Getty Images 10Q 2001 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

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

COMMISSION FILE NUMBER: 000-23747

GETTY IMAGES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


DELAWARE (STATE OF INCORPORATION)		98-0177556 (I.R.S. EMPLOYER IDENTIFICATION NO.)

601 N. 34TH STREET
SEATTLE, WASHINGTON 98103
(206) 925-5000

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF PRINCIPAL EXECUTIVE OFFICES)

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 twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes [X] No [ ]

As of October 31, 2001 there were 51,616,459 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

GETTY IMAGES, INC. AND SUBSIDIARIES
INDEX


		PAGE NO.





PART I. FINANCIAL INFORMATION




Item 1.	Financial Statements:




	Condensed Consolidated Statements of Operations - for the quarter and nine months ended September 30, 2001 and 2000	2




	Condensed Consolidated Balance Sheets - September 30, 2001 and December 31, 2000	3




	Condensed Consolidated Statements of Stockholders’ Equity - September 30, 2001 and December 31, 2000	4




	Condensed Consolidated Statements of Cash Flows - for the nine months ended September 30, 2001 and 2000	5




	Notes to Condensed Consolidated Financial Statements	6




Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10




Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27




PART II. OTHER INFORMATION




Item 1.	Legal Proceedings	28




Item 2.	Changes in Securities and Use of Proceeds	28




Item 5.	Other Information	28




Item 6.	Exhibits and Reports on Form 8-K	28




SIGNATURE		29




EXHIBIT INDEX		30

GETTY IMAGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)


		Three months ended						Nine months ended
		September 30,						September 30,

(In thousands, except per share amounts)		2001			2000			2001			2000

Sales		$	107,505		$	126,998		$	349,148		$	355,470
Cost of sales			27,941			37,481			95,888			105,087

	Gross profit		79,564			89,517			253,260			250,383
Selling, general and administrative expenses			57,792			62,078			180,229			186,646
Amortization of intangible assets			18,546			30,654			55,816			87,101
Depreciation			14,676			12,221			42,168			34,713
Integration and restructuring costs and loss on impairment of assets			4,776			3,891			18,094			12,640

	Loss from operations		(16,226	)		(19,327	)		(43,047	)		(70,717	)
Interest expense			(4,244	)		(4,446	)		(12,934	)		(11,268	)
Interest income			540			995			1,729			3,302
Debt conversion expense			—			—			—			(6,689	)
Exchange losses, net			(618	)		(210	)		(1,315	)		(983	)
Other expense, net			(227	)		(46	)		(84	)		(59	)
Loss on impairment of investments			—			—			(4,224	)		—

	Loss before income taxes and extraordinary item		(20,775	)		(23,034	)		(59,875	)		(86,414	)
Income tax (expense) benefit			2,541			(3,322	)		3,350			(2,937	)

	Loss before extraordinary item		(18,234	)		(26,356	)		(56,525	)		(89,351	)
Extraordinary item, net of tax			—			—			—			384

Net loss		$	(18,234	)	$	(26,356	)	$	(56,525	)	$	(88,967	)

Loss per share before extraordinary item — basic and diluted		$	(0.35	)	$	(0.52	)	$	(1.09	)	$	(1.77	)
Extraordinary item			—			—			—			0.01

Net loss per share — basic and diluted		$	(0.35	)	$	(0.52	)	$	(1.09	)	$	(1.76	)

Weighted-average shares outstanding — basic and diluted			51,870			50,417			51,653			50,485

The accompanying notes are an integral part of these condensed consolidated financial statements.

GETTY IMAGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)


				September 30,			December 31,
(In thousands)				2001			2000

ASSETS
	Current assets
		Cash and cash equivalents		$	38,976		$	65,894
		Accounts receivable, net			81,610			84,771
		Inventories, net			3,924			7,616
		Prepaid expenses			10,733			7,277
		Deferred catalog costs			14,967			17,998
		Deferred income taxes, net			6,100			6,082
		Other current assets			20,221			14,387

			Total current assets		176,531			204,025
	Property and equipment, net				153,711			140,793
	Intangible assets, net				654,336			707,408
	Investments				516			4,751
	Deferred income taxes, net				43,514			43,659

			Total assets	$	1,028,608		$	1,100,636

LIABILITIES AND STOCKHOLDERS’ EQUITY
	Current liabilities
		Accounts payable		$	57,190		$	74,216
		Accrued expenses			48,519			51,424
		Income taxes payable			8,126			16,283
		Current portion of long-term debt			566			739

			Total current liabilities		114,401			142,662
	Long-term debt				275,420			274,427

			Total liabilities		389,821			417,089

	Commitments and contingencies
	Stockholders’ equity
		Preferred stock			—			—
		Common stock			516			508
		Exchangeable preferred stock			2			5
		Additional paid-in capital			967,344			957,108
		Accumulated deficit			(321,951	)		(265,426	)
		Accumulated other comprehensive loss			(7,124	)		(8,648	)

			Total stockholders’ equity		638,787			683,547

			Total liabilities and stockholders’ equity	$	1,028,608		$	1,100,636

The accompanying notes are an integral part of these condensed consolidated financial statements.

