mr.
Jonathan Klein, our Chief Executive Officer.
The Torrance Group collectively owned approximately 6.52% of the
outstanding shares of our common stock as of March 1, 2001, and comprises the
following persons and entities: PDI, L.L.C.; Mr. Mark Torrance; Ms. Wade
Ballinger (Torrance); and certain of their family members.
Pursuant to shareholders agreements among us, the Getty Group and the
Torrance Group, none of the members of the Getty Group or the Torrance Group may
transfer their shares of our common stock except in accordance with the terms of
those agreements.
Two other stockholders, Pilgrim Baxter & Associates Ltd. and Waddell & Reed
Investment Management Company, owned approximately 8.0% and 7.4%, respectively,
of the outstanding shares of our common stock as of March 1, 2001.
As a result of their share ownership, each of the Getty Group, the Torrance
Group, Pilgrim Baxter and Waddell & Reed has significant influence over all
matters requiring approval of our stockholders, including the
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election of directors and the approval of mergers or other business
combinations. The substantial percentage of our stock held by each of the Getty
Group, the Torrance Group, Pilgrim Baxter and Waddell & Reed could also make us
a less attractive acquisition candidate or have the effect of delaying or
preventing a third party from acquiring control over us at a premium over the
then-current price of our common stock. In addition to ownership of common
stock, certain members of the Getty Group and the Torrance Group have management
and/or director roles within our company that increase their influence over us.
OUR RIGHT TO USE THE GETTY TRADEMARKS IS SUBJECT TO FORFEITURE IN THE EVENT WE
EXPERIENCE A CHANGE OF CONTROL.
We own trademarks and trademark applications through our subsidiaries
regarding the names Getty Images and Hulton Getty, and derivatives of those
names, including the name "Getty," and the related logo. We will use "Getty" as
a corporate identity as do our subsidiaries and we may use "Getty" as a product
or service brand in the future. We refer to the above as the "Getty Trademarks."
In the event that a third party or parties not affiliated with the Getty family
acquire control of us, 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. In
the event of an assignment, we will have 12 months to continue to use the Getty
Trademarks, after which time we no longer would have the right to use the Getty
Trademarks. Getty Investments' right to cause such an assignment might have a
negative impact on the amount of consideration that a potential acquirer would
be willing to pay to acquire our common stock.
Getty Investments L.L.C. owns approximately 21.09% of the outstanding
shares of our common stock as of March 1, 2001. Mr. Getty serves as the Chairman
of Getty Investments, while Mr. Klein and Mr. Andrew Garb, a member of our Board
of Directors, serve on the Board of Getty Investments.
WE MAY NOT BE ABLE TO PREVENT THE MISUSE OF OUR IMAGERY AND WE MAY BE SUBJECT TO
INFRINGEMENT CLAIMS.
We rely on intellectual property laws and contractual restrictions to
protect our rights to our imagery. These afford us only limited protection.
Unauthorized parties have attempted, and may attempt, to improperly use our
owned or licensed imagery. We cannot guarantee that we will be able to prevent
the unauthorized use of our imagery or that we will be successful in ceasing
such use once it is detected.
We have been subject to a variety of third-party infringement, misuse and
misappropriation claims in the past and will likely be subject to similar claims
in the future. We license a portion of our visual content from photographers and
cinematographers. While we require the photographers and cinematographers to
obtain and provide us with adequate releases for the people and property in the
imagery, we cannot guarantee that each photographer or cinematographer holds the
rights or releases it claims or that such rights and releases are adequate. As a
result, we may be subject to infringement, misuse and misappropriation claims by
third parties.
OUR INDEBTEDNESS COULD REDUCE OUR FLEXIBILITY AND MAKE US MORE VULNERABLE TO
ECONOMIC DOWNTURNS.
Our level of indebtedness will pose substantial risks to our security
holders, including the risk that we may not be able to generate sufficient cash
flow to satisfy our obligations under our indebtedness or to meet our capital
requirements. A portion of our cash flow from operations will be dedicated to
the payment of principal and interest on our senior credit facility, our 4.75%
convertible subordinated notes due 2003 and our 5.0% convertible subordinated
notes due 2007. Our ability to service our indebtedness will depend on our
future performance, which will be affected by general economic conditions and
financial, business and other factors, many of which are beyond our control.
Such indebtedness could have important consequences to our security holders,
including the following:
- our ability to make principal and interest payments on the notes could be
negatively impacted;
- we may be unable to obtain necessary financing for working capital,
capital expenditures, debt service requirements and other purposes;
- our flexibility in planning for, or reacting to, changes in our business
and competition could be reduced; and
- we may be more vulnerable to economic downturns.
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OUR BUSINESS IS SENSITIVE TO CHANGES IN ECONOMIC AND POLITICAL CONDITIONS
Any economic, business or industry conditions that cause customers or
potential customers to reduce, postpone or stop their purchases of imagery, or
to reduce the value of each image that is purchased, could have a negative
effect on our sales and profitability. The success and profitability of our
international operations are subject to numerous risks and uncertainties,
including local, regional and global economic conditions, political instability,
and changes in applicable tax laws (including U.S. tax laws on our foreign
operations).
There has been a recent slowdown in advertising, which potentially could
have an impact on the demand for the Company's products and services.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES COULD HAVE A NEGATIVE IMPACT ON THE
RESULTS OF OUR NON-U.S. BASED OPERATIONS.
We publish our consolidated financial statements in U.S. dollars and
conduct a portion of our business in currencies other than U.S. dollars,
particularly United Kingdom pounds sterling, Deutsche marks, French francs and
the Euro. As a result, we are 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 our non-U.S. based
operations into U.S. dollars for inclusion in our consolidated financial
statements. We cannot accurately predict the impact that future exchange rate
fluctuations may have on our results.
THE TRANSITION TO THE EURO WILL REQUIRE US TO MODIFY OUR EXISTING OPERATIONS AND
SYSTEMS.
In January 1999, eleven member countries of the European Union established
irrevocable, fixed conversion rates between their existing currencies and the
European Union's common currency (the Euro). The Euro was established to replace
the separate currencies of these eleven countries. The number of countries
adopting the Euro has since increased to twelve. The Euro is scheduled to be
phased in over a three-year period ending January 1, 2002. In order to
effectively handle transactions in the new currency, we are modifying our
systems and commercial arrangements. Modifications are necessary in areas such
as tax, payroll, benefits and pension systems, contracts with suppliers and
customers, internal financial reporting systems and information technology
systems. Although transactions may also be made in the currencies of the member
countries during the three-year transition period, we will use dual currency
processes for our operations during the transition period. We may not be able to
identify or successfully solve all problems associated with the transition and a
material disruption of our business may occur.
