- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) : APRIL 29, 1998
GETTY IMAGES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 000-23747 98-0177556
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification
No.)
2013 FOURTH AVENUE, FOURTH FLOOR 101 BAYHAM STREET
SEATTLE, WASHINGTON LONDON, ENGLAND
98121 NW1 OA6
(206) 441-9355 (011 44 171) 544-3456
(Addresses, including zip code, and telephone numbers,
including area code, of principal executive offices)
------------------------
NONE
(Former address, if changed since last report)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 5. OTHER EVENTS.
Reference is made to the financial statements filed as part of this report.
Such financial statements were filed by the Registrant in its Registration
Statement on Form S-4 (No. 333-38777) with respect to the common stock, par
value $0.01 per share, issued in connection with the previously announced merger
of Getty Communications plc and PhotoDisc, Inc.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
1
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 hereunto duly authorized.
GETTY IMAGES, INC.
By: /s/ LAWRENCE GOULD
-----------------------------------------
Name: Lawrence Gould
Date: April 29, 1998 Title: Chief Financial Officer
2
PHOTODISC, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
Board of Directors
PhotoDisc, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheet of PhotoDisc,
Inc. and subsidiaries (the "Company") as of December 31, 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
August 12, 1997
(September 16, 1997 as to Note 1)
3
PHOTODISC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER
31,
------
1996
------
ASSETS
Current assets:
Cash and cash equivalents..................................................... $6,315
Trade accounts receivable, net of allowance of $188........................... 1,739
Other accounts receivable..................................................... 257
Inventories................................................................... 1,207
Deferred taxes................................................................ 171
Prepaid expenses.............................................................. 809
------
Total current assets...................................................... 10,498
Property and equipment:
Leasehold improvements........................................................ 95
Furniture and equipment....................................................... 936
Image collection.............................................................. 1,800
Computer equipment............................................................ 2,296
------
5,127
Less accumulated depreciation................................................. (1,205)
------
Total property and equipment.............................................. 3,922
Other, net of accumulated amortization of $186.................................. 285
------
Total assets.............................................................. $14,705
------
------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable........................................................ $2,686
Accrued payroll and related liabilities....................................... 756
Other accrued liabilities..................................................... 550
Taxes payable................................................................. 276
------
Total current liabilities................................................. 4,268
------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common stock, $.01 par value--authorized, 20,000,000 shares, issued and
outstanding, 8,635,164 shares............................................... 86
Series A preferred stock, $.01 par value--authorized 5,000,000 shares, issued
and outstanding, 1,701,879 shares (preference in liquidation $7,199)........ 17
Additional paid-in capital.................................................... 6,230
Retained earnings............................................................. 4,126
Foreign currency translation adjustment....................................... (22 )
------
Total shareholders' equity................................................ 10,437
------
Total liabilities and shareholders' equity................................ $14,705
------
------
See notes to consolidated financial statements.
4
PHOTODISC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED
DECEMBER 31,
----------------
1995 1996
------- -------
Sales....................................................... $12,512 $28,231
Cost of sales:
Cost of royalties......................................... 1,158 2,416
Cost of finished product.................................. 1,884 3,686
------- -------
3,042 6,102
------- -------
Gross profit............................................ 9,470 22,129
Operating expenses:
Sales and marketing....................................... 4,018 9,456
Customer service and fulfillment.......................... 721 2,019
Product development....................................... 802 2,306
General and administrative................................ 1,597 4,132
------- -------
Total operating expenses................................ 7,138 17,913
------- -------
Operating income........................................ 2,332 4,216
Other income (expense):
Interest income (expense)................................. (28) 94
Other..................................................... (12) 2
------- -------
(40) 96
------- -------
Income before income tax expense........................ 2,292 4,312
Income tax expense........................................ 817 1,600
------- -------
Net income................................................ $ 1,475 $ 2,712
------- -------
------- -------
Unaudited pro forma information:
Pro forma net income per share............................ $ 0.13 $ 0.23
------- -------
------- -------
Pro forma weighted average
shares outstanding...................................... 10,952 11,756
------- -------
------- -------
See notes to consolidated financial statements.