GETTY IMAGES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(unaudited)


				Number of
		Number of		shares of
		shares of		exchangeable													Accumulated
		common stock,		preferred					Exchangeable			Additional					other
		$0.01 par		stock, no			Common		preferred			paid-in		Accumulated			comprehensive
(In thousands)		value		par value			stock		stock			capital		deficit			loss			Total

Balance at December 31, 2000			50,806		534		$	508	$	5		$	957,108	$	(265,426	)	$	(8,648	)	$	683,547
Net loss			—		—			—		—			—		(56,525	)		—			(56,525	)
Translation adjustment			—		—			—		—			—		—			1,524			1,524

	Comprehensive loss																				(55,001	)

Stock options exercised			462		—			5		—			6,561		—			—			6,566
Stock options accelerated			—		—			—		—			56		—			—			56
Tax benefit from employee stock option exercises			—		—			—		—			1,161		—			—			1,161
Issuance of shares for acquisition of assets and business			82		—			—		—			2,458		—			—			2,458
Exchange of shares			262		(262	)		3		(3	)		—		—			—			—

Balance at September 30, 2001			51,612		272		$	516	$	2		$	967,344	$	(321,951	)	$	(7,124	)	$	638,787

The accompanying notes are an integral part of these condensed consolidated financial statements.

GETTY IMAGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


		Nine months ended
		September 30,

(In thousands)		2001			2000

CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities		$	23,994		$	22,331

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired			(736	)		(244,649	)
Acquisition of property and equipment			(58,611	)		(57,389	)
Acquisition of intangibles			(1,745	)		—
Proceeds from the sale of long-lived assets			2,495			—
Cash paid for security deposit on lease			—			(2,139	)
Other, net			—			293

	Net cash used in investing activities		(58,597	)		(303,884	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt			—			250,000
Proceeds from the issuance of common stock			6,566			17,809
Payment of debt issuance costs			—			(8,429	)
Payment of debt conversion costs			—			(6,689	)
Repayment of debt			(485	)		(12,650	)
Other, net			—			(904	)

	Net cash provided by financing activities		6,081			239,137

Effect of exchange rate differences			1,604			(773	)

Net decrease in cash and cash equivalents			(26,918	)		(43,189	)
Cash and cash equivalents at beginning of period			65,894			105,356

Cash and cash equivalents at end of period		$	38,976		$	62,167

NON-CASH INVESTING AND FINANCING ACTIVITIES
Conversion of notes to common stock, net of issuance costs		$	—		$	60,421
Acquisition of assets and businesses for common stock			2,458			15,636

The accompanying notes are an integral part of these condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

The condensed consolidated financial statements and notes have been prepared by the company without audit. Certain information and footnote disclosures normally included in annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America (U.S.), have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. Management believes that the condensed statements include all necessary adjustments, which are of a normal and recurring nature and are adequate to present results of operations, financial position and cash flows for the interim periods. Significant intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year’s presentation with no effect on previously reported losses. The condensed information should be read in conjunction with the financial statements and notes incorporated by reference in the company’s latest annual report on Form 10-K.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the revenues and expenses reported during the period. Actual results may vary from those estimates.

EARNINGS PER SHARE

Basic earnings per share is calculated based upon the weighted-average number of shares outstanding during each period. For the periods in which the company incurred a net loss, diluted earnings per share were calculated based on the same shares as basic earnings per share. All stock options and convertible securities are excluded from the computation because of their antidilutive effect.

ACCOUNTS RECEIVABLE AND PROVISIONS FOR DOUBTFUL ACCOUNTS

Accounts receivable represent trade receivables, net of provisions for doubtful accounts. The provision for doubtful accounts recorded during the three months ended September 30, 2001 and September 30, 2000 was $1.4 million and $1.7 million, respectively. The provision for doubtful accounts recorded during the nine months ended September 30, 2001 and September 30, 2000 was $2.2 million and $4.1 million, respectively.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation of approximately $181.0 million and $147.6 million at September 30, 2001 and December 31, 2000, respectively.

INTANGIBLE ASSETS

Intangible assets consist principally of goodwill, which represents the excess of the purchase price and related costs over the fair value of net assets acquired in business combinations. Intangible assets are amortized on a straight-line basis over their estimated lives, ranging from three to 30 years.


		September 30,		December 31,
(In thousands)		2001		2000

Goodwill		$	767,537	$	769,475
Other intangibles			102,639		98,255

			870,176		867,730
Less accumulated amortization			215,840		160,322

	Net intangible assets	$	654,336	$	707,408

ACCRUED ACQUISITION COSTS

Included in the net assets of Visual Communications Group (VCG) that were acquired in March of 2000 were accrued costs of $5.8 million related to plans to exit activities and to terminate or relocate employees of VCG. These costs were recognized as liabilities and were included in the allocation of the acquisition cost. During 2000 and the first three quarters of 2001, the company paid cash of $3.1 million and $1.3 million, respectively, in connection with actions taken. Accrued costs of $1.4 million remain at September 30, 2001, consisting mainly of costs under lease agreements that no longer benefit the company and that will be paid and charged against the accruals in future periods.

