UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
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[ ] | 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)
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DELAWARE (STATE OF INCORPORATION) | | 98-0177556 (I.R.S. EMPLOYER IDENTIFICATION NO.) |
701 N. 34TH STREET
SUITE 400
SEATTLE, WASHINGTON 98103
(206) 268-2000
(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 April 30, 2001 there were 51,173,544 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
GETTY IMAGES, INC. AND SUBSIDIARIES
INDEX
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PART I | |
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Item 1. | | Financial Statements: |
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Item 2. | | | | | 9 | |
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Item 3. | | | | | 22 | |
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PART II | | |
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Item 1. | | | | | 23 | |
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Item 2. | | | | | 23 | |
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Item 5. | | | | | 23 | |
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Item 6. | | | | | 23 | |
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1
GETTY IMAGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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| | | Three months ended |
| | | March 31, |
(In thousands, except per share amounts) | | 2001 | | 2000 |
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Sales | | $ | 125,787 | | | $ | 104,825 | |
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Cost of sales | | | 35,624 | | | | 30,518 | |
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| Gross profit | | | 90,163 | | | | 74,307 | |
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Selling, general and administrative expenses | | | 61,526 | | | | 60,429 | |
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Amortization of intangible assets | | | 19,278 | | | | 25,035 | |
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Depreciation | | | 13,229 | | | | 10,202 | |
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Integration costs | | | 3,977 | | | | 4,191 | |
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| Loss from operations | | | (7,847 | ) | | | (25,550 | ) |
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Interest expense | | | (4,389 | ) | | | (2,323 | ) |
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Interest income | | | 518 | | | | 1,241 | |
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Debt conversion expense | | | — | | | | (6,689 | ) |
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Exchange loss, net | | | (301 | ) | | | (515 | ) |
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Other income (expense), net | | | 91 | | | | (19 | ) |
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| Loss before income taxes and extraordinary item | | | (11,928 | ) | | | (33,855 | ) |
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Income tax (expense) benefit | | | (2,631 | ) | | | 1,134 | |
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| Loss before extraordinary item | | | (14,559 | ) | | | (32,721 | ) |
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Extraordinary item, net of tax | | | — | | | | 384 | |
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Net loss | | $ | (14,559 | ) | | $ | (32,337 | ) |
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Loss per share before extraordinary item — basic and diluted | | $ | (0.28 | ) | | $ | (0.69 | ) |
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Extraordinary item | | | — | | | | 0.01 | |
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Net loss per share — basic and diluted | | $ | (0.28 | ) | | $ | (0.68 | ) |
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Weighted-average shares outstanding — basic and diluted | | | 51,447 | | | | 47,569 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
GETTY IMAGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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| | | | | March 31, | | Dec. 31, |
(In thousands) | | 2001 | | 2000 |
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ASSETS |
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| Current assets |
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| | Cash and cash equivalents | | $ | 52,020 | | | $ | 65,894 | |
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| | Accounts receivable, net | | | 87,277 | | | | 84,771 | |
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| | Inventories, net | | | 6,463 | | | | 7,616 | |
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| | Deferred catalog costs | | | 16,413 | | | | 17,998 | |
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| | Prepaid expenses and other assets | | | 24,412 | | | | 21,664 | |
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| | Deferred income taxes, net | | | 6,100 | | | | 6,082 | |
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| | | Total current assets | | | 192,685 | | | | 204,025 | |
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| Property and equipment, net | | | 140,024 | | | | 140,793 | |
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| Intangible assets, net | | | 687,931 | | | | 707,408 | |
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| Investments | | | 4,741 | | | | 4,751 | |
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| Deferred income taxes, net | | | 44,205 | | | | 43,659 | |
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| | | Total assets | | $ | 1,069,586 | | | $ | 1,100,636 | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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| Current liabilities |
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| | Accounts payable | | $ | 62,934 | | | $ | 74,216 | |
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| | Accrued expenses | | | 45,761 | | | | 51,424 | |
