<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 333-
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INDEX STOCK PHOTOGRAPHY, INC.
(Exact name of registrant as specified in its charter)
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Delaware 7319 13-362-8873
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(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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126 Fifth Avenue Bahar Gidwani
New York, New York 10011 Index Stock Photography, Inc.
(212) 929-4644 126 Fifth Avenue
(Address and telephone number of principal New York, New York 10011
executive offices) (212) 929-4644
(Name, address and telephone number
of agent for service)
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Copies to:
Arthur M. Schneck, Esq.
Joel W. Wagman, Esq.
Schneck Weltman Hashmall & Mischel LLP
1285 Avenue of the Americas
New York, New York 10019
(212) 956-1500
(212) 956-3252 (fax)
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Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [ ]
---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
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<PAGE>
CALCULATION OF REGISTRATION FEE
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- ------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Securities Amount To Be Offering Price Per Aggregate Offering Amount of
To Be Registered Registered Security Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock ($.0001 par value) 132,400(1) $6.04 $799,696 $275.74
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Common shares issuable upon exercise of Warrants issued in private
placement ("Private Placement Warrants"). Pursuant to Rule 466, there are
also registered such additional shares as may be issuable pursuant to
anti-dilution provisions of the Private Placement Warrants.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
=============================================================================
<PAGE>
INDEX STOCK PHOTOGRAPHY, INC.
CROSS REFERENCE SHEET
PURSUANT TO REGULATION C UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT")
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
FILED AS PART OF REGISTRATION STATEMENT
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Item Number
in Form S-1 Item Caption in Form S-1 Caption in Prospectus
--------------- -------------------------------------------------- -------------------------------------------------
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1 Forepart of the Registration Statement and Outside Cover Page
Outside Front Cover Page of Prospectus
2 Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages of Prospectus
of Prospectus
3 Summary Information, Risk Factors and Prospectus Summary; Summary Financial Information;
Ratio of Earnings to Fixed Charges Risk Factors
4 Use of Proceeds Use of Proceeds
5 Determination of Offering Price Front Page of Prospectus; Risk Factors; Underwriting
6 Dilution Dilution
7 Selling Security Holders Selling Stockholders; Plan of Distribution
8 Plan of Distribution Outside Front and Outside Back Cover Pages of Prospectus;
Underwriting; Plan of Distribution
9 Description of Securities to be Registered Description of Capital Stock
10 Interests of Named Experts and Counsel Legal Matters; Experts
11 Information with Respect to Registrant Business; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Facilities; Legal Proceedings; Financial Statements;
Selected Financial Information; Management; Principal
Stockholders; Certain Transactions
12 Disclosure of Commission Position on Management-Limitation of Liability and
Indemnification for Securities Act Liabilities Indemnification Matters
</TABLE>
<PAGE>
EXPLANATORY NOTE
Index Stock Photography, Inc. recently filed a registration statement
covering 1,000,000 shares of Common Stock. The form of Prospectus for such
offering is substantially identical in all respects to the prospectus
included in this registration statement ("Selling Stockholders Prospectus")
except where the context requires otherwise.
<PAGE>
==============================================================================
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
==============================================================================
PRELIMINARY PROSPECTUS DATED JULY 3, 1996
SUBJECT TO COMPLETION
INDEX STOCK PHOTOGRAPHY, INC.
132,400 SHARES OF COMMON STOCK
This Prospectus relates to the sale by certain selling stockholders (the
"Selling Stockholders") of 132,400 shares of Common Stock of Index Stock
Photography, Inc. (the "Company"). None of the proceeds from the sale of the
Common Stock by the Selling Stockholders will be received by the Company. The
Company will bear all expenses (other than selling commissions and fees and
expenses of counsel or other advisors to the Selling Stockholders) in
connection with the registration and sale of the Common Stock being offered
by the Selling Stockholders. See "Plan of Distribution."
The Common Stock will be offered by the Selling Stockholders in
transactions in the over-the-counter market, in negotiated transactions or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices (the "Concurrent
Offering"). The Selling Stockholders may effect such transactions by selling
the Common Stock to or through broker/dealers, and such broker/dealers may
receive compensation in the form of discounts, concessions or commissions
from the Selling Stockholders and/or the purchasers of the Common Stock for
whom such broker/dealers may act as agent or to whom they sell as principal,
or both. The Selling Stockholders may be deemed to be "underwriters" as
defined in the Securities Act of 1933 (the "Securities Act"). If any
broker-dealers are used by the Selling Stockholders, any commissions paid to
broker-dealers and, if broker-dealers purchase any shares of Common Stock as
principals, any profits received by such broker-dealers on the resales of the
shares of Common Stock may be deemed to be underwriting discounts or
commissions under the Securities Act. In addition, any profits realized by
the Selling Stockholders may be deemed to be underwriting commissions. All
costs, expenses and fees in connection with the registration of the shares
offered by selling Stockholders will be borne by the Company. Brokerage
commissions, if any, attributable to the sale of the shares will be borne by
the Selling Stockholders. See "Selling Stockholders" and "Plan of
Distribution."
The Common Stock is traded on The Nasdaq SmallCap Market(SM) ("Nasdaq")
under the symbol "ISPI" and on the Boston Stock Exchange under the symbol
"ISP."
Concurrently with the commencement of this offering, the Company offered
by separate Prospectus, 1,000,000 shares of Common Stock. The Company's
offering (the "Offering") was offered through Kaufman Bros., L.P. (the
"Representative").
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASER
OF THE COMMON STOCK IN THE CONCURRENT OFFERING.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is 1996.
<PAGE>
This Prospectus makes references to trademarks of other companies, which
marks are the property of such companies.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise indicated, the information set forth in
this Prospectus assumes no exercise of the Underwriters' over-allotment
option. References to share amounts issued and outstanding prior to this
Offering have been adjusted for a .662- for-one reverse stock split effected
in May 1996 and assume conversion to Common Stock of all shares of preferred
stock outstanding prior to this Offering.
THE COMPANY
Index Stock Photography, Inc. ("Index Stock" or the "Company") is both a
leading still image provider to traditional users of stock photography and an
Internet content provider. The Company has developed a proprietary system for
image storage, retrieval and transmission (the "Telephoto System") that
allows its employees and customers to find, select and receive images
electronically, using either keyword- or category-based search techniques.
Index Stock licenses its library of more than one million images for fees
based upon the type and nature of their use. Since its inception, the Company
has licensed images to more than 50,000 customers in 35 countries worldwide.
These images are provided to commercial users of stock photography, such as
advertisers, graphic designers and publishers, as well as to emerging new
markets of multimedia producers, consumer users and desktop publishers in the
growing small office / home office ("SOHO") market. The Company distributes
images to professional users through two offices in the United States and 21
independent foreign agents and to the consumer and SOHO markets via on-line
networks, such as CompuServe, Prodigy, and the World Wide Web portion of the
Internet. Index Stock has also developed image selection and layout tools
that allow users to search for, select and manipulate electronic versions of
down-loaded images. The Company promotes its images using printed and CD-ROM
catalogs, direct sales, direct mail, print advertising and public
appearances.
Companies in the $500 million per year traditional stock photography
industry provide a cost-and time-efficient alternative to hiring a
professional photographer by providing film-based still images for commercial
use in print and video advertisements, and for packages, calendars, greeting
cards, magazines, books and newspapers. Rapid technological change, resulting
in widespread availability of powerful and inexpensive personal computers and
desktop publishing software, is contributing to the consolidation of the
stock photography industry. The Company has taken advantage of this trend by
acquiring selected assets of four agencies to establish and expand its base
of images and photographers. During April 1996, the Company began providing
selected customers a secure Internet link to the Telephoto System and
believes that direct access to its images via the Internet will continue to
be attractive to its professional customer base. Index Stock believes that
its Telephoto System gives it a strategic advantage over competitors in the
traditional stock photography market.
The Company's decision in 1991 to commit fully to digitize and automate
its library using electronic imaging and communication technology has also
allowed it to expand into the rapidly developing new multimedia, consumer and
SOHO markets through on-line services and the Internet. Index Stock believes
that these new markets represent its largest opportunity as consumer on-line
services and Internet use grow, coupled with the popularity of desktop
publishing. Since November 1994, the Company has licensed images directly to
consumers through its on-line service, Photos to Go(TR) (available both on
CompuServe and the World Wide Web), for use in presentations, school reports,
screen savers and as illustrations on both personal and corporate "websites."
Consumers can also access and license images through Sprint's TPX system,
through Knight-Ridder's PressLink system, and through Infonautics' Electric
Library service (available currently on Prodigy, the Microsoft Network, and
the World Wide Web). The Company has also published sets of images on CD-ROM
discs that are distributed by Corel Corporation and PhotoDisc. Unlike many
Internet content providers, Index Stock's consumer market business will not
be dependent upon its ability to generate revenues from the sale of
advertising.
3
<PAGE>
Index Stock's Telephoto System allows it to scan, categorize, store and
retrieve thousands of still images in a more cost-effective, timely, and
convenient manner than has previously been possible. The Company's library
contains images contributed by over 400 independent photographers and graphic
artists who are affiliated with the Company, and by 21 other independent
still image suppliers, who in turn represent many additional artists. To
date, it has stored information on more than 150,000 images in the Telephoto
System. With development assistance from companies, including Microsoft,
Apple Computer, Netscape, Adobe and Accusoft, who provide technical support,
pre-release versions of software, and code libraries, the Company has created
a system that can search for and retrieve more than 60 images per minute over
a 28.8 kbps modem.
The Company's objective is to be the leading provider of still images to
both traditional advertising and publishing users and to new consumer and
SOHO users. The Company's strategy includes the following key elements: (i)
maintain leading edge technology; (ii) develop new multimedia, consumer and
SOHO markets; (iii) expand international presence; (iv) expand the Company's
image collection by continuing to add photographers, acquire additional
collections and affiliate with other sources of still images; and (v) develop
and introduce new products and services, including delivery of content other
than still images.