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO MEET OUR FUTURE CAPITAL
NEEDS.
We currently anticipate that our available cash resources, cash flow from
operations and our senior credit facility will be sufficient to meet our
anticipated needs for working capital and capital expenditures for at least the
following 12 months. After this time, if we are unable to generate sufficient
cash flows from operations to meet our anticipated needs for working capital and
capital expenditures, we will need to raise additional funds to, among other
things, promote our products and services, develop new and enhanced services,
respond to competitive pressures or make acquisitions. We may be unable to
obtain any required additional financing on terms favorable to us, if at all. If
adequate funds are not available on acceptable terms, we may be unable to
promote our products and services successfully, develop or enhance services,
respond to competitive pressures or take advantage of acquisition opportunities.
If we raise additional funds through the issuance of equity securities, our
stockholders may experience dilution of their ownership interest, and the
newly-issued securities may have rights superior to those of our common stock.
If we raise additional funds by issuing new debt, the new debt could be senior
indebtedness and we may be subject to limitations on our operations, including
limitations on the payment of dividends. Changes in U.S. and global financial
and equity markets, including significant fluctuations in interest rates and the
price of our equity securities, may impede our access to, or increase the cost
of, external financing for our operations and acquisitions.
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CERTAIN PROVISIONS OF OUR CORPORATE DOCUMENTS AND DELAWARE CORPORATE LAW MAY
DETER A THIRD-PARTY FROM ACQUIRING OUR COMPANY.
Our board of directors 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 our stockholders. This authority, together with certain provisions
of our amended and restated certificate of incorporation, may have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of our company. This could occur
even if our stockholders consider such change in control to be in their best
interests. In addition, the concentration of beneficial ownership of our common
stock in the Getty Group, the Torrance Group, Pilgrim Baxter and Waddell & Reed,
along with certain provisions of Delaware law, may have the effect of delaying,
deterring or preventing a takeover of our company.
IF THE USE OF THE INTERNET AND E-COMMERCE DOES NOT GROW AS ANTICIPATED, OUR
BUSINESS COULD BE SERIOUSLY HARMED.
Our growth strategy largely depends on the increased acceptance of the
Internet as a medium of commerce. Rapid growth in the use of the Internet is a
recent phenomenon. As a result, acceptance and use may not continue to develop
at historical rates and a broad base of our customers may not adopt or use the
Internet as a medium of commerce. Demand and market acceptance of our imagery
and related products over the Internet may not continue.
Our business could be harmed if:
- use of the Internet and other online services does not continue to
increase or increases more slowly than anticipated;
- the technology underlying the Internet and other online services does not
effectively support any expansion that may occur; and
- the Internet and other online services do not create a viable commercial
marketplace, inhibiting the development of e-commerce and reducing the
need for delivery of our products and services online.
AN INCREASE IN GOVERNMENT REGULATION OF THE INTERNET AND E-COMMERCE COULD HAVE A
NEGATIVE IMPACT ON OUR BUSINESS.
We are subject to a number of regulations applicable to businesses
generally, as well as laws and regulations directly applicable to e-commerce.
Although existing laws and regulations affecting e-commerce are minimal, state,
federal and foreign governments may adopt legislation regulating the Internet
and e-commerce in the near future. Any such legislation or regulation could
impede the growth of the Internet and decrease its acceptance as a
communications and commerce medium. If a decline in the use of the Internet
occurs, businesses and consumers may decide in the future not to use our online
services.
New laws and regulations could potentially govern or restrict any of the
following issues:
- user privacy;
- pricing and taxation of goods and services over the Internet;
- Website content;
- consumer protection; and
- characteristics and quality of products and services offered over the
Internet.
Future legislation could expose companies involved in the Internet or
e-commerce to potential liability.
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ONLINE SECURITY RISKS AND CONCERNS MAY HARM OUR BUSINESS.
A significant barrier to e-commerce and online communications is the secure
transmission of confidential information over public networks. Advances in
computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security
systems or those of other Websites to protect proprietary information. If any
well-publicized compromises of security were to occur, it could have the effect
of substantially reducing the use of the Internet for commerce and
communications. Anyone who circumvents our security measures could
misappropriate proprietary information or cause interruptions in our services or
operations.
The Internet is a public network, and data is sent over it from many
sources. In the past, computer viruses, programs that disable or impair
computers, have been distributed and have rapidly spread over the Internet.
Computer viruses could be introduced into our systems or those of our customers,
which could disrupt the delivery of our imagery products and services or make
them inaccessible to our customers. We may be required to expend significant
capital resources to protect against the threat of security breaches or to
alleviate problems caused by such breaches. To the extent that our activities
may involve the storage and transmission of proprietary information, such as
credit card numbers, security breaches could expose us to a risk of loss or
litigation and possible liability. Our security measures may be inadequate to
prevent security breaches and our business could be harmed if we do not prevent
them.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
The market price of our common stock has been volatile. For example, for
January 1, 2000 through March 1, 2001, the market price for our common stock has
ranged from $21.250 to $64.375. Fluctuations in the trading price of our common
stock may continue in response to a number of events and factors, including the
following:
- quarterly variations in operating results and announcements of
innovations;
- new products, services and strategic developments by us or our
competitors;
- business combinations and investments by us or our competitors;
- variations in our revenues, expenses or profitability;
- changes in financial estimates and recommendations by securities
analysts;
- failure to meet the expectations of securities analysts;
- performance by other visual content companies;
- news reports relating to trends in the visual content, Internet or other
product or service industries;
- changes in U.S. and global financial and equity markets; and
- changes in U.S., global or regional economic and political conditions.
Any of these events may cause the price of our shares to fall. In addition,
the stock market in general and the market prices for e-commerce companies in
particular have experienced significant volatility (including, recently steep
declines) that in some cases has been unrelated to the operating performance of
such companies. These broad market and industry fluctuations may adversely
affect the market price of our shares, regardless of our operating performance.
J. RELATIONSHIP WITH OUR EMPLOYEES
At December 31, 2000, we had 2,489 employees. Of these, 1,442 were located
in North America, 935 in Europe and 112 in the rest of the world. We believe
that we have satisfactory relations with our employees.