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| | Income taxes payable | | | 16,783 | | | | 16,283 | |
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| | Current portion of long-term debt | | | 808 | | | | 739 | |
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| | | Total current liabilities | | | 126,286 | | | | 142,662 | |
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| Long-term debt | | | 274,467 | | | | 274,427 | |
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| | | Total liabilities | | | 400,753 | | | | 417,089 | |
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| Commitments and contingencies |
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| Stockholders’ equity |
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| | Preferred stock | | | — | | | | — | |
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| | Common stock | | | 510 | | | | 508 | |
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| | Exchangeable preferred stock | | | 5 | | | | 5 | |
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| | Additional paid-in capital | | | 960,508 | | | | 957,108 | |
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| | Accumulated deficit | | | (279,985 | ) | | | (265,426 | ) |
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| | Accumulated other comprehensive loss | | | (12,205 | ) | | | (8,648 | ) |
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| | | Total stockholders’ equity | | | 668,833 | | | | 683,547 | |
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| | | Total liabilities and stockholders’ equity | | $ | 1,069,586 | | | $ | 1,100,636 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
GETTY IMAGES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(unaudited)
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| | | 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 |
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Balance at December 31, 2000 | | | 50,806 | | | | 534 | | | $ | 508 | | | $ | 5 | | | $ | 957,108 | | | $ | (265,426 | ) | | $ | (8,648 | ) | | $ | 683,547 | |
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Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (14,559 | ) | | | — | | | | (14,559 | ) |
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Translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,557 | ) | | | (3,557 | ) |
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| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (18,116 | ) |
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Stock options exercised | | | 172 | | | | — | | | | 2 | | | | — | | | | 2,435 | | | | — | | | | — | | | | 2,437 | |
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Tax benefit from employee stock option exercises | | | — | | | | — | | | | — | | | | — | | | | 572 | | | | — | | | | — | | | | 572 | |
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Issuance of shares for acquisition | | | 17 | | | | — | | | | — | | | | — | | | | 393 | | | | — | | | | — | | | | 393 | |
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Exchange of shares | | | 48 | | | | (48 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
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Balance at March 31, 2001 | | | 51,043 | | | | 486 | | | $ | 510 | | | $ | 5 | | | $ | 960,508 | | | $ | (279,985 | ) | | $ | (12,205 | ) | | $ | 668,833 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
GETTY IMAGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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| | | Three months ended |
| | | March 31, |
(In thousands) | | 2001 | | 2000 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net cash provided by (used in) operating activities | | $ | 312 | | | $ | (2,604 | ) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Acquisition of business, net of cash acquired | | | (737 | ) | | | (220,716 | ) |
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Acquisition of property and equipment | | | (16,620 | ) | | | (12,658 | ) |
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Proceeds from the sale of long-lived assets | | | 2,250 | | | | — | |
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Other, net | | | (556 | ) | | | 369 | |
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| Net cash used in investing activities | | | (15,663 | ) | | | (233,005 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from the issuance of long-term debt | | | — | | | | 250,000 | |
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Proceeds from the issuance of common stock | | | 2,437 | | | | 6,338 | |
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Payment of debt issuance costs | | | — | | | | (7,908 | ) |
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Payment of debt conversion costs | | | — | | | | (6,689 | ) |
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Repayment of debt | | | (92 | ) | | | (2,650 | ) |
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Other, net | | | — | | | | 100 | |
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| Net cash provided by financing activities | | | 2,345 | | | | 239,191 | |
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Effect of exchange rate differences | | | (868 | ) | | | (3,883 | ) |
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Net decrease in cash and cash equivalents | | | (13,874 | ) | | | (301 | ) |
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Cash and cash equivalents at beginning of period | | | 65,894 | | | | 105,356 | |
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Cash and cash equivalents at end of period | | $ | 52,020 | | | $ | 105,055 | |
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NON-CASH INVESTING ACTIVITIES |
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Conversion of notes to common stock, net of issuance costs | | $ | — | | | $ | 60,421 | |
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Acquisition of business for common stock | | | 393 | | | | 2,300 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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.