Index Stock was incorporated in Delaware in April 1991. Its principal
executive offices are located at 126 Fifth Avenue, New York, New York 10011
and its telephone number is (212) 929-4644. The Company's Internet mail
address is infoindexstock.com. Its address on the World Wide Web is
http://www.indexstock.com.
THE OFFERING
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<S> <C>
Securities offered ................ 1,000,000 shares
Securities outstanding prior to
the Offering(1) .................. 1,366,523 shares
Securities to be outstanding
after the Offering(1) ............ 2,366,523 shares
Use of Proceeds ................... To repay certain indebtedness and for general corporate
purposes, including working capital
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CONCURRENT OFFERING
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<S> <C>
Securities offered(2) ................. 132,400 shares
Securities, to be outstanding after the
Concurrent Offering(1)(2) ............ 2,498,923 shares
Use of Proceeds ....................... The Company will not receive any proceeds from the sale
of shares in the Concurrent Offering.
</TABLE>
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(1) Does not include: (i) 131,076 shares underlying outstanding options to
purchase shares under the Company's 1992 Non-qualified Stock Option Plan
at exercise prices ranging from $.88 to $4.53 per share; (ii) 132,400
shares underlying warrants exercisable at $6.04 per share issued by the
Company in a private financing in April 1996; (iii) 9,930 shares
underlying a warrant exercisable at $4.98 per share issued by the Company
in a private financing in January 1996, or (iv) any 100,000 shares
issuable upon exercise of the Representative's Warrants
(2) Issuable upon exercise of warrants exercisable at $6.04 per share.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six months
Year ended October 31 ended April 30
------------------------------------- ----------------------
1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ............................... $ 1,386 $ 1,732 $ 2,215 $ 993 $ 1,242
Commission expense ..................... (410) (512) (705) (291) (419)
Selling, general and administrative
expenses ............................. (1,066) (1,071) (1,488) (743) (897)
Research and development expenses ...... (255) (388) (424) (198) (260)
------- ------- ------- ------- -------
Income (loss) from operations .......... (345) (239) (402) (239) (334)
Net income (loss) ...................... (358) (255) (421) (245) (357)
Accretion of Series A and Series B
Preferred Stock ...................... (392) (510) (666) (333) (372)
Net income (loss) attributable to
common stockholders(1) ............... $ (750) $ (765) $(1,087) $ (578) $ (729)
======= ======= ======= ======= =======
Net income (loss) per share attributable
to common stockholders(1) ............ $ (0.54) $ (0.52) $ (0.72) $ (.39) $ (.47)
======= ======= ======= ======= =======
Weighted average number of shares used
in calculation of income (loss) per
share(2) ............................. 1,392 1,478 1,520 1,484 1,550
</TABLE>
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<CAPTION>
April 30, 1996
------------------------------------
Actual As Adjusted(3)
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<S> <C> <C>
Balance Sheet Data:
Working capital ........... $(267) $7,133
Total assets .............. 798 7,698
Long-term liabilities ..... 63 63
Total stockholders' equity . (23) 7,377
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(1) Net income (loss) attributable to common stockholders represents net
income (loss) after deducting the accretion of Series A and Series B
Preferred Stock. Although the Series A and Series B Preferred Stock will
be automatically converted to Common Stock effective with the closing of
this Offering, the carrying values of the Preferred Stock have been
increased by periodic accretions, based on the interest method, of the
difference between the fair value at the dates of issuance and the
redemption dates, at which time both amounts would be equivalent.
(2) The weighted average number of shares used in calculation of net income
(loss) per share includes all shares of Common Stock outstanding during
each year and 441,334 shares of Common Stock attributable to the
automatic conversion of the Series A and Series B Preferred Stock to
Common Stock effective with the closing of this Offering. The 441,334
shares are presumed to be outstanding since the issue date of the Series
A and Series B Preferred Stock. In addition, Common Stock and common
stock equivalents issued by the Company at prices below the initial
public offering price during the twelve month period prior to this
Offering have been included in the calculation as if they were
outstanding for all periods presented.
(3) Adjusted to give effect to (a) the sale of 1,000,000 shares of Common
Stock hereby at an assumed initial public offering price of $9 per share
(the midpoint of the range of the estimated initial public offering
price) and the application of the net proceeds therefrom, after deducting
the estimated underwriting discounts and commissions and offering
expenses payable by the Company and (b) the automatic conversion of the
Company's outstanding Preferred Stock effective with the closing of this
Offering. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors, prior to making an investment decision, should
consider carefully, in addition to the other information contained in this
Prospectus (including the financial statements and notes thereto), the
following risk factors. This Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results could differ materially. Factors that could
cause or contribute to such differences include, but are not limited to,
those discussed below, as well as those discussed elsewhere in the
Prospectus.
Limited Operating History; Operating Losses. The Company was incorporated
in April 1991, and accordingly has only a limited operating history upon
which an evaluation of the Company's business and prospects can be based. As
of April 30, 1996, the Company had an accumulated deficit of $3,281,660. The
Company incurred net losses of $420,948 and $255,081 for the fiscal years
ended October 31, 1995 and October 31, 1994, respectively, and incurred net
losses of $356,519 and $245,452 for the six months ended April 30, 1996 and
April 30, 1995, respectively. Significant portions of the Company's losses
were attributed to costs associated with developing computer software to
automate the finding, storing and distributing of images. The Company's
losses are expected to continue through at least the end of fiscal 1997, and
there can be no assurance that the Company will not continue to incur losses
thereafter. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Potential Fluctuations in Operating Results. The Company has experienced
and expects to experience fluctuations in its quarterly results. The
Company's revenues are affected by a number of factors, including: (i) the
timing of introduction of new printed and CD-ROM catalogs, promotional
mailings and advertisements; (ii) the timing of similar promotional activity
by major competitors; (iii) the payment of large license fees; (iv) seasonal
and holiday-related changes in activity in the Company's consumer on-line
services; and (v) foreign exchange rate fluctuations. The Company's operating
results also could fluctuate significantly from period to period in the
future depending upon changes in pricing, changes in customer budgets and the
volume and timing of orders received during the quarter, which are difficult
to forecast. As a result of the foregoing and other factors, the Company may
experience material fluctuations in revenues and operating results on a
quarterly or annual basis. Therefore, the Company believes that period to
period comparisons of its revenues and operating results are not necessarily
meaningful and should not be relied upon as indicators of future performance.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Inability to Replace Still Images. The Company has duplicates of
approximately 20,000 of its highest-quality and frequently-licensed still
images. Most of the duplicates are located in Index Stock's New York office.
The remaining duplicates are in its Los Angeles office and with the Company's
foreign agents. These still images are positive transparencies and cannot be
further duplicated satisfactorily under current technology. They can be
damaged by careless handling. In addition, heat, smoke and water in the event
of a fire could irreparably damage these still images. Insurance coverage
under such circumstances may be insufficient to cover such losses and the
injury that could result to the Company's business. Accordingly, damage to a
substantial number of the Company's images could have a material adverse
affect upon the Company's business.
Absence of Ownership Rights. The Company is dependent upon having a broad
range and expanding supply of images. Index Stock does not own any of the
images that it licenses to its customers and is dependent upon sources of
images not within its direct control. The Company enters into agreements with
photographers and agencies to supply it with images. The number of
photographers and agencies providing images to the Company has increased from
year to year since the Company's inception, although there can be no
assurance that this pattern will continue or that the Company will continue
to be able to source high-quality images upon terms and conditions favorable
to the Company or at all. See "Business--Marketing" and "--Proprietary
Rights."
Risk of Nonpayment. The Company's images are sent to customers and foreign
affiliates on an approval basis. Index Stock's business may be adversely
affected if a substantial number of its customers utilize images without
making the appropriate payment based upon the intended nature and frequency
of use.
6
<PAGE>
Market Acceptance of Image Subject Matter. Index Stock's image library
contains still images considered by the Company to be suitable for
presentations, advertising and concept uses, packaging, book covers, magazine
and newspaper articles, calendars and greeting cards. There can be no
assurance that user tastes will not change or that the Company will adapt
timely in obtaining or be able to obtain images responsive to changes in user
preferences. See "Business--Marketing."
Technology Development and Change. The Company's success will depend, in
part, upon its ability to continue to deliver its products directly to its
customers using various electronic storage and transmission technologies. It
is possible that new technologies could require the Company to change its
operating systems in ways it has not anticipated. Each time technology
changes, new software must be developed. These changes could place unexpected
financial burdens on the Company and its business and prospects. Although the
Company provides access to its services across multiple delivery channels,
including commercial on-line services, the success of the Company's products
and services depends on, among other things, the continual expansion and
popularity of the Internet and its network infrastructure, of which no
assurance can be given.
Uncertainty of New Markets. The Company's revenues at present are derived
principally from license fees paid for the commercial use of images licensed
in the advertising and design markets--the traditional markets of the stock
photography industry. While the consumer and SOHO markets are believed by the
Company to represent substantial growth opportunities, consumer acceptance of
purchasing goods and services on-line is uncertain and the Company has no
independent marketing or feasibility studies on whether the Company is likely
to be successful in developing these markets. The Company has limited
experience in the consumer and SOHO markets and no assurance can be given
that the Company will be able to adapt to changing conditions in these
markets. A significant portion of the proceeds from this Offering will be
used for product development and sales and marketing initiatives for the
consumer and SOHO markets. There can be no assurance that the Company will be
successful in penetrating these markets or maintaining any market share it
may obtain. See "Business-- Industry Overview" and "--Marketing."
Competition. The markets in which the Company operates are competitive.
There are several hundred sources of still images in the United States and in
foreign countries. Certain competitors, including divisions or subsidiaries
of large companies, have greater financial and marketing resources than the
Company. There can be no assurance that the Company will be able to compete
successfully in the future against existing or potential competitors or that
operating results will not be adversely affected by price competition from
the Company's larger competitors. See "Business--Competition."