Included in the net assets of The Image Bank, Inc. (TIB) that were acquired in November of 1999 were accrued costs of $3.2 million related to plans to exit activities and to terminate or relocate employees of TIB. These costs were recognized as liabilities and were included in the allocation of the acquisition cost. During 2000, the company increased these accrued costs by $1.5 million in conjunction with modifications of the plans. During 2000 and the first three quarters of 2001, the company paid cash of $3.5 million and $1.1 million, respectively, in connection with actions taken. Accrued costs of $0.1 million remain at September 30, 2001, consisting mainly of costs under lease agreements that no longer benefit the company and that will be paid and charged against the accruals in future periods.

INTEGRATION COSTS AND LOSS ON IMPAIRMENT OF ASSETS

In 1999, the company commenced integration of all of the company’s businesses after the acquisition of TIB and Art.com. Integration actions taken in the third quarter of 2000 and the related costs were as follows: $3.0 million for the review of processes and resultant actions to implement processes that would benefit the fully-integrated company going forward; $0.6 million for contract re-negotiations and terminations; and $0.3 million for consulting and other professional assistance in determining what functions and facilities should be combined. Integration actions taken in the first three quarters of 2000 and the related costs were as follows: $9.5 million for the review of processes and resultant actions to implement processes that would benefit the fully-integrated company going forward; $1.8 million for contract re-negotiations and terminations; and $1.4 million for consulting and other professional assistance in determining what functions and facilities should be combined. These costs were expensed as incurred during the three and nine months ended September 30, 2000.

and resultant actions to implement processes that would benefit the fully-integrated company going forward; $0.2 million for consulting and other professional assistance in determining what functions and facilities should be combined; and $0.1 million for asset impairments. These actions were completed, and the related costs were expensed as incurred during the quarter ended March 31, 2001.

On May 17, 2001, the company terminated the operations of one of its subsidiaries, Art.com, a provider of framed and unframed art and art-related products on the Internet. In connection with this event, the company recorded integration costs of approximately $1.9 million during the second quarter of 2001, including severance costs and costs to terminate the operations and exit the facilities of Art.com, as well as a loss on the impairment of related assets of $6.5 million.

During the second quarter of 2001, the company also recorded integration costs of $0.9 million, including severance costs and facilities exit costs, relating primarily to the planned closure of a Canadian office and consolidation of those operations into other offices.

RESTRUCTURING COSTS

During the third quarter of 2001, management announced that in response to further weakening in the U.S. and global markets served by Getty Images, the company would reduce its workforce by approximately 300 people worldwide and across multiple functions by the end of the third quarter. The company recorded $4.5 million in restructuring costs for a planned 320 employee terminations once management had committed the company to a formal plan of termination and had communicated to all employees the benefit arrangement they would receive if terminated. The company also incurred $0.3 million in other related restructuring costs.

As of September 30, 2001, 280 employees had been terminated and $3.4 million in termination costs had been paid. The remaining 40 employees will exit the company by the end of the first quarter of 2002. Management expects staff cost reduction of approximately $15 to $20 million per year when all planned employee terminations have been completed.

DEBT CONVERSION EXPENSE

In March 2000, the company redeemed $62.3 million of the then outstanding $75.0 million of 4.75% convertible subordinated notes, and issued 2,187,034 shares of the company’s common stock in redemption of such notes. In connection with the redemption, the company paid the note holders a cash premium of approximately $6.7 million. This premium is included in the Condensed Consolidated Statement of Operations as debt conversion expense. The carrying value of the converted debt, net of issuance costs of $1.9 million, was credited to common stock and additional paid-in capital.

LOSS ON IMPAIRMENT OF INVESTMENTS

During the second quarter of 2001, the company wrote off its minority investment in two small private companies after analyses showed that they suffered other than temporary declines in fair value. The total of these two impairment charges was $4.2 million.

EXTRAORDINARY ITEM

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.

BUSINESS SEGMENTS AND GEOGRAPHIC AREAS

As a provider of visual content, the company operates in one business segment. Due to the nature of the operations of the company, sales are made to a diverse client base and there is no reliance on a single customer or group of customers. Sales are reported in the geographic area where they originate. Sales to customers by geographic area, which are subject to the impact of translation differences and therefore are not necessarily reflective of the relative performance of individual areas, are summarized below:


		Three months ended				Nine months ended
		September 30,				September 30,

(In thousands)		2001		2000		2001		2000

United States		$	46,168	$	62,120	$	157,314	$	181,038
United Kingdom			15,027		16,617		48,608		50,565
Canada			11,187		10,426		34,804		30,220
Rest of world			35,123		37,835		108,422		93,647

	Total sales	$	107,505	$	126,998	$	349,148	$	355,470

INCOME TAXES

The estimated annual tax rate used to calculate the income tax benefit for the first three quarters of 2001 was 39.2% on losses before permanent differences, including amortization of goodwill and a valuation allowance associated with the loss on impairment of investments, while the rate used to calculate the income tax expense for the first three quarters of 2000 was 39.6% on income before similar items.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2001, the company adopted Statement of Financial Accounting Standards (SFAS) 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS 137 and 138, which requires recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The adoption of this statement did not have a significant impact on the results of operations, financial position or cash flows of the company.