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 quarter of 2001, the Company paid cash of $3.1 million and $0.3 million, respectively, in connection with actions taken. Accrued costs of $2.4 million remain at March 31, 2001, consisting mainly of costs under lease agreements that no longer benefit the Company and that will be paid in future periods. These costs will be charged against the accruals as they are paid.
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 quarter of 2001, the Company paid cash of $3.5 million and $0.5 million, respectively, in connection with actions taken. Accrued costs of $0.7 million remain at March 31, 2001, consisting mainly of costs under lease agreements that no longer benefit the Company and that will be paid in future periods. These costs will be charged against the accruals as they are paid.
6
INTEGRATION COSTS
In 1999, the Company commenced integration of all of the Company’s then existing businesses following the acquisition of TIB and Art.com. Integration actions taken in the first quarter of 2000 and the related costs were as follows: $2.6 million for the review of processes and resultant actions to implement processes that would benefit the fully-integrated company going forward; $1.0 million for consulting and other professional assistance in determining what functions and facilities should be combined; and $0.6 million for contract re-negotiations and terminations. These actions and related costs were not incurred as a direct result of a formal restructuring plan and as such, were expensed as incurred during the quarter ended March 31, 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 costs were expensed as incurred during the quarter ended March 31, 2001, as they were not incurred as a direct result of a formal restructuring plan.
LONG-TERM DEBT AND 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.
On March 13, 2000, the Company issued $250.0 million of 5% convertible subordinated notes due March 15, 2007. These 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 remaining 4.75% notes that were not converted into common stock. 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.
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.
7
BUSINESS SEGMENTS
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:
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| | | Three months ended |
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(In thousands) | | 2001 | | 2000 |
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Americas | | $ | 74,085 | | | $ | 63,287 | |
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Europe | | | 45,834 | | | | 36,639 | |
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Rest of world | | | 5,868 | | | | 4,899 | |
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| Total sales | | $ | 125,787 | | | $ | 104,825 | |
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INCOME TAXES
The effective tax rate used to calculate income tax expense for the first quarter of 2001 was 39.2% on income before non-deductible amortization of goodwill, while the rate used to calculate the income tax benefit for the first quarter of 2000 was 39.6% on income before non-deductible amortization of goodwill.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and No. 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.
8
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 e-commerce provider of visual content 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 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.
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 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, 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.
9
ACQUISITION
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 amortized over 10 years. The transaction was accounted for by the purchase method of accounting, and accordingly, the results of operations of the acquired company are consolidated in the Company’s financial statements from the date of acquisition.
INTEGRATION COSTS
In 1999, the Company commenced integration of all of the Company’s then existing businesses following the acquisition of TIB and Art.com. Integration actions taken in the first quarter of 2000 and the related costs were as follows: $2.6 million for the review of processes and resultant actions to implement processes that would benefit the fully-integrated company going forward; $1.0 million for consulting and other professional assistance in determining what functions and facilities should be combined; and $0.6 million for contract re-negotiations and terminations. These actions and related costs were not incurred as a direct result of a formal restructuring plan and as such, were expensed as incurred during the quarter ended March 31, 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 costs were expensed as incurred during the quarter ended March 31, 2001, as they were not incurred as a direct result of a formal restructuring plan.
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.
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.