Dependence Upon Intellectual Property. The Company's success is dependent
to a significant degree on its proprietary technology. The Company relies on
a combination of trade secrets and non-disclosure agreements with its
employees to establish and protect its proprietary rights. The Company does
not have any patents on the Telephoto System for image storage, selection and
retrieval. There can be no assurance that steps taken by the Company to
protect its intellectual property will be adequate to prevent
misappropriation. Further, there can be no assurance that others will not
independently develop technologies that are similar or superior to the
Company's technology. See "Business --Proprietary Rights."
Reliance Upon Distributors. A substantial portion of the Company's
revenues are derived from fees generated by foreign agents and parties with
whom the Company has strategic alliances that cover CD-ROM and on-line
marketing. There can be no assurance that these contract parties will
continue to perform satisfactorily or continue these agreements with the
Company in the future or that the terms available will not become more
burdensome to the Company. These contract parties generally are not subject
to any minimum purchase requirements and can discontinue marketing the
Company's products at any time upon proper notice. Accordingly, the Company
must compete for the focus and sales efforts of these contract parties.
Dependence on Third Party Software Vendors. The Company relies upon
software licensed from third parties including Microsoft, Apple Computer,
Adobe and Accusoft. The Company uses this software pursuant to standard
license agreements that limit or eliminate liability of the software supplier
in the event of a failure of product performance. These vendors also provide
the Company with development assistance, such as technical
7
<PAGE>
support, pre-release versions of software, and code libraries. Their
assistance could be discontinued at any time. Development of the Company's
image library without the product and technical support of these vendors
would likely delay continuing product development and materially adversely
affect operations.
Risk of System Failure and Security Risks. An increasing portion of the
Company's revenues and growth is expected to come from on-line licensing of
images. These on-line licensing systems will need to operate continuously and
reliably if the Company is to maintain its growth and maintain good relations
with its customers. Accordingly, any interruption in service could have a
material adverse effect on the Company. System failures could arise from a
break in the Company's connection to the Internet, power failures on its
premises, software or hardware failure in key components of the image
management or delivery system, or a failure in the systems of one or more
other outside services. While the Company has taken steps to minimize the
long-term effects of system failures, their occurrence could still have a
material adverse effect on the Company's business, results of operation, and
financial condition.
Despite the implementation of network security measures by the Company
such as limiting physical and network access to its hardware and software
systems, the Company's Internet infrastructure is vulnerable to computer
viruses, break-ins and similar disruptions caused by its customers or other
Internet users. Such problems caused by third parties could lead to
interruption, delays, or cessation in service to the Company's consumer and
SOHO users. Until comprehensive security technologies are developed, the
security and privacy concerns of existing and potential customers may inhibit
the growth of the Company's customer base and revenues.
Dependence on Key Personnel; Need to Hire Additional Qualified Personnel.
The Company is highly dependent on the technical and management skills of its
key employees, many of whom would be difficult to replace. The loss of the
services of any key personnel, including Mr. Bahar Gidwani, the Company's
Chairperson and Chief Executive Officer, could have a material adverse effect
upon the Company. Index Stock has entered into an employment agreement with
Mr. Gidwani. Prior to the completion of this Offering, the Company plans to
obtain key-person life insurance of $2,000,000 on Mr. Gidwani. Index Stock's
future success will also depend upon its ability to attract and retain
qualified management and technical personnel to support its future growth.
Competition for personnel is intense and there can be no assurance that the
Company will be successful in attracting or retaining qualified personnel.
The failure to attract and/or retain such persons could materially adversely
affect the Company's business, results of operation and financial condition.
See "Management."
Control by Current Stockholder, Officer and Director. Bahar Gidwani will
beneficially own immediately after this Offering approximately 32% of the
outstanding Common Stock of the Company (31% assuming exercise of the
Underwriters' over-allotment option). This ownership concentration may
provide him with effective control of the outcome of all matters submitted to
the stockholders for approval, including the election of directors of the
Company. As a result, Mr. Gidwani would be able to control the Company's
affairs and management. See "-- Ability to Issue Preferred Stock;
Anti-Takeover Effects of Delaware Law" and "Principal Stockholders."
Broad Management Discretion in the Use of Proceeds. A large portion of the
proceeds of this Offering has been allocated to working capital on a basis
that is subject to very broad discretion on the part of management. The
Company's management will have the discretion to allocate a large percentage
of the proceeds to uses which the stockholders may not deem advisable. There
can be no assurance that the use of proceeds can or will yield a return. See
"Use of Proceeds."
No Prior Public Market; Determination of Offering Price; Share Price
Volatility. There has been no public market for the Company's Common Stock
prior to this Offering and there can be no assurance that an active trading
market in the Common Stock will develop or be sustained after this Offering.
While the Company's Common Stock is expected to be eligible for initial
listing on the Nasdaq SmallCap Market(SM) immediately upon the closing of
this Offering, there can be no assurance that an active trading market will
develop or be sustained or that the market price of the Common Stock will not
decline below the initial public offering price. The initial public offering
price will be determined through negotiations between the Company and the
Representative and may not be indicative of the market price for the Common
Stock following this Offering. In addition, factors like announcements by the
Company, variations in its quarterly financial results, or failure to meet
securi-
8
<PAGE>
ties analysts' expectations, among other things, could cause the market price
of the Common Stock to fluctuate significantly. Further, in recent years the
stock market in general and the market for shares of small capitalization
stocks in particular have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of the affected companies.
Such fluctuations could adversely affect the market price of the Common
Stock. See "Underwriting."
Ability to Issue Preferred Stock; Anti-Takeover Effects of Delaware
Law. The Company's Board of Directors has authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges thereof, including voting rights, without any further vote or
action by the Company's stockholders. The voting and other rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change
in control of the Company. The Company has no current plans to issue any
shares of Preferred Stock. In addition, the Delaware General Corporation Law
contains provisions that may have the effect of delaying, deferring or
preventing a non-negotiated merger or other business combination involving
the Company. These provisions are intended to encourage any person interested
in acquiring the Company to negotiate with and obtain the approval of the
Board of Directors in connection with the transaction. However, certain of
these provisions may discourage a future acquisition of the Company in which
stockholders might receive an attractive value for their shares or that a
substantial number or even a majority of the stockholders might believe to be
in the best interest of stockholders. As a result, stockholders who desire to
participate in such a transaction may not have the opportunity to do so.
These provisions could also discourage bids for the shares at a premium, as
well as serve to create a depressive effect on the market price of the
shares. See "Description of Securities."
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after completion of this Offering, the Company will have
2,366,523 shares (not including the 132,400 shares offered in the Concurring
Offering) of Common Stock outstanding, of which 1,000,000 shares offered
hereby will be eligible for sale without regard to volume or other
limitations pursuant to Rule 144 under the Securities Act of 1933 (the
"Securities Act"), unless purchased by "affiliates" (as defined under Rule
144), which shares would be subject to resale limitations of Rule 144. Sale
of all of the remaining shares (1,366,523) is limited by restrictions under
the Securities Act and lock-up agreements under which the holders of such
shares have agreed not to sell or otherwise dispose of any of their shares
for a period of 12 months after the date of this Prospectus, without the
prior written consent of the Representative, which may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreement. See "Underwriting." Sales of
substantial amounts of Common Stock in the public market, or the perception
that such sales may occur, could adversely affect the prevailing market price
of the Common Stock and the ability of the Company to raise capital through a
public offering of its equity securities. Following the expiration of the
12-month lock-up period, 1,268,547 shares of Common Stock will be eligible
for sale in the public market without registration, subject to certain volume
and other limitations, pursuant to Rule 144 under the Securities Act. Of
these shares, 249,580 shares may be sold without regard to such limitations
pursuant to Rule 144(k). In January 1998, April 1998 and May 1998,
respectively, 19,860, 71,496 and 6,620 additional shares of Common Stock will
be eligible for sale in the public market under Rule 144. Subject to the
provisions of the lock-up agreements, all shares of Common Stock outstanding
on the date of this Prospectus will be eligible for sale to certain qualified
institutional buyers in accordance with Rule 144A under the Securities Act.
Additional shares, including shares issuable upon exercise of options, will
also become available for sale in the public market from time to time in the
future. Certain of the Company's stockholders have the right to cause the
Company to include their shares in future registrations of securities
effected by the Company under the Securities Act. An aggregate of 545,126
shares of Common Stock presently outstanding or issuable upon exercise of an
outstanding warrant are subject to such registration rights. If the exercise
of these piggy-back registration rights cause a large number of shares to be
registered and sold in the public market, these sales may have an adverse
effect on the market price of the Common Stock. If the Company is required to
include these shares in a Company-initiated registration statement, this may
have an adverse effect on the Company's ability to raise needed capital. In
addition, 132,400 shares of Common Stock underlying outstanding warrants have
been registered for sale and are being offered
9
<PAGE>
hereby, although the holders of such warrants have agreed not to sell or
otherwise offer such shares publicly for a 12-month period following the date
of this Prospectus, subject to the right of the Underwriters to release them,
in whole or in part, from such restriction. See "Principal Stockholders,"
"Shares Eligible for Future Sale," and "Description of Capital
Stock--Registration Rights."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in this Offering will experience
immediate and substantial dilution in the net tangible book value per share.
See "Dilution."
10
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of shares of
Common Stock in the Concurrent Offering. The net proceeds to the Company from
the sale of the 1,000,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $9 per share (the
midpoint of the range of the estimated initial public offering price) are
estimated to be approximately $7,400,000 ($8,608,250 if the Underwriters'
over-allotment option is exercised in full), after deducting estimated
underwriting discounts and commissions and offering expenses. The Company
plans to use $500,000 to repay short term indebtedness incurred during the
second quarter of fiscal 1996 from certain individuals including principal
stockholders of the Company, none of whom is an officer or director of the
Company. A portion of the proceeds from this indebtedness was used to repay
certain cash advances made to the Company by its Chief Executive Officer. No
interest was charged or accrued with respect to such advances. See "Certain
Transactions." Approximately $3,000,000 will be spent on direct mail,
promotions and sales expenses associated with the Company's continued
expansion into the multimedia, consumer and SOHO markets and the remaining
net proceeds will be used for working capital and general corporate purposes.