5
PHOTODISC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOREIGN
SERIES A ADDITIONAL CURRENCY
COMMON PREFERRED PAID-IN RETAINED TRANSLATION
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
------ --------- ---------- -------- ---------- -------
Balance, January 1, 1995.................................... $ 11 $-- $ 175 $ 328 -$- $ 514
Net income................................................ 1,475 1,475
Dividends paid............................................ (389) (389)
Foreign currency translation.............................. (2) (2)
------ --------- ---------- -------- ----- -------
Balance, December 31, 1995.................................. 11 -- 175 1,414 (2) 1,598
Net income................................................ 2,712 2,712
Common stock split........................................ 77 (77) --
Repurchase of 236,372 shares of common stock.............. (2) (998) (1,000)
Issuance of 1,701,879 shares of preferred stock........... 17 7,130 7,147
Foreign currency translation.............................. (20) (20)
------ --------- ---------- -------- ----- -------
Balance, December 31, 1996.................................. $ 86 $ 17 $6,230 $4,126 $(22) $10,437
------ --------- ---------- -------- ----- -------
------ --------- ---------- -------- ----- -------
See notes to consolidated financial statements.
6
PHOTODISC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
DECEMBER 31,
----------------
1995 1996
------- -------
Operating activities:
Net income................................................ $ 1,475 $ 2,712
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 286 1,002
Deferred income taxes................................... 1 (172)
Loss on asset disposition............................... -- 50
Foreign currency translation adjustment................. (2) (20)
Cash provided (used) by changes in operating assets and
liabilities:
Accounts receivable................................... (628) (870)
Inventories........................................... (908) 70
Prepaid expenses...................................... 46 (731)
Other assets.......................................... -- (271)
Accounts payable...................................... 361 1,753
Taxes payable......................................... 15 261
Accrued liabilities................................... 293 959
------- -------
Net cash provided by operating activities........... 939 4,743
Investing activities:
Purchase of property and equipment........................ (1,000) (3,865)
Financing activities:
Net borrowings (payments) on revolving credit
agreements.............................................. 544 (734)
Payments on long-term borrowings.......................... (76) (215)
Proceeds from long-term borrowings........................ 121 --
Dividend paid............................................. (389) --
Preferred stock issuance.................................. -- 7,147
Common stock repurchase................................... -- (1,000)
------- -------
Net cash provided by financing activities........... 200 5,198
------- -------
Net increase in cash and cash equivalents................... 139 6,076
Cash and cash equivalents:
Beginning of period....................................... 100 239
------- -------
End of period............................................. $ 239 $ 6,315
------- -------
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 23 $ 44
Income taxes............................................ 813 2,001
See notes to consolidated financial statements.
7
PHOTODISC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
NOTE 1: SUMMARY OF BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
PhotoDisc, Inc. (the "Company" or "PhotoDisc") develops high-resolution
photographs on CD-ROM which are sold primarily through retail catalog sales to
digital publishing and multimedia markets domestically and internationally.
The Company is subject to certain business risks which could affect future
operations and financial performance. These risks include changes in technology
and related delivery of products, increased competition and litigation against
the Company based on intellectual property rights.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of PhotoDisc,
Inc. and its subsidiaries, PhotoDisc Europe, Ltd., PhotoDisc Deutschland GmbH
and PhotoDisc Australia, Pty. All significant intercompany transactions are
eliminated upon consolidation.
CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
INVENTORIES
Inventories consist of raw materials and finished goods, and are valued at
the lower of cost or market on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets ranging from three to seven years. Image collection costs represents
capitalized production and image acquisition costs and refer to direct costs for
the purchase or development of images; such costs include scanning, direct
labor, overhead, and other costs related to the development of products. Costs
are charged to cost of sales over an initial estimated useful life of three
years. The remaining estimated useful life of images is evaluated periodically,
and adjusted as deemed appropriate based on units produced and estimated units
to be sold.
ORGANIZATION COSTS
The Company capitalized costs incurred with the formation and start-up of
the business. These costs are being amortized using the straight-line method
over five years.
FOREIGN CURRENCY TRANSLATION
Foreign currency adjustments arise as a result of the translation of the
financial statements of the Company's foreign subsidiary into U.S. dollars, the
Company's functional currency.
8
PHOTODISC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
NOTE 1: SUMMARY OF BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
Revenues are recognized upon shipment of goods to customers. The Company has
a policy which guarantees refunds or exchanges for all product returns,
regardless of reason, for 30 days after purchase. The Company provides
allowances for such returns based on historical return patterns and specific
customer information. Internet revenues are recognized when products are
down-loaded from the Company's Web site.