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RESULTS OF OPERATIONS
Three months ended March 31, 2001 vs. 2000
Below are selected highlights from the Company’s results of operations:
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(In thousands, except percentages) | | 2001 | | sales | | 2000 | | sales |
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Sales | | $ | 125,787 | | | | 100.0 | | | $ | 104,825 | | | | 100.0 | |
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Gross profit | | | 90,163 | | | | 71.7 | | | | 74,307 | | | | 70.9 | |
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Selling, general and administrative expenses | | | (61,526 | ) | | | (48.9 | ) | | | (60,429 | ) | | | (57.6 | ) |
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Amortization of intangible assets | | | (19,278 | ) | | | (15.3 | ) | | | (25,035 | ) | | | (23.9 | ) |
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Depreciation | | | (13,229 | ) | | | (10.5 | ) | | | (10,202 | ) | | | (9.7 | ) |
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Income tax (expense) benefit | | | (2,631 | ) | | | (2.1 | ) | | | 1,134 | | | | 1.1 | |
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Net loss | | | (14,559 | ) | | | (11.6 | ) | | | (32,337 | ) | | | (30.8 | ) |
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EBITDA | | $ | 28,637 | | | | 22.8 | | | $ | 13,878 | | | | 13.2 | |
NET LOSS
The Company recognized a net loss of $14.6 million, or $0.28 per share, during the first quarter of 2001 as compared to a net loss of $32.3 million, or $0.68 per share, during the same period in 2000. Excluding extraordinary items, the Company recognized a net loss of $32.7 million, or $0.69 per share, for the first quarter of 2000.
SALES
Sales of $125.8 million for the first quarter of 2001 were up $21.0 million or 20% over first quarter 2000 sales of $104.8 million. The Company experienced growth in nearly all geographies, with sales in the Americas growing $10.8 million or 17% and sales in Europe growing $9.2 million or 25%. Growth was realized across most brands, with particularly strong sales from Stone. Stone sales increased mainly due to increased customer usage of e-commerce as a means of selecting and taking delivery of images. This sales growth reflected mainly volume increases, but sales price increases were reflected as well. VCG sales also increased significantly over the first quarter of 2000, however, this was due mainly to the inclusion of a full quarter of sales for VCG in 2001, as compared to only nine days in 2000.
Although the Company’s sales grew year over year, sales for the first quarter of 2001 were lower than expected across all of the Company’s brands. We believe this shortfall resulted from the slowdown in the U.S. economy and particularly from delays and cancellations in marketing and advertising spending. Many of our domestic customers have expressed limited visibility regarding their outlook for marketing and advertising expenses for the remainder of the year. With respect to customers in overseas markets, the Company is cautious about sales levels towards the second half of the year. We believe the slowdown in the U.S. economy could have a delayed impact on these markets, particularly Australia and Europe.
GROSS PROFIT
The Company’s gross profit was $90.2 million or 71.7% of net sales for the first quarter of 2001, an increase over gross profit of $74.3 million or 70.9 % of net sales for the same period in 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 $61.5 million for the first quarter of 2001, an increase of $1.1 million from $60.4 million for the first quarter of 2000. This increase resulted primarily from the inclusion of a full quarter of expense for VCG in 2001, as compared to only nine days in 2000. As a percentage of net sales, selling, general and administrative expenses decreased to 49%, down from 58% in the year ago
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period. This decrease resulted from the Company’s ongoing efforts to reduce overall costs and increase efficiencies.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)
For the Company, EBITDA is defined as earnings before interest, income taxes, depreciation, amortization, exchange gains and losses and, when applicable, loss on impairment of long-lived assets, 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 the related impact 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 an indicator of our operating performance, or to cash flows as a measure of our liquidity.
EBITDA for the first quarter of 2001 was $28.6 million or 22.8% of net sales, as compared to $13.9 million or 13.2% of net sales for the first quarter of 2000. The increase in EBITDA and EBITDA margin resulted from improvements in gross margins and declining selling, general and administrative expenses as a percentage of sales.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets decreased to $19.3 million in the first quarter of 2001 from $25.0 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 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.
We expect that the amortization of intangible assets will result in substantial charges against our earnings in future periods, including approximately $72 million and $71 million in 2001 and 2002, respectively, based on unamortized balances at March 31, 2001. Any additional acquisitions involving intangibles, fair value adjustments or disposals of intangibles could materially impact these amounts.