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K. GOVERNMENTAL REGULATION
All of our facilities, including those in the United States, are subject to
environmental laws and regulations. Compliance with these provisions has not
had, and we do not expect such compliance to have, any material adverse effect
upon our business, financial condition or results of operations.
L. RECENT SIGNIFICANT EVENTS
On October 9, 2000, Elizabeth J. Huebner joined the Company as Senior Vice
President and Chief Financial Officer.
Please see above at Item 1. Business -- B. "Background" for recent
developments regarding Art.com.
ITEM 2. PROPERTIES
Our principal executive offices and worldwide headquarters are in Seattle,
Washington. We also have a significant presence in London, England.
In Seattle, we rent approximately 121,400 square feet of office space
pursuant to four leases. Leases covering approximately 79,600 square feet, 7,000
square feet, 26,200 square feet and 8,600 square feet expire in May 2004,
September 2004, March 2003 and December 2002, respectively. We also have surplus
office space of 63,000 square feet subleased until 2003. In November 1999, we
signed a twelve-year lease for approximately 179,000 square feet of office space
in Seattle. This lease is targeted to commence in September 2001 and will serve
to consolidate our office space in Seattle.
In London, we utilize approximately 81,200 square feet of office space
pursuant to eight leases. The leases cover approximately 14,400 square feet,
23,200 square feet, 20,000 square feet, 9,700 square feet, 5,700 square feet,
3,200 square feet, 5,000 square feet and 13,000 square feet and will expire in
2015, 2010, 2008, 2014, 2002, 2002, 2002 and 2010, respectively. We also own one
freehold property of approximately 8,000 square feet in London. We are
continuing to consolidate our office space in London and to attempt to dispose
of surplus office space.
In addition, we lease office space for our wholly owned offices throughout
the world in key business centers.
Our existing facilities are adequate and appropriate for our operations.
ITEM 3. LEGAL PROCEEDINGS
On September 14, 1999, Chanelle Desautels filed a lawsuit in the Supreme
Court of the State of New York against EyeWire, Inc. and various other
defendants alleging unauthorized use and publication of a photograph of Ms.
Desautels. The plaintiff sought approximately $8.0 million in damages. In
November 2000, the parties to the lawsuit agreed to a settlement of the matter
and subsequently entered into a settlement agreement pursuant to which the
plaintiff dismissed the lawsuit. Superstock, Inc., the original provider of the
photograph, has agreed to indemnify us against all claims in this lawsuit
pursuant to agreements dated June 10, 1997 and May 1, 2000.
On June 4, 1999, Charles Mason filed a lawsuit in U.S. District Court for
the Southern District of New York against TIB alleging breach of contract for
failure to return a number of transparencies (original photographic images)
after termination of an exclusive agency agreement with Mr. Mason, a
photographer. The plaintiff sought approximately $2.8 million in damages. In
April 2000, we entered into a settlement agreement with the plaintiff and as a
result the lawsuit was dismissed. Under the terms of the purchase agreement we
entered into to acquire TIB in November 1999, Eastman Kodak Company, the prior
sole shareholder of TIB, agreed to indemnify us from and against all of the
claims made by Mr. Mason.
We have been, and may continue to be, subject to legal claims from time to
time in the ordinary course of our business, including those related to alleged
infringement of the trademarks and other intellectual property rights of third
parties, such as the failure to secure model and property releases. We have
accrued a liability
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and charged operations for the estimated costs of settlement or adjudication of
asserted and unasserted claims prior to the balance sheet date. Presently, there
are no pending legal proceedings to which we are a party or to which any of our
property is subject which, either individually or in the aggregate, are expected
to have a material adverse effect on our consolidated financial position,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders, through
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"GETY." The following table sets forth, for each of the quarterly periods
indicated, the high and low sale prices of our common stock as reported on the
Nasdaq National Market.
HIGH LOW
------- -------
Year Ended December 31, 1999
First Quarter............................................ $25.125 $15.875
Second Quarter........................................... 30.500 17.000
Third Quarter............................................ 26.625 16.250
Fourth Quarter........................................... 56.125 18.125
Year Ended December 31, 2000
First Quarter............................................ 64.375 35.500
Second Quarter........................................... 45.375 25.000
Third Quarter............................................ 44.000 27.750
Fourth Quarter........................................... 37.375 21.250
On March 1, 2001, the closing market price of our common stock as reported
on the NASDAQ National Market was $26.25 per share.
There were approximately 180 holders of record of our common stock as of
March 1, 2001.
We have not paid or declared any dividends on our common stock since our
inception and anticipate that we will retain our future earnings to finance the
continuing development of our business. The payment of any future dividends will
be at the discretion of our board of directors and will depend upon, among other
things, future earnings, the success of our business activities, regulatory and
capital requirements, our general financial condition and general business
conditions. In addition, our senior credit facility restricts our ability to pay
future dividends. Our board of directors does not expect to declare cash
dividends on our common stock in the near future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, our consolidated financial
statements and notes thereto included in Item 14(A) and the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7. Historical results are not indicative of the
results to be expected in the future.
GETTY
COMMUNICATIONS PLC
GETTY IMAGES, INC. (PREDECESSOR COMPANY)
-------------------------------- ---------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998(1) 1997 1996
---------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales...................................... $ 484,846 $247,840 $185,084 $100,797 $ 85,014
Income/(loss) before income taxes.......... (164,151) (69,493) (32,873) 7,895 5,710
Net income/(loss).......................... (169,334) (67,833) (36,383) 4,022 2,728
========== ======== ======== ======== ========
Income/(loss) per share before
extraordinary item
Basic.................................... $ (3.41) $ (1.94) $ (1.22) $ 0.11 $ 0.10
Diluted.................................. (3.41) (1.94) (1.22) 0.10 0.10
Net income/(loss) per share
Basic.................................... (3.40) (1.94) (1.25) 0.11 0.10
Diluted.................................. (3.40) (1.94) (1.25) 0.10 0.10
Shares used in computing per share amounts
Basic.................................... 49,708 35,049 29,160 37,908 27,442
Diluted.................................. 49,708 35,049 29,160 38,765 27,832
========== ======== ======== ======== ========
OTHER OPERATING DATA:
EBITDA(2).................................. $ 94,416 $ 34,998 $ 35,350 $ 19,347 $ 15,608
EBITDA per basic share..................... $ 1.90 $ 1.00 $ 1.21 $ 0.51 $ 0.57
Ratio of earnings to fixed charges(3)...... N/A N/A N/A 4.16 3.07
Deficiency of earnings to fixed
charges(4)............................... $ 164,151 $ 69,493 $ 32,873 $ -- $ --
========== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
Total assets............................... $1,100,636 $939,569 $462,863 $171,638 $163,504
Long-term debt, net of current
maturities............................... 274,427 101,802 72,354 14,657 17,910
========== ======== ======== ======== ========
- ---------------
(1) Reflects the combination of the consolidated statement of operations of
Getty Communications plc, our predecessor company, for the period January 1,
1998 through February 9, 1998 and the Company's consolidated statement of
operations for the period February 10, 1998 through December 31, 1998.