The Company intends to invest the net proceeds in short-term,
investment-grade, interest-bearing instruments, pending use of the proceeds.
The Company believes that based upon its present business plan, the net
proceeds from this Offering will be sufficient to meet its currently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. See "Risk Factors -- Broad Management Discretion in Use
of Proceeds."
11
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock
and does not expect to pay dividends for the foreseeable future. The Company
currently intends to retain its earnings, if any, for use in its business.
Any future declaration of dividends will be subject to the discretion of the
Board of Directors of the Company and subject to restrictions that may be
imposed by any prospective lender to the Company.
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the
Company at April 30, 1996; (ii) the capitalization of the Company on a pro
forma basis to give effect to automatic conversion of the Company's
outstanding shares of Preferred Stock effective with the closing of this
Offering; (iii) the capitalization of the Company on a pro forma basis as
adjusted, to reflect the sale by the Company of the 1,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of $9
per share (the midpoint of the range of the estimated initial public offering
price), after deducting estimated underwriting discounts and commissions and
offering expenses, and the anticipated application of the net proceeds of
this Offering. See "Use of Proceeds." This table should be read in
conjunction with the Financial Statements and the notes thereto appearing
elsewhere in the Prospectus.
<TABLE>
<CAPTION>
April 30, 1996
----------------------------------------------
Pro forma
Actual Pro forma As Adjusted
------------- ------------- -------------
<S> <C> <C> <C>
Loan payable-bank (long-term portion) ................ $ 62,700 $ 62,700 $ 62,700
Notes Payable ........................................ 500,000 500,000 --
Stockholders' equity(1):
Preferred Stock, $.01 par value; 2,000,000 shares
authorized; 441,333 issued and outstanding; none
issued pro forma and pro forma as adjusted ...... 3,258,659 -- --
Common Stock, $.0001 par value; 10,000,000 shares
authorized; 918,570 shares issued and outstanding
(actual); 1,359,903 shares issued and outstanding
(pro forma); 2,359,903 shares issued and
outstanding (pro forma as adjusted) ............. 92 136 236
Additional paid-in capital ......................... -- 3,258,615 10,658,515
Accumulated deficit ................................ (3,281,660) (3,281,660) (3,281,660)
------------- ------------- -------------
Total stockholders' equity .................... (22,909) (22,909) 7,377,091
------------- ------------- -------------
Total capitalization .......................... $ 539,791 $ 539,791 $ 7,439,791
------------- ------------- -------------
</TABLE>
- ------
(1) Does not include: (i) 131,076 shares underlying outstanding options to
purchase shares under the Company's 1992 Non-qualified Stock Option Plan;
(ii) 132,400 shares of Common Stock underlying warrants issued by the
Company in a private financing in April 1996; (iii) 9,930 shares
underlying a warrant issued by the Company in a private financing in
January 1996; and (iv) 100,000 shares issuable upon exercise of the
Representative's Warrants.
12
<PAGE>
DILUTION
At April 30, 1996, the net tangible book value of the Company was
$(56,700), or approximately $(.04) per share. The net tangible book value per
share represents the amount of total assets (excluding intangible assets)
less total liabilities, divided by the total number of shares of Common Stock
outstanding, including shares of Preferred Stock automatically converted to
Common Stock upon completion of this Offering.
After giving effect to (i) the receipt of $7,400,000 of estimated net
proceeds from the sale by the Company of 1,000,000 shares of Common Stock in
this Offering at an assumed initial public offering price of $9 per share
(the midpoint of the range of the estimated initial public offering price)
and (ii) the use of such net proceeds as described under "Use of Proceeds,"
the net tangible book value at April 30, 1996 would have been $6,843,300 or
$2.90 per share of Common Stock. This represents an immediate increase in net
tangible book value of $2.94 per share of Common Stock to existing
stockholders and an immediate dilution to new investors of $6.10 per share of
Common Stock. The following table illustrates such dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share ...... $9.00
Net tangible book value per share before this Offering (.04)
Increase per share attributable to new investors ... 2.94
-------
Net tangible book value per share after this Offering . 2.90
-------
Dilution per share to new investors .................. $6.10
=======
</TABLE>
The following table sets forth at April 30, 1996, the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by the existing holders of Common Stock and by
new investors purchasing shares of Common Stock sold by the Company in this
Offering, assuming the sale of 1,000,000 shares of Common Stock by the
Company at an assumed initial public offering price of $9 per share (the
midpoint of the range of the estimated initial public offering price):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
------------------------ -------------------------- ---------------
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders . 1,359,903 57.6 $ 1,834,662 16.9 $1.35
New investors ....... 1,000,000 42.4 $ 9,000,000 83.1 $9.00
----------- --------- ------------- ---------
TOTAL. ............. 2,359,903 100.0% $10,834,662 100.0%
=========== ========= ============= =========
</TABLE>
The above information assumes no exercise of the Representative's Warrants
and no exercises of any outstanding options or warrants to purchase shares of
the Company's Common Stock. As of April 30, 1996, there were outstanding
131,076 options to purchase shares of Common Stock at exercise prices ranging
from $.88 to $4.53 per share and 142,330 warrants to purchase shares of
Common Stock at exercise prices ranging from $4.98 to $6.04 per share. The
issuance of shares of Common Stock upon the exercise of such options or
warrants may result in further dilution to new investors.
13
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected financial information presented below for each of the five
years ending with the period ended October 31, 1995 has been derived from the
Company's financial statements, which have been audited by Ernst & Young LLP,
independent auditors. The selected financial information presented below for
the six months ended April 30, 1995 and 1996 has been derived from unaudited
financial statements of the Company which included, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the quarterly selected financial information. The
results for any six month period are not necessarily indicative of the
results of operations for a full year or any other six month period. The
selected financial information should be read in conjunction with the
Financial Statements and the notes thereto and other financial information
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six months
Year ended October 31, ended April 30,
--------------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
---------------- ------- ------- ------- --------- ------- -------
Inception (in thousands except per share data)
(April 23, 1991
to October 31,
1991)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Revenues ........................... $ -- $1,269 $1,386 $1,732 $ 2,215 $ 993 $1,242
Operating Expenses:
Commissions .......................... -- 443 410 512 705 291 419
Selling, general and administrative .. 35 1,045 1,066 1,071 1,488 743 897
Research and development ............. 232 255 388 424 198 260
Income (loss) from operations .......... (35) (451) (345) (239) (402) (239) (334)
Net income (loss) ...................... (29) (438) (358) (255) (421) (245) (357)
Accretion of Series A and Series B Preferred
Stock ................................ -- (301) (392) (510) (666) (333) (372)
Net income (loss) attributable to common
stockholders(1) ...................... (29) (739) (750) (765) (1,087) (578) (729)
Net income (loss) attributable to common
stockholders per share(1) ............ $(.03) $ (.55) $ (.54) $ (.52) $ (.72) $ (.39) $ (.47)
Weighted average number of shares
outstanding(2) ....................... 837 1,335 1,392 1,478 1,520 1,484 1,550
</TABLE>
<TABLE>
<CAPTION>
April 30, 1996
-------------------------------------
Actual As Adjusted(3)
-------- --------------
<S> <C> <C>
Balance Sheet Data:
Cash ...................... $ -- $6,900
Working capital ........... (267) 7,133
Total assets .............. 798 7,698
Total stockholders' equity . (23) 7,377
</TABLE>
- ------
(1) Net income (loss) attributable to common shareholders represents net
income (loss) attributable to common stockholders after deducting the
accretion of Series A and Series B Preferred Stock. Although the Series A
and Series B Preferred Stock will be automatically converted to Common
Stock effective with the closing of this Offering, the carrying values of
the Preferred Stock have been increased by periodic accretions, based on
the interest method, of the difference between the fair value at the
dates of issuance and the redemption dates, at which time both amounts
would be equivalent.
(2) The weighted average number of shares used in calculation of net income
(loss) per share includes all shares of Common Stock outstanding during
each year and 441,334 shares of Common Stock attributable to the
automatic conversion of the Series A and Series B Preferred Stock to
Common Stock effective with the closing of this Offering. The 441,334
shares are presumed to be outstanding since the issue date of the Series
A and Series B Preferred Stock. In addition, Common Stock and common
stock equivalents issued by the Company at prices below the initial
public offering price during the twelve month period prior to this
Offering have been included in the calculation as if they were
outstanding for all periods presented.
(3) Adjusted to give effect to (a) the sale of 1,000,000 shares of Common
Stock hereby at an assumed initial public offering price of $9 per share
(the midpoint of the range of the estimated initial public offering
price) and the application of the net proceeds therefrom, after deducting
the estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company and (b) the automatic conversion
of the Company's outstanding Preferred Stock effective with the closing
of this Offering. See "Use of Proceeds" and "Capitalization."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements, including the notes thereto, included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."
OVERVIEW
Index Stock licenses high-quality photographs for use by advertisers,
graphic designers, publishers and multimedia producers. The Company
established operations in 1991 with the acquisition of selected business
assets of a major New York-based stock photography agency, Index Stock
International, Inc. Since then, the Company acquired selected assets from
three other stock photography agencies, Telephoto, Inc. in 1992, ProFiles
West in 1995 and Southern Stock in 1996. These acquisitions helped expand the
Company's image library from 200,000 to more than one million images and its
list of image providers from 92 to over 400.