DEPRECIATION
Depreciation expense increased to $13.2 million in the first quarter of 2001 from $10.2 million in the first quarter of 2000. The increase was primarily related to business acquisitions in 2000, 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. The Company expects depreciation expense in 2001 and beyond to continue to increase as a result of these increased investments.
INCOME TAXES
The effective tax rate used to calculate income tax expense for the first quarter of 2001 was 39.2% on income before non-deductible amortization of goodwill, while the rate used to calculate the income tax benefit for the first quarter of 2000 was 39.6% on income before non-deductible amortization of goodwill. Income taxes increased from a $1.1 million benefit for the first quarter of 2000 to a $2.6 million expense for the first quarter of 2001 due to the increase in income before non-deductible amortization of goodwill.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and No. 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.
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FINANCIAL CONDITION
At March 31, 2001, the Company held $52.0 million in cash and cash equivalents and had credit facilities under a bank line of credit totaling $100.0 million, of which $80.0 million was unused.
WORKING CAPITAL
At March 31, 2001, the Company’s working capital was $66.4 million, an increase of $5.0 million from working capital of $61.4 million at the end of 2000. Current assets decreased $11.3 million during the first quarter of 2001, resulting mainly from a decrease in cash and cash equivalents. Current liabilities decreased $16.4 million during the first quarter of 2001, due mainly to the payment of accounts payable and accrued expenses.
Cash and cash equivalents decreased $13.9 million during the first quarter of 2001. Significant uses of cash included $16.6 million in capital expenditures, $14.3 million in the payment of accounts payable and accrued expenses, including $6.7 million in interest payments, and $4.2 million in prepaid expenses and other assets. Significant cash inflows included $2.4 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, as well as cash receipts from customers.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to invest approximately $75.0 million in capital expenditures during 2001, including the $16.6 million invested during the first quarter. 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, as we did in the first quarter of 2000 to fund the acquisition of VCG. On March 13, 2000, the Company issued $250.0 million of 5% convertible subordinated notes due March 15, 2007 to fund this acquisition.
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.
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; |
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| • | | difficulty assimilating the operations, including financial and accounting functions, sales and marketing procedures, technology and other corporate administrative functions of the combined companies; |
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| • | | diversion of attention of our senior management from existing operations and other potential business opportunities; |
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| • | | 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 |
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| • | | 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; |
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| • | | transaction costs; and |
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| • | | 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 or written off against our future earnings.
We incurred net integration and restructuring costs of $41.6 million during 1998, 1999 and 2000, and $4.0 million during the first quarter 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.
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 April 25, 2001, we announced that our first quarter results 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; |
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| • | | our ability to continue to move customers to the digital distribution of imagery; |
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| • | | 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; |
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| • | | our ability to attract visitors to our Websites and the frequency of repeat purchases by our customers; |
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| • | | shifts in the nature and amount of publicity about us, our competitors or the visual content industry; |
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| • | | changes in the growth rate of Internet commerce; |
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| • | | our ability to enhance our technology to accommodate any future growth in our operations or customers; |
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| • | | changes in our pricing policies or the pricing policies of our competitors; |
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| • | | changes in government regulation; |
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| • | | costs related to potential acquisitions of technology or businesses; |
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| • | | changes in U.S. and global financial and equity markets; and |
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| • | | 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; |
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| • | | the number of relevant images available for purchase through digital download as compared to those available through traditional analog methods; |
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| • | | the level of customer comfort with the process of downloading visual content; |
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| • | | the relative ease of the downloading process; |
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| • | | concerns about the security of online transactions; and |
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| • | | 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.” 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, 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 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 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 efficiently fulfilling orders. While we have made improvements in this area, we cannot be sure that we
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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 23.3% of the outstanding shares of our common stock as of March 31, 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 6.5% of the outstanding shares of our common stock as of March 31, 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 election of directors and the approval of mergers or other business combinations. The substantial percentage of our stock held by each of the Getty
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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 21.1% of the outstanding shares of our common stock as of March 31, 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; |
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| • | | we may be unable to obtain necessary financing for working capital, capital expenditures, debt service requirements and other purposes; |
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| • | | our flexibility in planning for, or reacting to, changes in our business and competition could be reduced; and |
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| • | | 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. We remain cautious about the economic outlook for the remainder of 2001 and the potential impact on our business.