(2) "EBITDA" is defined as earnings before income taxes, depreciation,
amortization, interest, exchange gains/(losses), and when applicable, loss
on impairment, debt conversion expense, integration and restructuring costs,
extraordinary items and other income and expenses. Thus, EBITDA with respect
to us comprises sales less cost of sales and selling, general and
administrative expenses. We believe 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 our
operating performance. EBITDA should not be considered as an alternative to
operating income as an indicator of our operating performance or to cash
flows as a measure of our liquidity. EBITDA may not be comparable to other
similarly titled measures used by other companies.
(3) 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 related to debt and an
allocation of rental charges to approximate equivalent interest.
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(4) Due to the losses in 2000, 1999 and 1998, the ratio of earnings to fixed
charges was less than 1:1. The Company must generate additional earnings in
the amounts indicated in the table to achieve a ratio of 1:1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with our consolidated financial
statements and the notes thereto, Item 6. "Selected Consolidated Financial
Data," and the other financial information contained elsewhere and incorporated
by reference in this Annual Report. In the following discussion, "we," "us" and
"our" refer to Getty Communications plc for 1996 and 1997, Getty Communications
plc combined with Getty Images, Inc. and subsidiaries (the Company) for 1998,
and the Company for 1999 and 2000.
In addition to historical information, the discussion in this section may
contain certain forward-looking statements that involve risks and uncertainties.
The forward-looking statements relate to, among other things, operating results,
trends in sales, gross profit, operating expenses, effective tax rates,
anticipated expenses and liquidity and capital resources. Our actual results
could differ materially from those anticipated by these forward-looking
statements due to factors including, but not limited to, those set forth under
Item 1. Business -- I. "Factors That May Affect The Business."
OVERVIEW
The Company is a leading e-commerce provider of visual content and related
products and services to businesses worldwide, distributing products digitally
via the Internet and on CD-ROMs, as well as in film transparency form. We
pioneered the solution to aggregate and distribute visual content and, since
1995, have brought many of the visual content industry's leading brands under
one centralized corporate structure. We work with more than 4,500 active,
contributing photographers and an estimated 850 cinematographers and film
producers to obtain or create our content. We control an estimated 70 million
still images and an estimated 30,000 hours of film footage.
We provide our high quality, relevant imagery to creative professionals at
advertising agencies, graphic design firms, corporations and broadcasting
companies; press and editorial customers involved in newspaper, magazine, book,
CD-ROM and online publishing; and business users and small office/home office
users. By aggregating the content of our various leading brands on the Internet
and partnering with third-party providers, we offer a comprehensive and
user-friendly solution for our customers' imagery and related product needs.
Our revenue is derived from granting rights to use images and from
providing related services. Revenue principally consists of a large number of
relatively small transactions involving granting rights to use single images,
video and film clips or CD-ROM products containing between 100 and 300 images.
We also generate revenue from subscription or bulk purchase agreements where
customers are provided access to imagery online. We use a variety of
distribution platforms, including digital distribution via the Internet and
CD-ROMs as well as analog distribution of 35mm film, video and analog
transparencies. Price is generally determined by resolution size, and the extent
of rights granted over the use of the image or clip and can vary significantly
across geographic markets and customer groups.
Our cost of sales primarily consists of commission payments to contributing
photographers and cinematographers. These suppliers are under contract with
subsidiaries of the Company and receive payments of up to 50% of the sales
value, depending on the type of product and where and how the product is sold.
We own a significant number of the images in our collections and these images do
not require commission payments. Cost of sales also includes, to the extent
applicable, shipping and handling costs for duplicate transparencies, the costs
of CD-ROM production and costs associated with framing and shipping art
products. As a result, our gross margin is impacted by the mix of sales
conducted digitally on the Internet, sales of wholly-owned imagery, geographic
distribution of sales and brand sales mix.
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ACQUISITIONS
During 2000, 1999 and 1998, the Company acquired all of the outstanding
stock of various companies in the visual content market.
VCG
On March 22, 2000, the Company acquired Visual Communications Group
Holdings, Ltd., VCG Holdings LLC, and Definitive Stock, Inc. from their parent,
Visual Communications Group B.V. (a subsidiary of United News & Media plc). The
Company also acquired Visual Communications Group Deutschland GmbH from its
parent United News & Media plc. These acquired companies are collectively
referred to as VCG, and provide stock photography, specialty image collections
and news and feature photography internationally. The total purchase price was
$226.9 million, including $204.7 million in cash, $18.7 million in debt assumed
and paid and $3.5 million in related transaction costs. Net assets of $1.1
million were acquired, as well as $25.8 million in identifiable intangibles that
are amortized over their useful lives ranging from five to 10 years. The
remaining goodwill of $200.0 million is amortized over 10 years.
Other 2000 Acquisitions
During 2000, the Company also made the following acquisitions with cash,
common stock, and/or exchangeable preferred stock exchangeable into common
stock: i/us Corporation, an Ontario corporation and provider of specialty
graphics and publishing tools to Website developers, designers and graphics
users; Cass & Cass Ltd. (d/b/a TIB-UK), the agent of The Image Bank (TIB) in the
United Kingdom; four additional TIB agents in the United States, Canada and
Sweden; and a stock photo agency in Australia. The aggregate purchase price, net
assets acquired and related goodwill, respectively, were $28.5 million, $0.6
million, and $27.9 million. The pro forma sales and net income or loss of these
acquisitions are immaterial and therefore are not included below.