Effective July 1, 2001, the company adopted SFAS 141,Business Combinations. This statement requires the use of the purchase method of accounting for all new business combinations, requires that intangible assets be recorded separate from goodwill only if they are contractual or legal rights or if they are separable, and requires additional disclosures. The adoption of this statement does not affect the company’s reported results of operations, financial position or cash flows. The statement does, however, more narrowly define identifiable intangible assets, thus limiting the allocation of purchase price on future acquisitions to such intangibles and expanding the allocation of purchase price to goodwill. This will have the effect of decreasing future amortization expense.

Effective January 1, 2002, the company will adopt SFAS 142,Goodwill and Other Intangible Assets.This pronouncement will change the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease. Initial impairment tests are required to be completed by the end of the first quarter of 2002 for intangible assets and by the end of 2002 for goodwill. Any loss resulting from these initial impairment tests will be recognized as the effect of a change in accounting principle. Annual impairment tests are required every year thereafter, with any impairment recognized as a loss on impairment of assets. Management has not yet completed an evaluation of the effects this standard will have on the company’s consolidated financial statements. However, amortization of intangibles will be significantly lower in 2002 than in prior periods, and the company could incur significant charges as a result of the impairment tests.

Effective January 1, 2002, the company will adopt SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets. This pronouncement requires one model for accounting for long-lived assets to be disposed of and broadens the presentation of discontinued operations to include more transactions. This accounting pronouncement does not immediately impact the company, however, it could cause any future long-lived asset disposals to be accounted for or presented in a different manner than in the past.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto and other financial information contained elsewhere and incorporated by reference in this report on Form 10-Q, including our annual report on Form 10-K. In the following discussion, “we,” “us,” “our” and “the company” refer to Getty Images, Inc. and its consolidated subsidiaries.

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 Quarterly Report on Form 10-Q 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, capital expenditures, 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 under “FACTORS THAT MAY AFFECT THE BUSINESS” below. 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.

GENERAL

The company is a leading provider of imagery and related products and services 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 worldwide. We work with a large number of active photographers, illustrators, 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 generate our revenue from granting rights to use images and from providing related services. Revenue is principally derived from 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 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 image and where and how the image is delivered. 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 and the costs of CD-ROM production. 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.

For the company, EBITDA is defined as earnings before interest, income taxes, depreciation, amortization, exchange gains and losses and, when applicable, losses on impairments, debt conversion expense, integration and restructuring costs, extraordinary items and other income and expenses. This figure can more easily be calculated as gross profit less selling, general and administrative expenses in the periods presented. Due to our various acquisitions and integration and restructuring activities, and the related impacts on net loss, we believe that EBITDA provides an appropriate measure of our operating performance. EBITDA should not, however, be considered as an alternative to operating income, as defined by generally accepted accounting principles, as an indicator of our operating performance, or to cash flows as a measure of our liquidity.

ACQUISITIONS

On March 22, 2000, the company acquired Visual Communications Group Holdings, Ltd., VCG Holdings LLC, Definitive Stock, Inc. and Visual Communications Group Deutschland GmbH. 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 being amortized over 10 years. The transaction was accounted for by the purchase method of accounting, and accordingly, the results of operations of the acquired companies have been consolidated in the company’s financial statements since the date of acquisition.

INTEGRATION COSTS AND LOSS ON IMPAIRMENT OF ASSETS

In 1999, the company commenced integration of all of the company’s businesses after the acquisition of The Image Bank, Inc. and Art.com. Integration actions taken in the third quarter of 2000 and the related costs were as follows: $3.0 million for the review of processes and resultant actions to implement processes that would benefit the fully-integrated company going forward; $0.6 million for contract re-negotiations and terminations; and $0.3 million for consulting and other professional assistance in determining what functions and facilities should be combined. Integration actions taken in the first three quarters of 2000 and the related costs were as follows: $9.5 million for the review of processes and resultant actions to implement processes that would benefit the fully-integrated company going forward; $1.8 million for contract re-negotiations and terminations; and $1.4 million for consulting and other professional assistance in determining what functions and facilities should be combined. These costs were expensed as incurred during the three and nine months ended September 30, 2000.

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 functions and to take advantage of opportunities for further leveraging cost and technology platforms. Integration costs incurred during the first quarter of 2001 totaled $4.0 million, including: $1.9 million for the termination of approximately 40 employees; $1.4 million for the abandonment of facilities; $0.4 million for the review of processes and resultant actions to implement processes that would benefit the fully-integrated company going forward; $0.2 million for consulting and other professional assistance in determining what functions and facilities should be combined; and $0.1 million for asset impairments. These actions were completed, and the related costs were expensed as incurred during the quarter ended March 31, 2001.