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
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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, 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; |
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| • | | the technology underlying the Internet and other online services does not effectively support any necessary expansion; and |
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| • | | 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; |
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| • | | pricing and taxation of goods and services over the Internet; |
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| • | | Website content; |
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| • | | consumer protection; and |
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| • | | 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 March 31, 2001, the market price for our common stock has ranged from $13.94 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; |
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| • | | new products, services and strategic developments by us or our competitors; |
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| • | | business combinations and investments by us or our competitors; |
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| • | | variations in our revenues, expenses or profitability; |
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| • | | changes in financial estimates and recommendations by securities analysts and investors; |
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| • | | failure to meet the expectations of securities analysts; |
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| • | | performance by other visual content companies; |
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| • | | news reports relating to trends in the visual content, Internet or other product or service industries; |
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| • | | changes in U.S. and global financial and equity markets; and |
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| • | | changes in U.S., global or regional economic and political conditions. |
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.
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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 and respective fair values are shown in the table below:
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| | Maturities | | Fair Value |
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| | | | March 31, | | Dec. 31, |
(In thousands, except percentages) | | 2002 | | 2003 | | 2007 | | Total | | 2001 | | 2000 |
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Fixed rate debt (USD) | | $ | — | | | $ | 12,653 | | | $ | 250,000 | | | $ | 262,653 | | | $ | 171,238 | | | $ | 208,104 | |
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Average interest rate | | | — | | | | 4.75 | % | | | 5.0 | % | | | 4.99 | % | | | 4.99 | % | | | 4.99 | % |
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Variable rate debt (USD) | | $ | 20,000 | | | | — | | | | — | | | $ | 20,000 | | | $ | 19,077 | | | $ | 19,003 | |
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Average interest rate | | | 6.31 | % | | | — | | | | — | | | | 6.31 | % | | | 6.31 | % | | | 7.40 | % |
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Other borrowings | | $ | 468 | | | | — | | | | — | | | $ | 468 | | | $ | 468 | | | $ | 471 | |
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Average interest rate | | | 4.65 | % | | | — | | | | — | | | | 4.65 | % | | | 4.65 | % | | | 5.50 | % |
FOREIGN CURRENCY RISK
The Company had no outstanding foreign exchange contracts or related deferred gains or losses as of March 31, 2001.
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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. The shares were issued in a private placement to sophisticated investors pursuant to an exemption under Regulation S of the Securities Act of 1933, as amended.
Item 5. Other Information
Effective May 1, 2001, John Hallberg resigned as our Senior Vice President and General Manager of Art.com.
Item 6. Exhibits and Reports on Form 8-K
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| Reference is made to the Index of Exhibits beginning on page 25 for a list of all exhibits filed as part of this report. |
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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.
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May 7, 2001 | GETTY IMAGES, INC. |
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| By | /s/ ELIZABETH J. HUEBNER |
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| | Elizabeth J. Huebner Senior Vice President and Chief Financial Officer |
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EXHIBIT INDEX
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EXHIBIT |
NUMBER | | DESCRIPTION OF EXHIBIT |
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3.1 | | Amended and Restated Certificate of Incorporation of Getty Images (1) |
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3.2 | | Certificate of Amendment to the Certificate of Incorporation of Getty Images (2) |
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3.3 | | Bylaws of Getty Images (1) |
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10.1* | | Separation Agreement between the Company and John Hallberg, dated April 10, 2001. |
* | | Filed herewith. |
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(1) | | Incorporated by reference from the Exhibits to the Registrant’s Form S-4 Registration Statement, No. 333-38777. |
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(2) | | Incorporated by reference from the Exhibits to the Registrant’s Form 8-K, dated November 10, 1998. |
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