INCOME TAXES
Prior to 1995, the Company's shareholders elected to file income taxes as an
S corporation. On January 1, 1995, the Company changed its status to a C
corporation and began accounting for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires
an asset and liability approach to financial accounting and reporting for income
taxes.
UNAUDITED PRO FORMA NET INCOME/LOSS PER SHARE
Pro forma net income/loss per share is based on the weighted average number
of shares outstanding during the period after consideration of the dilutive
effect, if any, of options and warrants issued and outstanding, and after giving
pro forma effect to the conversion of the Company's outstanding preferred stock
as if such conversion had occurred at the beginning of the periods presented.
All outstanding preferred stock will be converted on a one-for-one basis into an
aggregate of 1,701,879 shares of common stock in connection with the merger
described below.
MERGER AGREEMENT
On September 15, 1997, the Company entered into a Merger Agreement with
Getty Communications plc ("Getty Communications") and Getty Images, Inc. ("Getty
Images"), pursuant to which the PhotoDisc Common Shareholders will receive cash
and shares of Getty Images Common Stock for each share of PhotoDisc Common Stock
held; and Getty Communications Shareholders will be issued one share of Getty
Images Common Stock for every two Getty Communications Ordinary Shares held of
record by such holders, and Getty Communications will become a wholly owned
subsidiary of Getty Images.
In connection with the merger, all outstanding shares of the Company's
Series A Convertible Preferred stock will be converted on a one-for-one basis
into an aggregate of 1,701,879 shares of PhotoDisc common stock and all options
to purchase shares of PhotoDisc common stock that remain outstanding on the
closing of the merger will be assumed by Getty Images and become exercisable for
shares of common stock of Getty Images in a ratio equivalent to that used in
determining the merger consideration to be received by the shareholders of
PhotoDisc. Prior to and conditional on completion of the merger, PhotoDisc will
extend an offer to certain current holders of PhotoDisc options to purchase from
such holders options representing up to 20% of all shares subject to such
options. All outstanding warrants to purchase shares of common stock of
PhotoDisc will either be exercised prior to completion of the merger or expire.
9
PHOTODISC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
NOTE 1: SUMMARY OF BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates used by the Company include the development of
allowance for doubtful accounts, estimated units of inventory to be sold,
depreciable and amortizable lives of property and equipment, allowance for sales
returns, income taxes, and the fair value of financial instruments.
FOREIGN SALES
The Company had sales to customers in foreign countries, primarily in
Europe, Asia and Australia. The foreign sales accounted for 23% and 29% of total
revenues in aggregate for the years ended December 31, 1995 and 1996,
respectively. No one country accounted for more than 10% of sales for any of the
periods presented.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements in
order to conform with the 1996 presentation.
PRODUCT DEVELOPMENT COSTS
Product development costs consist of payroll and related expenses for
development and internet network operations personnel and consultants. Certain
costs directly related to the production of images, such as photoshoot costs,
and costs related to the scanning and editing of images, are capitalized as a
component of property and equipment. All other product development costs are
expensed as incurred.
NOTE 2: INVENTORIES
Inventories are composed of raw materials and finished products available
for sale as follows:
DECEMBER
31,
-----------
1996
-----------
Raw material (primarily packaging)................................................ $ 468
Finished goods.................................................................... 739
-----------
$ 1,207
-----------
-----------
NOTE 3: LINE OF CREDIT
The Company had a revolving line of credit with a bank which required
monthly interest payments of prime plus 1.25% (9.5% at December 31, 1996) and
expired in May 1997. No amounts were outstanding under this facility at December
31, 1996.
10
PHOTODISC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
NOTE 4: EQUITY
On June 27, 1996, the Board of Directors amended the Company's Articles of
Incorporation to authorize 5,000,000 shares of preferred stock, par value $.01
per share, and 20,000,000 shares of common stock, par value $.01 per share.
PREFERRED STOCK
The Preferred stock is issuable in one or more series, each with such
designations, preferences, rights, qualifications, limitations and restrictions
as the Board of Directors of the Company may determine at the time of issuance.