Since beginning operation in 1991, Index Stock (i) designed and built its
Telephoto System, a proprietary hardware and software system for scanning,
storing, keywording and retrieving images; (ii) loaded information on more
than 150,000 images into this system; and (iii) acquired assets from and
combined the operations of four established stock photo agencies. Through the
end of fiscal 1995, the Company invested approximately $1.3 million in
developing versions of the Telephoto System and $0.4 million in loading
information on images. In connection with its asset purchases, Index Stock
made payments of approximately $567,000, including $362,000 for consulting
and non-competition agreements, and issued approximately 143,500 shares of
the Company's common stock. The first two acquisitions provided the Company
with a broad base of images and photographers and the core of its foreign
agent network. The two more recent asset purchases added more specialized
collections of images. ProFiles West provided images on the American West,
outdoor sports, Western travel and nature and Southern Stock provided images
on the Southeast, water sports, marine life, the Caribbean, Southeastern
travel and nature. Typical fees for commercial users average $475 per image.
Consumer and SOHO market customers are charged a fee varying from about $5 to
$100 per image.
Costs and expenses incurred in connection with the development of the
Company's proprietary hardware and software system were expensed as incurred
in accordance with generally accepted accounting principles. Research and
development expenditures planned for the year ending October 31, 1996 are
related to testing and evaluation of the Telephoto System and alternative
applications of this system. Most of these costs and expenses will be
expensed as incurred.
Index Stock recognizes revenue upon the acceptance by its customers of the
license terms and notification of their intention to use the licensed image.
The principal cost of generating revenues is royalties paid by the Company to
photographers and other image providers. Commissions payable vary between 25%
to 70% of the net revenues received by the Company depending upon the nature
and use of the image. Factors affecting commissions paid include the identity
of specific photographers and sales mix between commercial uses and consumer
and SOHO uses. The Company pays lower commissions on most of the images
included in its CD-Rom and print catalogs because the Company bears the
promotional expense associated with catalog production and distribution.
Higher commissions are paid for non-catalog based images and consumer and
SOHO market uses.
The Company began digitizing and automating its image library in 1992 and
has been using its on-line retrieval system since 1994. In July 1995, Index
Stock completed an extensive site on the World Wide Web portion of the
Internet to market images directly to consumer and SOHO customers.
Historically, revenues derived from these groups have not been material.
However, with the growing number of consumer and SOHO users accessing the
Internet, management believes that this market segment provides the Company
with opportunities for growth.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items in the Company's statement of operations:
<TABLE>
<CAPTION>
Six months ended
Year Ended October 31, April 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue .................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Commission expense ....................... 29.6 29.6 31.8 29.3 33.7
Selling, general and administrative
expenses................................ 76.9 61.8 67.2 74.8 72.2
Research and development expenses ........ 18.4 22.4 19.1 20.0 21.0
</TABLE>
SIX MONTHS ENDED APRIL 30, 1996 COMPARED WITH SIX MONTHS ENDED APRIL 30, 1995
REVENUES
Revenues were $1,242,000 for the first half of fiscal 1996 compared to
$993,000 for the first half of fiscal 1995, an increase of approximately 25%.
This increase was primarily due to an increase in professional customer
sales. In addition, Index Stock's revenues also increased due to an increase
in on-line consumer sales, which the Company believes resulted from the
recent incorporation in March 1996 of a graphical user interface that made
the Telephoto System easier for consumer customers to use.
COMMISSION EXPENSE
Commission expense was $419,000 for the first six months of fiscal 1996
compared to $291,000 for the first six months of fiscal 1995, an increase of
approximately 44%. As a percentage of revenues, commission expense increased
to 34% during the first six months of fiscal 1996 from 29% during the first
half of fiscal 1995, due primarily to an increase in licensing of non-catalog
images and images of independent agencies represented by Index Stock. The
Company paid higher commission rates on both of these types of still images.
In addition, commission expense increased due to the licensing of consumer
market and SOHO images.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $897,000 for the first
half of fiscal 1996 compared to $743,000 for the first half of fiscal 1995,
an increase of approximately 21%. As a percentage of revenues, selling,
general and administrative expenses decreased to 72% for the first half of
fiscal 1996 from 75% in the first half of fiscal 1995, due to a smaller
proportion of revenue spent on direct mailings, advertisements and customer-
relations personnel to sustain sales in the professional markets. The Company
intends to use a portion of the proceeds of this Offering for promotional
activities designed to increase interest in its on-line delivery offerings.
See "Use of Proceeds."
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $260,000 for the first six months
of fiscal 1996 compared to $198,000 for the first half of fiscal 1995, an
increase of approximately 31%. As a percentage of revenues, research and
development expenses increased to 21% for the first half of fiscal 1996 from
20% in the first half of fiscal 1995, due primarily to completion of version
2.0 of the Telephoto System for inventory management, image searching and
retrieval, image key-wording, and rights management. The Company also
commenced several new software development projects involving its website and
CompuServe on-line service.
16
<PAGE>
FISCAL YEAR ENDED OCTOBER 31, 1995 COMPARED WITH FISCAL YEAR ENDED OCTOBER
31, 1994
REVENUES
Revenues were $2,215,000 for fiscal 1995 compared to $1,718,000 for fiscal
1994, an increase of approximately 29%. This increase was due primarily to
increased orders resulting from broader distribution of the Company's printed
catalog and introduction of a CD-ROM catalog, increases in the rate of repeat
business from U.S. customers, expansion of the Company's foreign distribution
network and the entrance by the Company into the consumer and SOHO markets.
COMMISSION EXPENSE
Commission expense was $705,000 for fiscal 1995 compared to $512,000 for
fiscal 1994, an increase of approximately 38%. As a percentage of revenues,
commission expenses increased to 32% during fiscal 1995 from 30% in fiscal
1994 due to an increase in licensing of non-catalog images and images of
independent image suppliers represented by Index Stock.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $1,488,000 for fiscal
1995 compared to $1,071,000 for fiscal 1994, an increase of approximately
39%. As a percentage of revenues, selling, general and administrative
expenses increased to 67% in fiscal 1995 from 62% in fiscal 1994. A portion
of this increase was related to the Company's decision in April 1995 to
expand its efforts directed toward the consumer and SOHO markets for
licensing still images. The most significant component in selling expense
during fiscal 1995 was the cost of production and distribution of printed and
CD-ROM printed catalogs. The Company distributed two printed catalogs and a
CD-ROM catalog during fiscal 1995. It did not distribute any catalog during
fiscal 1994. In addition, advertising costs increased to $156,000 in fiscal
1995, compared to $35,000 in fiscal 1994. The most significant components of
general and administrative expenses are the Company's salary and benefits
costs. These rose during fiscal 1995 as compared to fiscal 1994 as the
Company hired and trained new employees.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $424,000 for fiscal 1995 compared
to $388,000 for fiscal 1994, an increase of approximately 9%. This increase
resulted from the completion by the Company of phases of several development
projects relating to inventory management, image searching and retrieval,
image key-wording, and rights management systems. As a percentage of
revenues, research and development expenses decreased to 19% in fiscal 1995
from 22% in fiscal 1994, due to an increase in Company sales.
FISCAL YEAR ENDED OCTOBER 31, 1994 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1993
REVENUES
Revenues were $1,718,000 for fiscal 1994 compared to $1,386,000 for fiscal
1993, an increase of approximately 24%. This increase was due primarily to
increased orders resulting from the addition of new agents to the Company's
foreign agent network, distribution of a new printed catalog, and an increase
in the average price per transaction with the Company's customers.
COMMISSION EXPENSE
Commission expense was $512,000 for fiscal 1994 compared to $410,000 for
fiscal 1993, an increase of approximately 25%. As a percentage of revenues,
commission expense in fiscal 1994 and fiscal 1993 remained constant.
17
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $1,071,000 for fiscal
1994 compared to $1,066,000 in fiscal 1993. As a percentage of revenues,
selling, general and administrative expenses decreased to 62%, in fiscal 1994
from 77% in fiscal 1993. This improvement was due primarily to benefits from
the Company's automation of its operations and increased sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $388,000 for fiscal 1994 compared
to $255,000 for fiscal 1993, an increase of approximately 52%. As a percent
of revenue, research and development expenses increased to 22% in fiscal 1994
from 18% in fiscal 1993. The increase was related to the commencement of
several new software development projects and the related recruitment of
additional development staff.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its cash requirements through the
sale of equity securities and borrowings from third parties, including the
Chief Executive Officer of the Company and certain principal stockholders of
the Company. See "Certain Transactions." Sales of such equity securities to
date have aggregated $1,796,000. Cash advances to the Company from its Chief
Executive Officer have aggregated $230,750. During the second quarter of
fiscal 1996, the Company issued an aggregate of $500,000 principal amount of
10% promissory notes, due on the earlier of March 31, 1997 or the closing of
any financing having gross proceeds of not less than $3 million. Such
promissory notes will be repaid from the proceeds of this Offering.
Effective July 1995, the Company converted a $99,000 outstanding line of
credit with Citibank, N.A. to a five year term loan with the bank. The
outstanding balance on October 31, 1995 was $92,400 and is repayable in equal
monthly principal installments of $1,650.
During the period of January 1994 through April 1996, the Company's Chief
Executive Officer made cash advances to the Company aggregating $230,750. A
portion of the net proceeds received in April 1996 from the issuance of
Company's 10% notes was used to repay this indebtedness in full.
The Company believes that based upon its present business plan, the net
proceeds from the sale of the Common Stock offered hereby will be sufficient
to meet its currently anticipated working capital and capital expenditure
requirements for at least the next 12 months. There can be no assurance that
additional capital beyond the amounts currently forecasted by the Company
will not be required nor that any such required additional capital will be
available on reasonable terms, if at all, at such time as required by the
Company.
18
<PAGE>
BUSINESS
Index Stock is both a leading still image provider to traditional users of
stock photography and an Internet content provider. The Company has developed
a proprietary system for image storage, retrieval and transmission (the
"Telephoto System") that allows its employees and customers to find, select
and receive images electronically, using either keyword-or category-based
search techniques. Index Stock licenses its library of more than one million
images for fees based upon the type and nature of their use. Since its
inception, the Company has licensed images to more than 50,000 customers in
35 countries worldwide. These images are provided to commercial users of
stock photography, such as advertisers, graphic designers and publishers, as
well as to emerging new markets of multimedia producers, consumer users and
desktop publishers in the growing small office / home office ("SOHO") market.