Art.com
On May 4, 1999, Getty Images acquired Art.com, a leading provider of framed
and unframed art and art-related products on the Internet. The total purchase
price was $135.0 million, including $10.0 million in cash, $115.7 million in
common stock, $5.9 million related to stock options exchanged and $3.4 million
in related transaction costs. Net assets of $13.1 million were acquired, leaving
goodwill of $121.9 million to be amortized over three years. After a cash flow
analysis was performed in the fourth quarter of 2000 for Art.com and a related
business that operates as a division of Art.com, the Company determined that
long-lived assets were impaired. As such, the Company wrote off $53.4 million of
Art.com goodwill, reducing the carrying value of the remaining long-lived assets
to their estimated fair value, as determined by a third-party estimate.
The Image Bank
On November 24, 1999, the Company acquired The Image Bank (TIB), a leading
provider of visual content to the advertising design, publishing, corporate,
broadcast and editorial markets. The total purchase price was $193.3 million,
including $183.2 million in cash and $10.1 million in related transaction costs.
Net assets of $1.9 million were acquired, as well as $20.1 million in
identifiable intangibles that are amortized over their useful lives ranging from
five to 10 years. The remaining goodwill of $171.3 million is amortized over 10
years.
Other 1999 Acquisitions
During 1999, the Company also made the following acquisitions with cash,
common stock, and/or exchangeable preferred stock exchangeable into common
stock: EyeWire, a provider of royalty-free photography, video, typefaces,
software and other design resources; Online USA, an agency specializing in the
sourcing and distribution of celebrity imagery over the Internet; American Royal
Arts, a leading provider of animation art; and Newsmakers, a digital news agency
covering events, news and celebrity photography. The aggregate purchase price,
net liabilities acquired and related goodwill, respectively, were $45.1 million,
$2.7 million, and
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$47.8 million. The pro forma sales and net income or loss of these acquisitions
are immaterial and therefore are not included below.
Allsport
On February 10, 1998, the Company acquired Allsport, a worldwide sports
photography company, providing images to the sports journalism market and the
broader market of advertisers and sports promoters. The total purchase price was
$51.1 million, including $27.0 million in cash, $14.7 million in common stock,
$8.5 million related to stock options exchanged and $0.9 million in related
transaction costs. Net assets of $0.6 million were acquired, as well as $4.6
million in identifiable intangibles that are amortized over their useful lives
ranging from two to three years. The remaining goodwill of $45.9 million is
amortized over 20 years.
PhotoDisc
On February 9, 1998, the Company acquired PhotoDisc, a developer and
marketer of digital stock photography, products and electronic delivery of
images. The total purchase price was $245.7 million, including $34.1 million in
cash, $171.8 million in common stock, $29.7 million related to stock options
exchanged and $10.2 million in related transaction costs. Net assets of $3.3
million were acquired, as well as $46.4 million in identifiable intangibles that
are amortized over their useful lives ranging from two to three years. The
remaining goodwill of $196.0 million is amortized over 20 years.
Other 1998 Acquisitions
During 1998, the Company also made the following acquisitions with cash and
common stock: Energy Film Library, a provider of contemporary stock footage; and
Liaison, a provider of photographs to the photojournalism market. The aggregate
purchase price, net liabilities acquired and related goodwill, respectively,
were $26.9 million, $1.0 million, and $27.9 million. The pro forma sales and net
income or loss of these acquisitions are immaterial and therefore are not
included below.
The following unaudited pro forma information shows the Company's results
of operations for the years ended December 31, 2000, 1999 and 1998 as if the
acquisition of VCG had occurred on January 1, 1999 and as if the acquisitions of
TIB, Art.com, PhotoDisc and Allsport had occurred on January 1, 1998. The pro
forma information includes adjustments related to the financing of the
acquisitions, the effect of amortizing goodwill and other identifiable
intangibles acquired, as well as the related tax effects. The pro forma results
of operations are unaudited, have been prepared for comparative purposes only,
and do not purport to indicate the results of operations which would actually
have occurred had the combinations been in effect on the dates indicated or
those which may occur in the future (in thousands, except per share data).
YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
--------- --------- --------
(UNAUDITED)
Sales............................................ $ 504,190 $ 409,318 $263,003
Loss before extraordinary items.................. (180,504) (143,855) (93,322)
Net loss......................................... (180,120) (143,855) (94,152)
Basic and diluted net loss per share............. $ (3.62) $ (3.94) $ (2.82)
IMPAIRMENT OF LONG-LIVED ASSETS
In the fourth quarter of 2000, Art.com, a subsidiary, did not meet its
revenue targets and incurred a larger than expected loss, which led the Company
to believe an impairment of long-lived assets may exist at December 31, 2000.
After performing a cash flow analysis of Art.com and a related business that
operates as a division of Art.com, the Company determined that the long-lived
assets were impaired. As a result, the Company wrote off $53.4 million of
Art.com goodwill, reducing the carrying value of the remaining long-lived assets
to their estimated fair value, as determined by a third-party estimate. In the
first quarter of 2001, the
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Company took steps to significantly reduce costs at Art.com, including a
workforce reduction of over 50 employees, and to evaluate strategic alternatives
for the future of the businesses, including a potential sale.
RESTRUCTURING COSTS
During 1999, the Company implemented a rationalization plan as a result of
the acquisitions of TIB and Art.com. Under the approved plan, the Company
consolidated facilities, terminated employees to eliminate duplicative
functions, and canceled or modified certain contracts that would no longer
benefit the Company as a result of the restructuring. The Company accrued $7.1
million in connection with this plan.
Restructuring charges incurred under the 1999 plan consisted of $0.9
million in asset impairments, $1.8 million in facilities liabilities, $0.5
million in accrued liabilities, and $4.0 million in employee benefits. The $0.9
million in assets consisted mainly of leasehold improvements and equipment that
were no longer of use and were disposed of or abandoned. The charge to
facilities liabilities consisted of costs, mainly lease terminations, associated
with the exit of 10 sales facilities worldwide. The charge to accrued
liabilities consisted of re-negotiation or termination fees on contracts with
product and service providers. Employee benefits were accrued for 53 terminated
employees, consisting of 15 management and 38 operational staff performing
duplicative functions worldwide.
During 1998, the Company approved and implemented a plan to realign all of
its businesses worldwide to better serve the Company's major customer groups.