The Company's Articles of Incorporation, amended June 1996, authorized
1,701,879 shares of Series A Preferred stock and 1,701,879 shares of Series A-1
Preferred stock. At December 31, 1996, no shares of the Series A-1 Preferred
stock had been issued. The Company issued 1,701,879 shares of Series A Preferred
stock during 1996 with the following terms:
CONVERSION: Each share of Series A Preferred stock is convertible at the
option of the holder into shares of common stock based on the Series A
conversion price. The conversion price was set at the original Series A issue
price of $4.23 per share, which was greater than the fair market value of the
Company's common stock as of the date the Series A Preferred stock was issued.
The conversion price is subject to possible adjustment for the dilutive effect
of additional shares of common stock, except common stock issued pursuant to an
incentive equity ownership program or to effect a joint venture or other
partnering arrangement, merger, or reorganization. Each share is automatically
converted in the event of a public offering of the Company's common stock.
In addition, in the event of an initial public offering of the Company's
common stock, or a merger, consolidation or other transaction in which more than
50 percent of the Company's common stock is disposed of, the holders of the
Company's Series A Preferred stock are entitled to receive additional cash
consideration in connection with the conversion of their shares into common
stock. The amount of cash consideration is determined based on a formula which
takes into account the timing of the transaction, the fully diluted valuation of
the Company and the original price of the Series A Preferred stock.
LIQUIDATION: In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series A Preferred
stock will be entitled to receive, prior to any distributions of the surplus
funds of the Company to the holders of common stock, an amount equal to $4.23
per share plus any declared but unpaid dividends.
VOTING: The holders of Series A Preferred stock are entitled to the number
of votes they would be entitled to if the shares of Series A Preferred stock
were converted to common stock.
The rights, preferences, privileges, and restrictions relating to the Series
A-1 Preferred stock are the same as those for the Series A Preferred stock,
except that no adjustments will be made to the conversion price.
COMMON STOCK
On May 31, 1996, the Board of Directors authorized an eight-for-one common
stock split. This common stock split was effected in the form of eight shares of
common stock issued for every one share of
11
PHOTODISC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
NOTE 4: EQUITY (CONTINUED)
common stock outstanding at the date of declaration. All references in the
financial statements to number of shares outstanding and related prices, per
share amounts and stock option plan data have been retroactively adjusted for
the stock split. During 1996, the Company repurchased 236,372 shares for $4.23
per share.
NOTE 5: COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is subject to legal proceedings and claims in the ordinary
course of business. The Company is not currently aware of any legal proceedings
or claims that the Company believes will have, individually or in the aggregate,
a material adverse effect on the Company's financial position or results of
operations.
ROYALTY AGREEMENTS
The Company enters into licensing agreements in conjunction with the
purchase of images. The Company is required under certain licensing agreements
to pay royalties based on a percentage of net sales to photographers and stock
photo houses as long as the product is marketed. Such royalties are recorded as
expense when revenue is recognized and paid quarterly. The Company may grant
advance royalties to photographers on a case-by-case basis, which are
capitalized as prepaid expense and amortized over future royalty earnings.
The parties to the licensing agreements have agreed to certain mutually
restrictive covenants with regard to confidentiality, indemnification,
disclosure of sales information, promotional use of products, and noncompete
agreements. Management believes the Company was in compliance with such
covenants at December 31, 1996.
OPERATING LEASES
The Company leases office space from an officer and shareholder under an
operating lease expiring December 2002. The Company has also advanced
approximately $360 for building improvements to the lessor, which will be repaid
ratably over the lease term. Lease payments of approximately $46 are due
monthly. Lease payments to the related party were $170 and $265 for 1995 and
1996, respectively. Also, the Company leases other office space and office
equipment from unaffiliated parties under operating leases over three to five
years. In February 1997, the Company entered into a lease for additional office
space
12
PHOTODISC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
NOTE 5: COMMITMENTS AND CONTINGENCIES (CONTINUED)
from an unrelated third party. Future minimum lease payments, including the
lease entered into in February 1997, are as follows:
YEAR ENDED
DECEMBER 31,
- -------------------------------------------------------------------------------------
1997................................................................................. $ 716
1998................................................................................. 1,329
1999................................................................................. 1,372
2000................................................................................. 1,372
2001................................................................................. 1,368
Thereafter........................................................................... 1,053
---------
$ 7,210
---------
---------
NOTE 6: EMPLOYEE BENEFITS
DEFINED CONTRIBUTION PLANS
Prior to 1996, the Company provided eligible employees with a Salary
Reduction Simplified Employee Pension Plan (SAR-SEP), which allowed employees to
contribute a portion of their wages to a tax-deferred individual retirement
account. The Company could also contribute to the plan at the discretion of the
Board of Directors. The voluntary contribution by the Company was $48 during
1995. The SAR-SEP was replaced with a 401(k) Savings Plan in 1996. The Company
can contribute to the plan at the discretion of the Board of Directors. There
were no contributions made by the Company during 1996.