Index Stock believes that these emerging markets represent its largest market
opportunity as on-line consumer and distribution networks and Internet use
expand. The Company distributes images through two offices in the United
States, 21 independent foreign agents and the on-line networks of CompuServe,
Prodigy, and the World Wide Web portion of the Internet. Unlike many Internet
content providers, Index Stock's consumer market business will not be
dependent upon its ability to generate revenues from the sale of advertising.
Index Stock has also developed image selection and layout tools that allow
users to search, select and manipulate electronic versions of down-loaded
images. The Company promotes its images using printed and CD-ROM catalogs,
direct sales, direct mail, print advertising and public appearances.
INDUSTRY BACKGROUND
Traditional still image providers, such as stock photography agencies,
provide commercial users with film-based images for use in print and video
applications. Stock photography agencies traditionally serve a broad range of
commercial customers. These include newspapers, magazines, book publishers,
calendar publishers, independent design firms, advertising agencies,
corporate design departments, greeting card publishers, freelance designers,
direct mail houses, television production companies, multimedia publishers,
producers of posters, clothing, puzzles, and other printed products, and
schools, universities, churches and charities.
Although the functions of the still image provider have remained
relatively unchanged over the years, new electronic scanning, searching,
storage and transmission technologies have developed in response to changes
in user needs. These technologies and the proliferation of easy-to-use
desktop publishing software have also generated new market opportunities. The
percentage of new computers shipped with high-quality color and high
resolution video boards increased dramatically during the past five years and
enhanced user ability to receive quality images. International Data
Corporation reported the number of SOHO market customers owning PCs to be 4.9
million in 1995, over 14% of which had multimedia capabilities. At the same
time, on-line communication and consumer distribution networks became easier
to use, less costly and accessible to broad audiences of multimedia, consumer
and SOHO users. Further, the rapid expansion of the World Wide Web allowed
more direct access to on-line communication for these groups.
Still image providers are part artist representative, part content
provider and part direct marketer of products and services. The business is
divided into three principal functions:
Content Collection. Agencies gather many images from photographers,
artists, publications and museums. Although some agencies purchase images,
most, like Index Stock, have an image library and represent on a
commission basis independent photographers and graphic artists or other
independent still image suppliers, who in turn represent additional
artists.
Storage/Retrieval. Agencies sort images into categories and store them.
When a customer requests a certain type of image with a set of
characteristics, agencies respond by offering images from their inventory
that match specific customer specifications.
Sales/Marketing. Agencies solicit photographs from a variety of sources
for use in diversified markets, and most issue catalogs that show the
types of image they specialize in. In recent years, images have begun to
be marketed through CD-ROM catalogs and other user-friendly forms of
electronic transmission.
19
<PAGE>
The following illustrates the traditional image flow within a stock
photography agency.
SOURCES USES
Stock Photo Agencies
Assignment Photographers Advertising Agencies
Photo Journalists Design Firms
Agency-Employed Magazine & Book
Photographers Publishers
Museums, Libraries Newspapers
Large Corporations
Source: Index Stock Photography, Inc.
20
<PAGE>
Both stock photo agencies and their customers require cost-effective,
time-efficient and convenient methods of obtaining and delivering still
images. Stock photo agencies have developed as an alternative to the more
costly and time consuming approach of assigning a professional photographer
to obtain specific images. These agencies have traditionally been labor
intensive from the submission of images by suppliers of the agency to the
selection and delivery of images to the agency's customers. This traditional
business has had certain difficulties:
o Physical Transfer of Images
Physically transferring original images from an image supplier to an
agency or from an agency to a customer can be time-consuming and may
result in loss or damage to the images.
o Long Delivery Time
When a customer wants to use an image that is not in a catalog, it may
take a day or more to find the right images and often it is hard for a
customer to describe the image it wants without seeing it. Certain
customers require immediate delivery of an image to use for a layout test
or client presentation.
o Uncertain Cost
Commercial customers need an easy way of knowing in advance how much a
particular planned use of an image will cost. Because of labor
intensiveness, agencies using traditional methods of operation cannot
deliver images cost effectively enough to service small budget customers
with personal or "unusual" needs for images.
THE OPPORTUNITY
The Company's decision to digitize and automate its image library has
enabled Index Stock personnel and customers to reduce costs and time spent in
selecting images. The Company's simplified image selection process provides
customers with direct use of keyword-or category-based search techniques.
Digitalization, automation and changing communication technology have also
enabled the Company to expand beyond traditional stock photography content
sources, into sources such as sound and video libraries. The expansion of the
Internet and the advent of on-line services focused on the consumer have
opened an opportunity for technologically-oriented stock photography agencies
to serve the emerging new multimedia, consumer and SOHO markets. Index
Stock's Telephoto System and new content sources should allow it to expand
into these newer and much larger markets, as well as to provide more
cost-effective and time-efficient service to its traditional commercial base.
21
<PAGE>
The following illustrates new sources of and uses for stock photography
and other electronic content.
SOURCES USES
- -------------------------- ------------------------
Independent Stock Home Users
Photo Agencies Schools, Libraries
- -------------------------- ------------------------
- -------------------------- ------------------------
Assignment Photographer Small Business
Photo Journalists Home Offices
- -------------------------- ------------------------
- -------------------------- ------------------------
Agency-Employed Desktop Publishers Within
Photographers Large Companies
- -------------------------- ------------------------
- -------------------------- ----------------------- ------------------------
Museums, Libraries Index Stock Photography Advertising Agencies
Large Corporations Design Firms
- -------------------------- ----------------------- ------------------------
- -------------------------- ------------------------
Vector Art Libraries Magazine & Book
Sound Libraries Publishers
Visual Libraries
- -------------------------- ------------------------
- -------------------------- ------------------------
Image Manlipulation Newspapers
Hardware & Software Cos
- -------------------------- ------------------------
------------------------
Internet Mails, E-Lines.
_____________Traditional Areas Newsgroups
------------------------
- -------------Already Established New Areas
------------------------
.............Potential New Areas All-Rights-Included
CD-ROM Libraries
-----------------------
Source: Index Stock Photography, Inc.
To date, more than 150,000 images have been electronically included in the
Company's Telephoto image storage and management system. The Company is
presently able to digitize approximately 1,000 images per week and intends to
incorporate the remaining images currently in its library into the system within
the next three years. A portion of the net proceeds from this Offering will be
used to increase the rate at which the Company can digitize images. The Company
developed tools that allow users to manipulate and customize the selection and
layout of electronic images in the Company's image library. These image
selection and layout tools assisted Index Stock in development of its site on
the World Wide Web portion of the Internet. This site contains selected Index
Stock images, prices for using images, information on Index Stock's
photographers and business policies, links to other web sites that the Company
believes will be of interest to its customers, and other products such as CD-ROM
image collections and T-shirts. While commercial users requiring high-resolution
versions of images may still need physical delivery of images selected for use,
the selection process has been streamlined by reducing the cycle time from
customer inquiry to delivery. Users not requiring high-resolution versions may
receive delivery electronically.
Multimedia, consumer and SOHO users can access and license images through
the Company's Photos To Go(TR) service (available both on CompuServe and the
World Wide Web), through Sprint's TPX system, through Knight-Ridder's
PressLink system, and through Infonautics' Electric Library service
(available currently on Prodigy, the Microsoft Network, and the World Wide
Web). These markets accept medium-and low-resolution quality images that can
be delivered electronically for fees consistent with the price sensitivity of
these markets. These users can manipulate or customize any down-loaded image.
The Internet permits a broad range of individual and business users
worldwide to access information and to communicate with others via electronic
transfer. In particular, the World Wide Web allows content providers, like
the Company, to publish and interlink information or content on-line and
allows users easily to find and retrieve it.
22
<PAGE>
The following illustrates the homepage of Index Stock's website.
- ------------------------------ ---------------------------------
PHOTOS FOR PHOTOS FOR
CONSUMERS PROFESSIONALS
- ------------------------------ ---------------------------------
PICTURES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
. Image Search . Photography: . What's New . Resource Links . V.I.P. Registration
. Consumer & Small The Hobby . About Index Stock . Webmaster's Choice . Telephoto(TM) Brawser
Business Pricing . Caption Contest . IndexLinx Sites . Building A Home Page . Photo Catalogs
. Photos To Go(TM) . T-Shirts . Photographer Profiles . Copyright & Licensing . Special Collections
CD-ROM . Custom Merchandise . Photo Submissions . About Stock Photos . Electronic Delivery
. Special Promotions . Background Tile Sets . Job Postings . PACA . New Photograph
</TABLE>
- ------------------------------------------------------------------------------
This site is best viewed with Netscape Navigator. To contact Index, send your
e-mail message to Webmaster@index stock.com. Our mailing Fifth Avenue, New York,
NY 10011. Telephone: 212-929-4644 Fax: 212-633-1914.
- ------------------------------------------------------------------------------
23
<PAGE>
STRATEGY
The Company's objective is to be the leading provider of still images to
both traditional advertising and publishing users and to new multimedia,
consumer and SOHO users. The Company's strategy includes the following key
elements:
MAINTAIN LEADING EDGE TECHNOLOGY
The Company will continue to use leading edge technology to automate fully
all aspects of its business. Index Stock believes that its Telephoto System
provides it with a strategic advantage in gathering, processing and
distributing content. The Company will continue to upgrade its technology
platform to maintain the advantages of ease of access, convenience and lower
cost per use.
DELIVER NEW MARKETS
The Company intends to expand its efforts to reach the new multimedia,
consumer and SOHO markets through its site on the World Wide Web and through
its on-line and consumer distribution networks. Index Stock will use on-line
consumer services and the Internet to educate customers about additional ways
to access and use its content. The Company will also continue to promote its
products through direct mail, e-mail, print advertising, public relations and
referrals.