Major actions under the plan included exiting underutilized facilities and
consolidation of facilities, employee terminations to eliminate duplicative
functions, and the cancellation of certain contracts that would no longer
benefit the Company as a result of the restructuring. The Company accrued $10.1
million in connection with this plan.
Asset impairments of $3.2 million under the 1998 plan consisted mainly of
system assets, primarily software. The $1.4 million charge to facilities
liabilities consisted of costs, mainly lease terminations, associated with the
exit of 10 sales and distribution facilities worldwide. The $1.5 million charge
to accrued liabilities consisted of re-negotiation or termination fees on
contracts with product and service providers. Approximately $4.0 million in
employee benefits were accrued for approximately 50 terminated employees,
consisting of 10 management and 40 operational staff performing duplicative
functions worldwide.
All actions in the 1998 and 1999 plans were completed within one year of
commencement or the related accruals were reversed, with the exception of
certain agreements, such as leases, that remained in place beyond this date
while providing no economic benefit to the Company. The payments on such
agreements were charged to the restructuring accruals as they were made.
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The restructuring charges and related accruals recognized under the 1998
and 1999 plans affected the Company's consolidated financial position in the
following manner (in thousands):
PROPERTY AND FACILITIES ACCRUED ACCRUED
EQUIPMENT LIABILITIES LIABILITIES BENEFITS
------------ ----------- ----------- --------
Original 1998 plan charges............... $ 3,182 $ 1,406 $1,461 $ 4,026
Fiscal year 1998 activity:
Cash paid.............................. -- (191) (94) (3,598)
Non-cash write-downs/disposals......... (2,732) -- -- --
------- ------- ------ -------
Balance December 31, 1998................ $ 450 $ 1,215 $1,367 $ 428
Fiscal year 1999 activity:
New charges (the 1999 plan)............ $ 877 $ 1,760 $ 466 $ 3,991
Cash paid.............................. -- (768) (901) (2,974)
Non-cash write-downs/disposals......... (1,327) -- -- --
Adjustments to 1998 plan............... -- (1,052) (466) (134)
------- ------- ------ -------
Balance December 31, 1999................ $ -- $ 1,155 $ 466 $ 1,311
Fiscal year 2000 activity:
Cash paid.............................. -- (471) (38) (1,083)
Adjustments to 1999 plan............... -- (684) (428) (228)
------- ------- ------ -------
Balance December 31, 2000................ $ -- $ -- $ -- $ --
======= ======= ====== =======
INTEGRATION COSTS
Integration costs were incurred in addition to costs accrued for the 1999
and 1998 restructuring plans discussed above in the amount of $4.9 million and
$3.7 million, respectively. Major integration actions included: consulting and
other professional assistance in determining what functions and facilities
should be combined; the review of processes and resultant actions to implement
processes that would benefit the fully-integrated company going forward;
contract re-negotiations and terminations; and the assessment of the
compatibility of the Company's images across its brands after multiple
acquisitions. These actions and related costs were determined not to be within
the scope of Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," as they were not incurred as a direct result of the formal
restructuring plans identified above. As such, these costs were expensed as
incurred and were included on the integration costs line of the Consolidated
Statements of Operations.
Subsequent to the VCG acquisition in 2000, management determined that
further integration of the Company's operations and facilities was necessary to
eliminate duplicate facilities and combined functions and to take advantage of
opportunities for further leveraging cost and technology platforms. Actions
included: the termination of approximately 210 employees; the review of
processes and resultant actions to implement processes that would benefit the
fully-integrated company going forward; abandonment of 23 sales facilities;
consulting and other professional assistance in determining what functions and
facilities were needed; and contract re-negotiations and terminations. These
actions and related $18.6 million in costs were also determined not to be within
the scope of EITF 94-3, as they were not incurred as a direct result of a formal
restructuring plan. As such, these costs were expensed as incurred and were
included on the integration costs line of the Consolidated Statements of
Operations. Additional employee terminations are expected to take place through
the end of the second quarter of 2001 in connection with this integration.
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A summary of integration costs and how they impacted the Company's Consolidated
Results of Operations is as follows (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------ ------
Employee termination costs.............................. $ 6,622 $ -- $ --
Facilities exit costs................................... 3,621 -- --
Process integration costs............................... 3,593 1,436 1,891
Consulting and professional fees........................ 2,899 630 1,167
Contract re-negotiation/termination costs............... 1,662 2,494 622
Other................................................... 240 323 --
------- ------ ------
$18,637 $4,883 $3,680
======= ====== ======
DEBT CONVERSION EXPENSE
In 2000, we incurred debt conversion expense of $6.7 million related to
premiums paid when we induced the early retirement of approximately $62.3
million of our then outstanding $75.0 million of 4.75% convertible subordinated
notes due 2003.
EXTRAORDINARY ITEMS
In January 2000, a subsidiary of the Company retired $3.3 million of debt
at a discount prior to maturity. This resulted in an extraordinary gain of $0.4
million, net of income taxes of $0.3 million, or $0.01 per share.
In May 1998, the Company completed the issuance of $75.0 million, 4.75%
convertible subordinated notes due 2003. A portion of the proceeds was used to
repay $49.0 million of term debt, due to HSBC Bank plc (formerly Midland Bank
plc), prior to maturity. This early repayment resulted in an extraordinary
charge of $0.8 million, net of an income tax benefit of $0.4 million, or $0.03
per share, resulting principally from the write-off of unamortized loan costs.
RESULTS OF OPERATIONS
The Company recognized a net loss of $169.3 million or $3.40 per share for
the year ended December 31, 2000, as compared to net losses of $67.8 million or
$1.94 per share in 1999 and $36.4 million or $1.25 per share in 1998. Excluding
the effects of extraordinary items discussed above, the Company recognized net
losses of $169.7 million or $3.41 per share for 2000 and $35.6 million or $1.22
per share for 1998. There were no extraordinary items recorded in 1999.