$1.9 million during the second quarter of 2001, including severance costs and costs to terminate the operations and exit the facilities of Art.com, as well as a loss on the impairment of related assets of $6.5 million.

RESTRUCTURING COSTS

DEBT CONVERSION EXPENSE

LOSS ON IMPAIRMENT OF INVESTMENTS

EXTRAORDINARY ITEM

RESULTS OF OPERATIONS

Three months ended September 30, 2001 and 2000

Below are selected highlights from the company’s unaudited results of operations:


	Three months ended September 30,

				% of						% of
(In thousands, except percentages and per share amounts)	2001			sales			2000			sales

Sales	$	107,505			100.0		$	126,998			100.0
Gross profit		79,564			74.0			89,517			70.5
Selling, general and administrative expenses		(57,792	)		(53.7	)		(62,078	)		(48.9	)
Amortization of intangible assets		(18,546	)		(17.3	)		(30,654	)		(24.1	)
Depreciation		(14,676	)		(13.7	)		(12,221	)		(9.6	)
Income tax (expense) benefit		2,541			2.4			(3,322	)		(2.6	)
Net loss		(18,234	)		(17.0	)		(26,356	)		(20.8	)
Net loss per share	$	(0.35	)		—		$	(0.52	)		—

EBITDA	$	21,772			20.3		$	27,439			21.6

NET LOSS AND NET LOSS PER SHARE

The company recognized a net loss of $18.2 million, or $0.35 per share, during the third quarter of 2001 as compared to a net loss of $26.4 million, or $0.52 per share, during the same period in 2000.

SALES

Sales of $107.5 million for the third quarter of 2001 were down $19.5 million or 15% from third quarter 2000 sales of $127.0 million. This sales decrease reflected mainly volume decreases, offset in part by sales price increases. The company experienced declines in nearly all geographies, particularly in the United States where sales declined $16.0 million or 26%.

Sales for the third quarter of 2001 were lower than expected across nearly all of the company’s brands and geographies, due mainly to the continual worldwide decline in marketing and advertising spending, as well as the terrorist attacks on the United States on September 11, 2001. Management does not expect the economy, either domestic or abroad, to improve during the remainder of 2001 and cannot predict the impact that any further terrorist activities or worldwide response to such activities would have on the company.

GROSS PROFIT AND GROSS MARGIN

The company’s gross profit was $79.6 million for the third quarter of 2001, a decrease from gross profit of $89.5 million for the same period in 2000. As a percentage of sales, the company’s gross margin was 74.0% for the third quarter of 2001, an increase over a gross margin of 70.5% for the third quarter of 2000. The increase in gross margin in the current period was due to a larger percentage of sales of higher margin items, mainly wholly owned images, in the sales mix and a lower percentage of lower margin sales from businesses such as Art.com.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $57.8 million for the third quarter of 2001, a decrease of $4.3 million or 7% from $62.1 million for the third quarter of 2000. This decrease resulted primarily from lower staff and advertising and marketing costs, offset in part by an increase in professional fees. As a percentage of sales, selling, general and administrative expenses increased over the year ago period, due mainly to a larger percentage decline in sales than in selling, general and administrative expenses.

As discussed above, management expects staff cost reduction of approximately $15 to $20 million per year when all planned employee terminations have been completed.

EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)

EBITDA for the third quarter of 2001 was $21.8 million or 20.3% of sales, as compared to $27.4 million or 21.6% of sales for the third quarter of 2000. The decrease in EBITDA and EBITDA margin resulted from gross profit that was declining faster than selling, general and administrative expenses were declining.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets decreased to $18.5 million in the third quarter of 2001 from $30.7 million in the same period in 2000, due mainly to the elimination of goodwill amortization related to Art.com. After performing a cash flow analysis in the fourth quarter of 2000 of Art.com and a related business that operated 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.

In accordance with a recent accounting pronouncement, the company will no longer amortize goodwill beginning January 1, 2002, but will continue to amortize other recognized intangible assets. Where the company assesses that certain intangible assets should be recognized as goodwill under this new pronouncement, these assets will be reclassified to goodwill and will no longer be amortized. Management expects that the amortization of intangible assets will be approximately $72 million for 2001 and $5 million for 2002, based on unamortized balances at September 30, 2001.

DEPRECIATION

Depreciation expense increased to $14.7 million in the third quarter of 2001 from $12.2 million in the third quarter of 2000. This increase was primarily 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. Management expects depreciation expense for the remainder of 2001 and beyond to continue to increase as a result of these increased investments.

INCOME TAXES

The estimated annual tax rate used to calculate the $2.5 million income tax benefit for the third quarter of 2001 was 39.2% on losses before permanent differences, including amortization of goodwill and a valuation allowance associated with the loss on impairment of investments. The rate used to calculate the $3.3 million income tax expense for the third quarter of 2000 was 39.6% on income before similar items.