EXPAND INTERNATIONAL PRESENCE
The Company intends to leverage its existing network of international
agents and the communications capabilities of the Telephoto System to further
develop its professional and consumer market licensing efforts outside of the
U.S.
EXPAND IMAGE COLLECTION
The Company intends to increase significantly the number of images
contained in its image library and make substantially all of its images
accessible electronically. Index Stock intends to expand the Company's image
collection by continuing to add photographers, acquire additional collections
and affiliate with other sources of still images. The Company also intends to
solicit exclusive rights to represent image collections held by major
corporations and libraries. For example, Index Stock has obtained the right
to represent much of the Northrup Grumman Corporation's collection of color
and black & white images.
DELIVER ADDITIONAL CONTENT
The Company intends to use its Telephoto System as a platform for delivery
of a variety of content-based products and services other than still images.
For example, the Company has made Graphic Corp. fonts available to its
customers for downloading and will explore offering other new products and
services that deliver content other than still images.
DELIVERY ALTERNATIVES AND PRODUCTS
In the past, Index Stock sent commercial users of stock photography
original positive transparencies delivered on a same day or overnight basis.
When possible, the Company delivered high-quality duplicates of its most
valuable images. These duplicates were also delivered physically to the
Company's foreign agents. Certain commercial users in the United States now
receive images from the Company in files of scanned electronic form on a
floppy disc, CD-ROM or removable hard disc. The Company can deliver up to a
16MB file size scan of selected images. Under certain circumstances, the
customer can create a final product directly from this file without using a
film version of the image. Customers requiring immediate delivery of images
can also receive them via e-mail or fax. Index Stock has also produced a
number of CD-ROM discs sold through retail mail order channels. The purchaser
of these CD-ROM discs obtains the right to use the images included on these
discs for certain types of design and advertising projects.
New distribution technologies have also been employed to deliver images.
For example, the Company was able to transfer 5,000 images to an on-line
distribution network using a File Transfer Protocol (FTP) Server on the
Company's World Wide Web site. Index Stock uses standard utilities to create
correct file sizes for this system and provides a copyright notice on each
image. It then uses a simple conversion program to transfer the required
keywords for this service from its SQL Server database. The Company also
recently delivered other sets of images to customers and distribution
networks on floppy discs, Syquest(R) discs, CD-ROM, by e-mail and on 4mm DAT
tape.
24
<PAGE>
The Company also supports on-line viewing and retrieval of its images
through six different on-line services:
Telephoto(TR) is the Company's proprietary, Internet-based browsing
system. Using this system, the Company's customers can search for images,
view them, and download medium-resolution versions for layout and design
work. The system is offered only to selected customers, and carries no
subscription or use charges. Customers pay only for using images in their
projects.
Photos to Go(TR) on CompuServe allows any CompuServe user to search for
and download images directly from the Company's database. CompuServe handles
all of the billing and tracking operations associated with this service.
- ------------------------------------------------------------------------------
Photos To Go
[Screen shot of Company's Photos to Go
service on CompuServe]
How to use Photos to Go
Who Should use Photos to Go
About Photos to Go
Talk to Us: Our Feedback Form
Photos To Go Products
Will I Be Charged?
Pictures
- ------------------------------------------------------------------------------
Photos to Go(TR) on the World Wide Web allows Internet customers to search
directly for and view images that are stored on the Company's Internet site.
Customers can pay to download images using any major credit card.
The Picture Exchange ("TPX"), an operation of Sprint, allows customers to
browse for images using a free-text search engine and download
medium-resolution versions for layout use. Currently, TPX customers must pay
to TPX a one-time subscription fee and a fee for the time they are connected
to the service. Customers pay the Company directly for each medium-resolution
image they download.
PressLink, offered by Knight-Ridder to newspapers, publishers, and other
image-using customers, both in the U.S. and Europe, allows customers to
download images directly from the service. Customers pay all fees to
PressLink and are charged for the images they use and for various connection
and set up costs. Index Stock receives a portion of content fees charged by
Presslink to its users.
Electric Library from Infonautics offers the Company's images as part of
an on-line information service that is distributed through both the Prodigy
Network and the World Wide Web portion of the Internet (address
http://www.infonautics.com). The Company receives a portion of the
subscription fees that Infonautics receives from its users.
The Company is evaluating other methods of delivering its product and
creating an awareness of imaging in nontraditional imaging markets. To date,
this has included (i) incorporating groups of images into other companies'
software products, such as Corel and PhotoDisc CDs; and (ii) producing
CD-ROMs with large numbers of low-resolution images suitable for personal use
only.
25
<PAGE>
NEW PRODUCTS
The Company has also begun developing several new products that deliver
content other than still images. The first of these was introduced in
November 1995. It was a set of image-carrying T-shirts called "BBTs" that are
available for purchase through the Company's web site. At present, the
Company offers image-carrying T-shirts, sweat shirts, and caps.
[Screen shot of Product Order Form]
SECTION A - ORDER YOUR FASHION STATEMENTS HERE
Pictures
Section 1 Section 2 Section 3
Quantity: Quantity: Quantity:
(Fill in number) ___ (Fill in number) ___ (Fill in number) ___
Item: (Check ONE) Item: (Check ONE) Item: (Check ONE)
__T-shirts @ $12.97 __T-shirts @ $12.97 __T-shirts @ $12.97
__Sweatshirt @ $23.97 __Sweatshirt @ $23.97 __Sweatshirt @ $23.97
__Cap @ $11.97 __Cap @ $ 11.97 __Cap @ $11.97
Design: (Check ONE) Design: (Check ONE) Design: (Check ONE)
__BBT#1001 __BBT#1001 __BBT#1001
__BBT#1002 __BBT#1002 __BBT#1002
__BBT#1003 __BBT#1003 __BBT#1003
__BBT#1004 __BBT#1004 __BBT#1004
__BBT#1005 __BBT#1005 __BBT#1005
OPERATIONS
Index Stock offers a varied and changing supply of still image content
that it believes to be responsive to changing taste and demand for different
themes. Attracting and maintaining representative relationships with
desirable photographers and independent agencies is an important part of
having the necessary inventory to respond to customer requests. The proper
cataloging of images is critical to controlling the receipt of images from
suppliers and responding to user requests in a timely manner. Index Stock
strives to be identified with high-quality still images, a broad range of
image subjects and a convenient system for accessing and retrieving images.
LICENSE FEES
The Company licenses photographs and still images to its customers for a
fee. Fees vary based upon the type and nature of use. Typical fees for
commercial users average $475 per image. The consumer and SOHO customers
access images on-line and through the Internet and are charged a fee varying
from about $5 to $100 per image, paid for using credit cards.
The Company has been selective in its engagement of the photographers,
graphic artists and agencies whose images the Company markets. Index Stock
constantly seeks new image providers and independent agencies with
reputations for high-quality work. The Company believes that this emphasis on
image quality has helped it establish a favorable reputation in the industry.
The license fees charged reflect fundamental differences between the
traditional stock photo image market and the emerging new multimedia,
consumer and SOHO markets. Fees charged in the emerging markets are expected
to remain lower than those charged in commercial markets, although the
Company's costs of completing a customer transaction are expected to be
significantly lower. It is anticipated that the volume of users will be
greater in the emerging markets due to the large universe of potential users.
The fee differential is justified by the Company's expectation that the
consumer and SOHO market user will review far fewer images before making a
decision, will generally not require the level of staff assistance available
to commercial users and will use images only for personal and educational
uses.
26
<PAGE>
The fee differential is also justified by the differences in the quality
of resolution and types of images typically licensed to the traditional and
the emerging consumer and SOHO market users. The Company licenses only
compressed, medium-resolution images to consumer and SOHO users who generally
do not have sufficiently powerful computers or printers able to take
advantage of high-resolution images frequently required by traditional market
users. Traditional and consumer users also generally request different types
of images. The former tend to look for images of business situations,
technology, medical situations, sports, people at leisure, and nature scenes.
To date, the latter have generally requested images of people expressing
emotions, humorous situations, sports, animals, travel scenes and nature. As
a result, the same image is not usually licensed to users in both of these
distinct markets with their significant price differences. There is no
assurance that this will not change.
COMPUTERIZED TRACKING
The Company's library staff operates a computerized submission tracking
system that catalogues each image that is submitted and retained by the
Company. The editing staff selects the best images from each submission,
retaining typically between 5% and 50% of the images it receives. The library
staff relies upon custom programs to categorize and bar-code the selected
images and to record the return of the remaining images to the photographer
or image supplier. Each selected image is scanned at a medium resolution
using a Company custom-built, mechanized scanning system. Keyword operators
enter a description of each scanned image into an SQL Server database using a
structured vocabulary developed by the Company based upon customer service
experience.
CUSTOM BROWSER SOFTWARE
Index Stock's custom browser software allows sales personnel in the
Company's New York and Los Angeles offices to respond to customer inquiries
to locate images using broad categories, specific keywords, or combinations
of both. The software permits them to search image caption fields or select
images from a particular photographer. The library and editing staff also use
this browser to evaluate the need for additional images in specific image
categories and to review a photographer's work and popularity among its
customers. The browser can retrieve hundreds of images within a few minutes.
The current version operates on both IBM-compatible and Apple Macintosh PCs.
The Company has also installed the browser on a developmental basis on the
computers of several of its larger customers. The Company is currently
distributing the browser to many of its traditional customers.
Pictures
[Screen shot of Company's Telephoto Browser
showing 12 images available to users
resulting from a keyword search]
27
<PAGE>
MARKETING
Index Stock produces all of its advertising and sales promotion materials
in-house, using desktop publishing software. The Company has produced CDs of
images with both outside vendors and in-house personnel. During the
development of this delivery medium, the Company believes that it acquired
valuable information about image data storage, CD cataloging, CD packaging
and artwork, and end-user instructions.