STOCK OPTION PLANS
The Company has reserved 3,000,000 shares of common stock for issuance under
its 1994 Stock Option Plan for certain qualified employees and directors.
Options granted under this plan may be either incentive stock options or
nonqualified stock options and are generally granted at the fair market value of
the Company's common stock at the date of grant. Options vest and expire under
the terms established at the date of grant. The remaining contractual option
lives range from 8 to 10 years. The Company has agreed to pay an aggregate of
approximately $149 to two option holders upon their exercise of options to
purchase an aggregate of 859,200 shares should their options be about to
terminate or in connection with the occurrence of certain extraordinary
corporate events including the closing of the Merger Agreement described in Note
1 above. The Company will record compensation expense in the period in which
these payments occur. A summary of stock options, restated to reflect the
eight-for-one stock split, follows:
DECEMBER 31, WEIGHTED DECEMBER 31, WEIGHTED
1995 AVERAGE 1996 AVERAGE
------------- EXERCISE PRICE ------------- EXERCISE PRICE
SHARES (PER SHARE) SHARES (PER SHARE)
------------- --------------- ------------- ---------------
Outstanding, beginning of
period......................... 1,650,400 $ 0.1575 1,650,400 $ 0.1575
Granted.......................... -- 536,900 2.2200
Exercised........................ -- --
Canceled......................... -- (36,000) 0.1575
------------- -------------
Outstanding, end of period....... 1,650,400 $ 0.1575 2,151,300 $ 0.6722
------------- -------------
------------- -------------
Exercisable, end of period....... 477,667 $ 0.1575 1,407,334 $ 0.2361
------------- -------------
------------- -------------
13
PHOTODISC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
NOTE 6: EMPLOYEE BENEFITS (CONTINUED)
The following table summarizes information about common stock option outstanding
at December 31, 1996:
DECEMBER 31, 1996
--------------------------------------
WEIGHTED
AVERAGE
NUMBER OF REMAINING NUMBER OF
OPTIONS CONTRACTUAL OPTIONS
EXERCISE PRICES (PER SHARE) OUTSTANDING LIFE EXERCISABLE
- ------------------------------------------------------- ----------- ------------- ----------
$0.1575................................................ 1,614,400 7.64 1,353,734
$2.2200................................................ 536,900 9.65 53,600
----------- ----------
2,151,300 8.14 1,407,334
----------- ----------
----------- ----------
During 1995, the Company granted warrants to purchase 500,880 shares of
common stock at $0.125 per share to a majority shareholder and 167,592 shares at
$0.1575 per share to founding shareholders, in recognition of various
contributions to the Company since its inception. Fair value at the date of both
grants was deemed to be $0.1575 per share. The warrants expire on February 17,
2000.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized. Had compensation
expense been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net income would have been reduced to
the pro forma amounts indicated below:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Net income:
As reported.............................................................. $ 1,475 $ 2,712
Pro forma................................................................ $ 1,442 $ 2,650
The effects of applying SFAS No. 123 in the above pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to options granted
prior to 1995.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the foregoing assumptions:
expected life, 2 years following vesting; stock volatility, 0%; risk free
interest rates, 7.13% and 6.05% for the years ended December 31, 1995 and 1996,
respectively; and no dividends during the expected term.
14
PHOTODISC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
NOTE 7: INCOME TAXES
The provision for federal income taxes for 1995 and 1996 is comprised of the
following:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Current tax expense.......................................................... $ 816 $ 1,756
Deferred tax expense......................................................... 1 (156)
--------- ---------
$ 817 $ 1,600
--------- ---------
--------- ---------
The tax effects of the temporary differences comprising the Company's net
deferred tax assets at December 31, 1996 are as follows:
DECEMBER
31,
-----------
1996
-----------
Inventory.......................................................................... $ 64
Allowance for bad debt and returns................................................. 27
Prepaid expenses................................................................... (91)
Property and equipment.............................................................
Accrued payroll and related liabilities............................................ 58
Other accrued liabilities.......................................................... 112
-----
$ 171
-----
-----
15