Nine months ended September 30, 2001 and 2000

Below are selected highlights from the company’s unaudited results of operations:


	Nine months ended September 30,

				% of						% of
(In thousands, except percentages and per share amounts)	2001			sales			2000			sales

Sales	$	349,148			100.0		$	355,470			100.0
Gross profit		253,260			72.5			250,383			70.4
Selling, general and administrative expenses		(180,229	)		(51.6	)		(186,646	)		(52.5	)
Amortization of intangible assets		(55,816	)		(16.0	)		(87,101	)		(24.5	)
Depreciation		(42,168	)		(12.1	)		(34,713	)		(9.8	)
Income tax (expense) benefit		3,350			1.0			(2,937	)		(0.8	)
Net loss		(56,525	)		(16.2	)		(88,967	)		(25.0	)
Net loss per share	$	(1.09	)		—		$	(1.76	)		—

EBITDA	$	73,031			20.9		$	63,737			17.9

NET LOSS AND NET LOSS PER SHARE

For the first three quarters of 2001, the company recognized a net loss of $56.5 million, or $1.09 per share, as compared to a net loss of $89.0 million, or $1.76 per share, in the year ago period. Excluding the extraordinary item, the company recognized a net loss of $89.4 million, or $1.77 per share, for the first three quarters of 2000.

SALES

Sales of $349.1 million for the first three quarters of 2001 were down $6.3 million or 2% from sales for the first three quarters of 2000 of $355.5 million. The sales decrease resulted primarily from volume decreases, offset in part by sales price increases and the acquisition of VCG at the end of the first quarter of 2000. The company experienced declines in nearly all geographies, particularly in the United States where sales declined $23.7 million or 13%.

GROSS PROFIT AND GROSS MARGIN

Gross profit for the first three quarters of 2001 was $253.3 million or 72.5% of sales, an increase over gross profit of $250.4 million or 70.4% of sales for the same period in 2000. The increase in both gross profit and gross margin in the current period was due to a larger percentage of sales of higher margin items, mainly wholly owned images, in the sales mix and a lower percentage of lower margin sales from businesses such as Art.com.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $180.2 million for the first three quarters of 2001, a decrease of $6.4 million or 3% from $186.6 million for the first three quarters of 2000. This decrease resulted primarily from lower advertising and marketing costs, offset in part by an increase in staff costs and professional fees. As a percentage of sales, selling, general and administrative expenses decreased to 52%, down from 53% in the year ago period.

As discussed above, management expects staff cost reduction of approximately $15 to $20 million per year when all planned employee terminations have been completed.

EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)

EBITDA for the first three quarters of 2001 was $73.0 million or 20.9% of sales, as compared to $63.7 million or 17.9% of sales for the first three quarters of 2000. The increase in EBITDA and EBITDA margin resulted from declining selling, general and administrative expenses as compared to increasing gross profit.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets decreased to $55.8 million in the first three quarters of 2001 from $87.1 million in the same period in 2000 as a result of the write-off of Art.com goodwill described in the third quarter analysis.

DEPRECIATION

Depreciation expense increased to $42.2 million in the first three quarters of 2001 from $34.7 million in the first three quarters of 2000. This increase was primarily related to business acquisitions in 2000, the continued development of technology assets related to our web-based sales strategy and an increase in our capitalized costs of image digitization. Management expects depreciation expense for the remainder of 2001 and beyond to continue to increase as a result of these increased investments.

INCOME TAXES

The estimated annual tax rate used to calculate the $3.4 million income tax benefit for the first three quarters of 2001 was 39.2% on losses before permanent differences, including amortization of goodwill and a valuation allowance associated with the loss on impairment of investments. The rate used to calculate the $2.9 million income tax expense for the first three quarters of 2000 was 39.6% on income before similar items.

RECENT ACCOUNTING PRONOUNCEMENTS

FINANCIAL CONDITION

At September 30, 2001, the company held $39.0 million in cash and cash equivalents and had credit facilities under a $100.0 million bank line of credit, of which $80.0 million was unused.

WORKING CAPITAL

At September 30, 2001, the company’s working capital was $62.1 million, an increase of $0.7 million from working capital of $61.4 million at the end of 2000. Current assets decreased $27.5 million during the first three quarters of 2001, resulting from declines in nearly all categories, mainly cash and cash equivalents, offset in part by a substantial increase in other current assets. Current liabilities decreased $28.3 million during the first three quarters of 2001, with declines in all categories.

Cash and cash equivalents decreased $26.9 million during the first three quarters of 2001. Significant uses of cash included $58.6 million in capital expenditures, $13.0 million in interest payments, and the payment of accounts payable. Significant cash inflows included $6.6 million in proceeds from the issuance of common stock due to stock option exercises, $2.3 million in proceeds from the sale of certain assets of a French subsidiary, and cash receipts from customers.

Other current assets increased $5.8 million or 41% over year end. Approximately $5.0 million of this increase resulted from an increase in other receivables relating to reimbursable improvements made to our new offices in New York.

LIQUIDITY AND CAPITAL RESOURCES

Management expects to invest between $70 million and $75 million in capital expenditures during 2001, including the $58.6 million invested year-to-date. 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.