Below are selected financial highlights of the Company's results of
operations for the years shown:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
2000 % OF SALES 1999 % OF SALES 1998 % OF SALES
--------- ---------- --------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
STATEMENT OF OPERATIONS
DATA:
Sales....................... $ 484,846 100.0% $ 247,840 100.0% $185,084 100.0%
Gross profit................ 344,181 71.0 180,576 72.9 132,254 71.5
Selling, general and
administrative expense.... (249,765) (51.5) (145,578) (58.7) (96,904) (52.4)
Amortization of intangibles
and depreciation.......... (168,139) (34.7) (90,000) (36.3) (51,358) (27.7)
Interest expense, net....... (11,665) (2.4) (4,585) (1.8) (2,986) (1.6)
Income tax
(expense)/benefit......... (5,567) (1.1) 1,660 0.7 (2,680) (1.4)
Net loss.................... (169,334) (34.9) (67,833) (27.4) (36,383) (19.7)
========= ===== ========= ===== ======== =====
OTHER OPERATING DATA:
EBITDA...................... $ 94,416 19.5% $ 34,998 14.1% $ 35,350 19.1%
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2000 RESULTS OF OPERATIONS COMPARED TO 1999 RESULTS OF OPERATIONS
Sales
Consolidated sales of $484.8 million for 2000 grew $237.0 million or 96%
over sales of $247.8 million in 1999. This growth was experienced mainly in
sales to customers in North America and Europe, which increased $149.7 million
or 108% and $79.0 million or 84%, respectively.
Sales growth in 2000 was realized across all brands, particularly VCG,
Stone, TIB Stills and Film, which grew $57.8 million, $42.8 million, $34.8
million and $26.9 million, respectively. Sales in VCG, TIB Stills and Film
increased mainly due to significantly lower or no sales in the prior year due to
acquisition of these companies late in 1999 or in 2000. Stone, a worldwide
provider of contemporary stock photography, experienced organic growth due
mainly to increased customer usage of e-commerce as a means of selecting and
taking delivery of images. The increase in Stone revenues was primarily volume
based but does reflect the effects of price increases.
Gross Profit and Gross Margin
The Company's gross profit and gross margin were $344.2 million and 71.0%,
respectively, for the year ended December 31, 2000, as compared to gross profit
and gross margin of $180.6 million and 72.9%, respectively, for the same period
in 1999. The decrease in gross margin in the current year was due to lower gross
margins at VCG, acquired in March, 2000, and at Art.com. The decrease was
partially offset by increases resulting from a continuing sales mix shift to
web-based sales and a higher sales mix of wholly-owned imagery. As stated above,
management is taking action to improve the cost structure of Art.com and
evaluating strategic alternatives for its future, including a potential sale. As
such, management does not expect gross margins going forward to decline further
as a result of these negative factors.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $249.8 million or 51.5%
of sales in 2000, as compared to $145.6 million or 58.7% of sales in 1999. The
majority of the dollar increase was due to the inclusion of TIB-UK, VCG and TIB
in the consolidated results of operations from the dates of acquisition.
Additional contributing factors included advertising and marketing expenses
associated with new Websites, increased investment in management and new sales
offices, and costs associated with the development of new technology products
and new business systems, particularly those related to e-commerce, that were
not capitalized. Selling, general and administrative expenses declined as a
percentage of sales over the same period due to operational efficiencies gained
through our restructuring and integration efforts. During 2000, we closed 15
offices and eliminated over 400 positions.
The Company is committed to managing its selling, general and
administrative expenses as it continues to integrate and consolidate its
businesses and implement new and standardized business systems. As customers
increasingly move towards digital image search, retrieval and payment, we plan
to streamline our support operations. We are also consolidating our offices and
other premises throughout the world as part of the integration of our existing
and acquired businesses. As such, management does not expect organic selling,
general and administrative expenses to grow substantially over the next year.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
For the Company, EBITDA is defined as earnings before interest, income
taxes, depreciation and amortization, as well as exchange gains/(losses), loss
on impairment of long-lived assets, debt conversion expenses, integration and
restructuring costs, extraordinary items and other income and expenses, when
applicable. This figure can more easily be calculated as gross profit less
selling, general and administrative expenses in the years presented. The Company
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 its operating performance. EBITDA should not,
however, be considered as an alternative to operating income as an indicator of
our operating performance or to cash flows as a measure of our liquidity.
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EBITDA for 2000 was $94.4 million or 19.5% of sales, an increase of 170%
over EBITDA of $35.0 million or 14.1% of sales for 1999. Our continued drive to
integrate our businesses resulted in a significant increase in the EBITDA margin
in 2000, as selling, general and administrative expenses declined as a
percentage of sales.
Amortization of Intangibles and Depreciation
Amortization of intangibles increased to $118.7 million in 2000 from $64.3
million in 1999 due to the inclusion of intangible assets arising from
additional acquisitions. The amortization of intangibles will result in
substantial charges against our earnings in future periods, including
approximately $72.0 million and $71.0 million in 2001 and 2002, respectively,
based on unamortized balances at December 31, 2000. Any additional acquisitions
involving intangibles could materially increase these amounts.
Depreciation expense increased to $49.5 million in 2000 from $25.7 million
in 1999. The increase was primarily related to business acquisitions in 2000 and
1999, together with increased capital expenditures related to the continued
development of technology assets related to our web-based sales strategy and an
increase in our capitalized costs of image digitization. We expect depreciation
expense in 2001 and beyond to continue to increase as a result of these
increased investments.
Net Interest Expense
Net interest expense totaled $11.7 million in 2000 and $4.6 million in
1999. We incurred interest expense of $15.8 million and $5.5 million in 2000 and
1999, respectively, on increased long-term borrowings. This interest expense was
offset in part by interest income of $4.1 million and $0.9 million earned on our
invested cash and cash equivalents in 2000 and 1999, respectively.
Income Taxes
The Company recorded income tax expense of $5.6 million in 2000 as compared
to a benefit of $1.7 million in 1999. Excluding the effect of the amortization
of intangibles, debt conversion expense and the loss on impairment of long-lived
assets, which are largely non-tax deductible, the Company's effective tax rates
were 39.2% and 39.4% in 2000 and 1999, respectively. Fluctuations in the
effective tax rate were due to variations in the profit mix and tax rates in the
countries in which we operated, as well as the effect of debt conversion costs
and loss on impairment of long-lived assets that were not fully tax deductible.
As of December 31, 2000, the Company had net deferred tax assets of $49.7
million. Although realization is not assured, management believes, based on its
current expectations and tax planning strategies, that it is more likely than
not that the net deferred tax assets will be realized.
1999 RESULTS OF OPERATIONS COMPARED TO 1998 RESULTS OF OPERATIONS
Sales
Our total sales for 1998 and 1999 were $185.1 million and $247.8 million,
respectively, representing an increase of 33.9% in 1999 over the prior year. The
increase was largely attributable to the continued growth of our base
businesses, acquisitions (we acquired PhotoDisc and Allsport in February 1998,
Art.com in May 1999, EyeWire in August 1999 and TIB in November 1999) and growth
in e-commerce sales. We experienced an increase in the rate of demand for both
analog and digital, search, selection and fulfillment of imagery during 1999,
particularly in North America.