FACTORS THAT MAY AFFECT THE BUSINESS

IN ADDITION TO OTHER INFORMATION IN THIS QUARTERLY REPORT ON FORM 10-Q, 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, RESULTS OF OPERATIONS AND CASH FLOWS. THE FOLLOWING LIST IS NOT INTENDED TO BE EXHAUSTIVE.

OUR BUSINESS COULD BE AFFECTED BY A FAILURE TO SUCCESSFULLY COMPLETE THE INTEGRATION OF ACQUIRED BUSINESSES.

As a result of the acquisition strategy we have pursued since our inception in 1995, we have focused significant resources and attention on integrating acquired businesses. The October 6, 2001 launch of gettyimages.com marked a significant milestone in the business wide initiative to integrate the company’s web offerings. Additionally, the company has established the technology, business process, sales and marketing procedures, finance systems, customer interface, and other corporate administrative functions for the continued transformation and consolidation of company-wide systems. However, our future performance will largely depend on our ability to complete the integration of acquired companies and our finance, sales and customer database systems. These acquisitions and integrations create risks such as:

•		disruption of our ongoing business;

•		diversion of attention of our senior management from existing operations and other potential business opportunities; and

•		challenges associated with converting content from the analog format to digital format, particularly the core collections of TIB and VCG.

We cannot guarantee that we will successfully complete the integration of 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 have taken significant steps towards implementing new operational and financial systems, procedures and controls, are training and upgrading 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 RELEVANT 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 relevant 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 or impairment losses related to the goodwill or other intangible and tangible assets of acquired companies; 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. We also incurred an additional $6.5 million in asset impairments resulting from the ultimate disposition of Art.com in the second quarter of 2001. Future acquisitions by us, if any, could generate goodwill and other intangibles that could result in similar charges to be amortized or written off against our future earnings as well as other asset impairments.

We incurred net integration and restructuring costs of $41.6 million during 1998, 1999 and 2000, and $11.6 million during the first three quarters of 2001, 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.

During the second quarter of 2001, the company wrote off its minority investment in two small private companies after analyses showed that they suffered an other-than-temporary decline in fair value. The total of these two impairment charges was $4.2 million.

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. For instance, on July 25, 2001 and April 25, 2001, we announced that our second and first

quarter results, respectively, were below these expectations. In this event, the effect on the trading prices of our subordinated notes and our common stock may be difficult to predict. 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;

•		changes in U.S., global or regional economic and political conditions; and

•		continued economic and political difficulties and uncertainty arising from the impacts of the September 11, 2001 attacks on the World Trade Center and the Pentagon, and fears regarding additional terrorist actions.

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, opportunities and acquisitions to create and expand in 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.

THE SUCCESS OF OUR BUSINESS DEPENDS ON THE GROWTH IN DEMAND FOR THE DIGITAL DOWNLOAD OF VISUAL CONTENT.

The success of our business depends, in part, 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 analog 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. On October 6, 2001, we launched gettyimages.com, a significant step toward integrating the company’s web-based offerings, supporting technology platform and business practices under the “Getty Images” brand name. Continued 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.” See also “Our Right to Use the Getty Trademarks is Subject to Forfeiture in the Event We Experience a Change of Control” below.

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 three years, which absent a breach cannot be terminated except on twelve months’ written notice. 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 can be 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 have joined us in 2000 and 2001. 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 efficiently fulfilling orders. While we have made improvements in this area, 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 continue adding software and hardware and continue to 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 21% of the outstanding shares of our common stock as of September 30, 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% of the outstanding shares of our common stock as of September 30, 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.

As a result of their share ownership, the Getty Group and the Torrance Group each have significant influence over all matters requiring approval of our stockholders, including the election of directors and the approval of mergers or other business combinations. The substantial percentage of our stock held by the Getty Group and the Torrance Group 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 use “Getty Images” as a corporate identity, as do certain of our subsidiaries, and we have begun using “Getty Images” as a product and service brand. 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 19% of the outstanding shares of our common stock as of September 30, 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 may 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.

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 use of imagery, or to reduce the value of each image used, 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 we believe has had an impact on the demand for the company’s products and services. Management does not expect the economy, either domestic or abroad, to improve during the remainder of 2001. Additionally, continued economic and political difficulties and uncertainty arising from the impacts of the September 11, 2001 attacks on the World Trade Center and the Pentagon, and fears regarding additional terrorist actions may have a potential negative impact on our company and customer base.

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 Great British 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.

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 and the Torrance Group, along with certain provisions of Delaware law, may have the effect of delaying, deterring or preventing a takeover of our company.

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 and data transmission;

•		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.

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 September 30, 2001, the market price for our common stock has ranged from $9.15 to $64.38. 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 and investors;

•		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;

•		changes in U.S., global or regional economic and political conditions; and

•		continued economic and political difficulties and uncertainty arising from the impacts of the September 11, 2001 attacks on the World Trade Center and the Pentagon, and fears regarding additional terrorist actions.

Any of these events may cause the price of our shares to change. In addition, the stock market in general and the market prices for e-commerce companies in particular have experienced significant volatility (including, recent 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The company is exposed to a variety of market risks, primarily related to fluctuations in interest rates and foreign currency rates.

INTEREST RATE RISK

Our exposure to market rate risk for a change in interest rates relates primarily to our debt instruments, the majority of which are fixed rate borrowings. The book value, exclusive of unamortized debt issuance costs, and respective fair values are shown in the table below:


													Fair Value
	Maturities
													September 30,			December 31,
(In thousands, except percentages)	2002			2003			2007			Total			2001			2000

Fixed rate debt (U.S.D.)	$	—		$	12,653		$	250,000		$	262,653		$	195,450		$	208,104
Average interest rate		—			4.75	%		5.0	%		4.99	%		4.99	%		4.99	%
Variable rate debt (U.S.D.)	$	20,000			—			—		$	20,000		$	19,370		$	19,003
Average interest rate		5.02	%		—			—			5.02	%		5.02	%		7.40	%
Other borrowings	$	435			—			—		$	435		$	435		$	471
Average interest rate		2.71	%		—			—			2.71	%		2.71	%		5.50	%

The $250.0 million of 5% convertible subordinated notes are convertible into common stock at $61.08 per share and are subordinated to senior indebtedness of the company and to all debt and liabilities, including trade payables and lease obligations, if any, of the company’s subsidiaries. The 5% notes rank equal in right of payment to the $12.7 million of 4.75% notes. The company may redeem the notes, in whole or in part, at any time on or after March 20, 2003 at specified redemption prices ranging from 102.857% beginning on March 20, 2003 to 100.714% beginning on March 15, 2006. Interest on the notes is payable on March 15 and September 15 of each year.

The $12.7 million of 4.75% convertible subordinated notes are convertible into common stock at $28.51 per share, subject to adjustments in certain circumstances, and are subordinated to senior indebtedness of the company and to all debt and liabilities, including trade payables and lease obligations, if any, of the company's subsidiaries. The company may redeem the notes, in whole or in part, at any time on or after June 1, 2001 at specified redemption prices ranging from 101.90% beginning on June 1, 2001 to 100.95% beginning on June 1, 2002. Interest on the notes is payable June 1 and December 1 of each year.

The $20.0 million variable rate debt represents utilized credit facilities under a $100.0 million bank line of credit. The $20.0 million balance matures every one to three months and is rolled over into a new borrowing. Interest on borrowings under this line of credit is due each time a borrowing matures.

FOREIGN CURRENCY RISK

The company had no outstanding foreign exchange contracts or related deferred gains or losses as of September 30, 2001.

Unrealized net foreign exchange losses were $4.2 million as of September 30, 2001 and $14.4 million as of December 31, 2000. As of December 31, 1999, unrealized net foreign exchange gains were $2.7 million. These unrealized gains and losses arose from the revaluation of certain intercompany balances deemed to be long-term in nature. The company has no plans to settle these balances in the foreseeable future, and as such, has accounted for them in the same manner as translation adjustments. If the company were to sell or terminate the operations of a subsidiary with an unrealized gain or loss, the company would recognize the foreign exchange gain or loss in the income statement as part of the transaction.


PART II			OTHER INFORMATION


Item 1.			Legal Proceedings

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. 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 2.			Changes in Securities and Use of Proceeds

On January 18, 2001, the company issued 17,305 shares of its common stock, in addition to other consideration, in connection with the purchase of all of the issued and outstanding capital stock of Sumer Australasia Pty Limited and all of the units of The Image Bank Unit Trust. These acquisitions were made to acquire the business of The Image Bank Australia, which was operated through The Image Bank Unit Trust with Sumer Australasia Pty Limited acting as corporate trustee.

On June 15, 2001, the company issued 64,821 shares of its common stock, in addition to other consideration, in connection with the purchase of certain assets of The Image Bank Brasil Ltda.


Item 5.			Other Information

Effective July 23, 2001, Lewis Blackwell was elected Senior Vice President, Creative Direction, and James Bonaventura was elected Senior Vice President, Sales.


Item 6.			Exhibits and Reports on Form 8-K

(a)			Exhibits:

			Reference is made to the Index of Exhibits beginning on page 30 for a list of all exhibits filed as part of this report.

(b)			Reports on Form 8-K:

			No reports on Form 8-K were filed during the quarter ended September 30, 2001.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

November 14, 2001

GETTY IMAGES, INC.

/s/Elizabeth J. Huebner

Elizabeth J. Huebner
Senior Vice President and
Chief Financial Officer

EXHIBIT INDEX


EXHIBIT NUMBER		DESCRIPTION OF EXHIBIT

3.1		Amended and Restated Certificate of Incorporation of Getty Images (1)
3.2		Certificate of Amendment to the Certificate of Incorporation of Getty Images (2)
3.3		Bylaws of Getty Images (1)

(1)		Incorporated by reference from the Exhibits to the Registrant’s Form S-4 Registration Statement, No. 333-38777.




(2)		Incorporated by reference from the Exhibits to the Registrant’s Form 8-K, dated November 10, 1998.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Good

Getty Images (GYI) Inactive 10-Q2001 Q3 Quarterly report

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