Gross Profit and Gross Margin
Gross profit as a percentage of sales, or gross margin, increased
sequentially from 71.5% in 1998 to 72.9% in 1999. This result reflects the
increasing shift in sales mix to e-commerce with its lower cost of sales, as
well as continuing changes in our sales mix at the brand level.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses were $96.9 million and $145.6
million in 1998 and 1999, respectively, representing 52.4% and 58.7% of sales in
each respective year. The principal factors contributing to increases in the
dollar amounts of selling, general and administrative expenses during 1999 were
the inclusion of acquisitions in our consolidated financial results (Allsport
and PhotoDisc from February 1998, Art.com from May 1999, EyeWire from August
1999 and TIB from November 1999), accelerated investment in advertising and
marketing costs associated with the new Websites, increased investment in
management and new sales offices, and the development of new technology products
and new business systems, particularly those related to e-commerce, that were
not capitalized.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA for 1998 and 1999 was $35.4 million and $35.0 million, respectively,
representing a decrease of 1.0% in 1999 from the prior year. The slight decline
in EBITDA in 1999 was primarily attributable to our investment in Art.com and
American Royal Arts. Our EBITDA in 1999, excluding Art.com and American Royal
Arts, was positively impacted by our overall growth, including growth through
acquisitions, the growth in e-commerce sales, the increasing sales mix of
wholly-owned imagery, as well as operating efficiencies. EBITDA as a percentage
of sales decreased from 19.1% in 1998 to 14.1% in 1999.
Amortization of Intangibles and Depreciation
Amortization of intangibles was $37.0 million in 1998 and $64.3 million in
1999. The increase in amortization arose from the inclusion of amortization of
goodwill relating to the acquisitions of PhotoDisc and Allsport in February
1998, Art.com in May 1999, EyeWire in August 1999 and TIB in November 1999.
Depreciation increased from $14.4 million in 1998 to $25.7 million in 1999.
The increase primarily arose from acquisitions together with increased
investment in capital expenditures related to the continued development of our
e-commerce strategy.
Income Taxes
Our 1998 income tax expense was $2.7 million as compared to a tax benefit
of $1.7 million in 1999. Excluding the effect of the amortization of
intangibles, which is largely non-tax deductible, we had an effective tax rate
of 38.0% in 1998 and 39.4% in 1999. The changes in the effective rate of tax,
excluding the impact of the amortization of intangibles, were due to variations
in the profit mix and tax rates in the countries in which we operated and
integration and restructuring costs, which were not all fully tax deductible.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company held $65.9 million in cash and cash
equivalents, as well as bank credit facilities totaling $100.0 million, of which
$80.0 million was unused.
At December 31, 2000, the Company's working capital was $61.4 million, a
decrease of $55.6 million from working capital of $117.0 million at the end of
1999. Current assets decreased $5.0 million during 2000, with decreases in cash
and cash equivalents, offset in part by increases in other current assets.
Current liabilities increased $50.6 million during 2000, with the current
portion of long-term debt decreasing and other current liabilities increasing.
Cash and cash equivalents decreased $39.5 million during 2000. Significant
uses of cash included $232.9 million for business acquisitions, $78.6 million in
capital expenditures, $12.7 million in the repayment of long-term debt, and
approximately $10.8 million in interest payments. Significant cash inflows
included $250.0 million in proceeds from the issuance of long-term debt, $20.0
million in proceeds from the issuance of common stock and $37.7 million in cash
provided by operating activities.
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Management expects capital expenditures to approximate $75.0 million in
2001 and $60.0 million in 2002. Debt repayments on currently outstanding debt
will be insignificant until the Company's bank loans become due in 2002,
contributing to total long-term debt repayment in that year of approximately
$20.0 million. Interest payments, based on the borrowings outstanding as of
December 31, 2000, are expected to approximate $15.0 million in 2001. Existing
cash balances and cash flows provided by operating activities and borrowing
capacity are expected to be sufficient to fund operations, capital expenditures
and long-term debt requirements for at least the following 12 months. However,
we continue to seek opportunities to grow both organically and by acquisition.
Accordingly, we may be required, or we may elect, to raise additional funds
through debt or equity offerings in addition to the sources mentioned above to
finance acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," subsequently amended by SFAS No.
137 and No. 138, and required to be adopted for years beginning after June 15,
2000. This statement will require recognition of all derivatives as either
assets or liabilities on the balance sheet at fair value. The Company will adopt
the statement effective January 1, 2001 and does not anticipate that the
adoption will have a significant effect on the results of operations or
financial position of the Company.
The Securities and Exchange Commission's Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition," was adopted in the fourth quarter of 2000.
Implementation of this SAB had no effect on our results of operations or
financial position.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of market risks, primarily related to
changes in interest rates and foreign currency rates.
INTEREST RATE RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our debt instruments, the majority of which are fixed rate
borrowings. The book value and respective fair values are shown in the table
below:
MATURITIES FAIR VALUE FAIR VALUE
--------------------------------------- DECEMBER 31, DECEMBER 31,
DEBT 2002 2003 2007 TOTAL 2000 1999
---- ------- ------- -------- -------- ------------ ------------
(IN THOUSANDS EXCEPT PERCENTAGES)
Fixed rate (USD)................. $ -- $12,653 $250,000 $262,653 $208,104 $135,469
Average interest rate............ -- 4.75% 5.0% 4.99% 4.99% 4.75%
Variable rate (USD).............. $20,000 -- -- $ 20,000 $ 19,003 $ 29,118
Average interest rate............ 7.40% -- -- 7.40% 7.40% 8.58%
Other borrowings................. $ 471 -- -- $ 471 $ 471 $ 3,485
Average interest rate............ 5.50% -- -- 5.50% 5.50% 0.5%
FOREIGN CURRENCY RISK
We conduct our business primarily in the United States and Europe, with
cash flows primarily denominated in U.S. dollars, Euros and pounds sterling. For
non-U.S. subsidiaries, the local currency is considered the functional currency.
For reporting purposes, assets and liabilities are translated upon consolidation
into U.S. dollars at the rate of exchange in ef