A network-based sales management system records all contacts with Company
customers. The system helps Index Stock plan for future customer calls and
records special customer preferences and needs. It also assists in the
maintenance of the Company's mailing lists and provides marketing information
to guide the Company in its image acquisition and promotion efforts. The
Company currently uses internal direct sales personnel to sell images to
traditional users of still images.
U.S. MARKETING
The Company presently markets its images through printed and CD-ROM
catalogs, on floppy or other types of removable discs, and through e-mail or
fax delivery. The Company has created awareness of its products among
traditional commercial users by direct sales contact and through the
Company's printed and CD catalog. The Company is also seeking to establish
user awareness through news articles and promotions with on-line network
distribution channels. Index Stock monitors the number of times prospective
customers access the Company's World Wide Web site or its on-line network on
Compuserve. The rates of access have steadily increased since July 1995 when
the Company began tracking this information.
The Company believes that one way of evaluating the success of the
Company's marketing programs and effectiveness of its sales force is to
monitor the percentage of customer requests for images that result in the
licensing of an image. During the period 1992 through 1995, this rate of
conversion improved from approximately 60% to 70%. Index Stock believes that
this improvement resulted from having an expanded library, a reputation for
high quality, and a staff capable of responding to customer needs in a timely
and efficient manner. The staff's ability to deliver these services is
directly linked to the development and use of the Company's Telephoto System
for electronic image storage, retrieval and transmission.
INTERNATIONAL MARKETING
A significant portion of the Company's revenues are derived from the
licensing of images in the traditional advertising and design markets in
foreign countries. Index Stock currently markets images in 34 foreign
countries through 21 independent foreign agents.
CONSUMER MARKETING
In order to further develop awareness among potential consumer and SOHO
customers, Index Stock has begun sponsoring contests, "chat" sessions, and
links to other image-related activities. Advertising is expected to become
more prominent in the marketing and development of these markets. The Company
has also arranged to provide information and discounts on hardware and
software from companies like Specular(TR), Adobe, Macromedia(TR), U-Lead(TR),
and Equilibrium(TR). The Company's site on the World Wide Web currently
contains links to more than 50 other web sites. Management expects that these
and other steps such as direct mail and print advertisement, will increase
overall traffic in its on-line area, although there can be no assurance.
There can be no assurance that increased awareness will result in actual
transactions with the Company.
COMPETITION
The still image business is fragmented and competitive. Participants in
the industry compete based upon the size of their image library, quality of
images available for license, price and service. Index Stock's competitors
have not reacted to the advent of electronic imaging and changing
communication technologies in any uniform manner. The Company believes that
digitizing and automating fully image storage, retrieval and transmission is
important to the Company's planned growth and provides a strategic advantage
over its competition. The Company believes that its competitors who use
electronic scanning are only scanning selected images, while the Company
plans to make its entire collection available electronically. The Company
believes that its approach in this area will contribute to improved customer
service and satisfaction while reducing the costs incurred by the Company in
connection with the delivery of its products and services.
It is possible that new competitors for on-line stock photo services may
come from outside of the traditional stock photography industry. Index Stock
is aware of several large companies that have decided to set up
28
<PAGE>
third-party multimedia networks. For example, PhotoDisc, a major supplier of
photo-based CD-ROMs, is offering images from its discs to customers through a
searchable web site. Picture Network International ("PNI") has indicated that
it has scanned, keyworded and stored approximately 400,000 images obtained
from 64 sources. Its customers can access this database through PNI's site on
the World Wide Web. Depending upon the size of the job, the customer will
contract directly with PNI or be referred to the image provider. Corbis, Inc.
has announced that it has the right to distribute electronic versions of
several hundred thousand images from several sources. Corbis has a forum on
America On-Line and a searchable site on the World Wide Web and announced
plans to build on-line services and CD products around stock and art photos.
Index Stock believes that the Company's direct contacts with customers and
photographers differentiate it from its competition and provide Index Stock
with valuable marketing information that would not be available under these
competitors' approach to the business. However, these competitors may have
larger staffs than Index Stock and greater financial resources available to
them.
PROPRIETARY RIGHTS
The Company does not own any of the still images in its library. Index
Stock contracts with copyright owners to pay a fee based upon use of its
images. This right generally includes the right to duplicate the image, store
it in the Company's database, and distribute it to the Company's customers
and agents, domestic and foreign. In certain instances the Company's right to
use an image may be geographically restricted or have other special limits on
use.
The Company's standard contract with image providers generally provides
for a five-year term and requires that the image provider furnish all copies
of the covered images to the Company on an exclusive basis. These agreements
typically require the Company to make quarterly royalty payments based upon
licensed fees collected by the Company from its customers. The actual royalty
paid ranges from 25% to 70% of the amounts received by the Company. The
precise terms of each contract may differ and the details of any particular
contract are stored on-line in the Company's database. The Company's
contracts with image providers include provisions releasing the Company from
claims or liability resulting from the physical loss of or damage to an image
in the Company's library or the misappropriation or misuse of the image by
any third party. The Company maintains in multiple locations duplicates of
the most popular images in its image library.
The Company's Telephoto System for image storage, retrieval and
transmission of still images is protected as a trade secret of the Company
and is not covered by any patents. Each employee who has participated in the
development of this proprietary system or has access to it has entered into a
confidentiality and nondisclosure agreement with the Company designed to
prevent unauthorized use or disclosure. See "Risk Factors."
The Company has obtained a fully paid-up nonexclusive World wide license
to use patent rights covered by a certain United States patent owned by
E-Data Corporation. This patent pertains to certain processes involving
electronic distribution of images.
FACILITIES
The Company leases its headquarters in New York City, consisting of
approximately 7,000 square feet, pursuant to a lease that expires on December
31, 1996. The Company will continue to maintain its headquarters in New York
City and move to a 16,500 square foot facility that will be ready for
occupancy in July 1996. The new lease has an initial term of seven years and
seven months and an initial base annual rent of $185,625 and increasing over
the term to $221,645 per annum. Index Stock also leases its office in Los
Angeles, consisting of approximately 140 square feet, on a month to month
basis. Management believes that its facilities are adequate for its present
level of planned operations.
EMPLOYEES
At May 31, 1996, the Company had 39 full time employees, including 15
relating to sales or sales management, 7 related to development of electronic
products and services, 12 related to handling of images, and 5 related to
administration. The Company also had 5 part-time employees, working primarily
in the image-handling area. The Company believes that its relations with its
employees are good. None of the Company's employees is represented by a labor
union or is subject to a collective-bargaining agreement.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, key personnel and directors of the Company and
certain information about them are set forth below.
<TABLE>
<CAPTION>
Name Age Position
------------------- ----- ---------------------------------------------------
<S> <C> <C>
Bahar Gidwani ..... 41 Chairperson of the Board and Chief Executive Officer
Christopher Ferrone . 38 Vice-President International
Lindsey Nicholson . 30 Vice-President Editing
Michael Uffer ..... 44 Vice-President Technology
Leslie Gerber ..... 30 Vice-President Production
Kathy Mullins ..... 54 Vice-President Electronic Services
Robert N. Paltos .. 51 Vice-President Sales
James D. Pyden .... 39 Chief Financial Officer
Nina Palmieri ..... 32 Vice-President Library Services
Susan Fournier .... 38 Director
Kent Lawson ....... 51 Director
Arthur M. Schneck . 70 Director
</TABLE>
All directors hold office for one year terms or until their successors are
elected and qualified. Officers serve at the discretion of the Board of
Directors. Non-employee directors will receive $1,000 for each meeting
attended and be entitled to receive stock options granted by the Board of
Directors upon the recommendation of the Compensation Committee.
Bahar Gidwani has been Chairperson of the Board and Chief Executive
Officer since he founded the Company in 1991. Prior to founding Index Stock,
Mr. Gidwani worked from 1983 through 1990 in the Research Department of
Kidder, Peabody & Co. where he ultimately attained the level of
Vice-President and Shareholder. From 1981 through 1983, Mr. Gidwani worked
for McKinsey & Co. in both its New York and Lisbon offices. From 1976 through
1979, Mr. Gidwani worked for Burroughs Corporation as a software developer,
project manager, and account executive in its Boston and Hong Kong offices.
Mr. Gidwani received an MBA degree with Highest Distinction (Baker Scholar)
from Harvard Business School in 1981 and received his designation as a
Chartered Financial Analyst (CFA) in 1986.
Christopher Ferrone has held various managerial and supervisory positions
with the Company. Presently, he supervises the operations of the Company's
New York office and manages the Company's relationships with its
international agents. Before joining Index Stock, Mr. Ferrone worked as a
credit analyst and loan officer with The Bank of Tokyo and as an assistant
treasurer at U.S. Trust.
Lindsey Nicholson joined Index Stock in 1992. She had previously worked
for six years with another major stock photography agency, The Stock Market,
where she managed the photography department and directed its international
distribution effort. Ms. Nicholson's duties include designing the Company's
catalog and directing its relations with its photographers.
Michael Uffer joined Index Stock in October 1993 and is responsible for
directing its development operations. Prior thereto, Mr. Uffer led several
development efforts for Popkin Software, a leading developer of Computer
Aided Software Engineering tools. From 1985 through 1991, Mr. Uffer held
positions of increasing responsibility in the development operation of
Information Builders, a major supplier of cross-platform database tools.
30
<PAGE>
Leslie Gerber joined Index Stock in September 1993, and is responsible for
the Company's scanning and keywording operation. Prior thereto, Ms. Gerber
worked for the City of New York from September 1991 through 1993 and The
Image Bank from March 1990 through June 1991, another major stock photo
agency.
Kathy Mullins joined Index Stock in November 1992 and is responsible for
all aspects of the Company's consumer and SOHO marketing programs. Prior
thereto, she spent eight years leading marketing activities for Comstock,
another major stock photo agency. While with Comstock, Ms. Mullins helped
develop its direct mail and advertising programs and participated in its
international expansion. In addition to her BA degree, she recently received
a diploma in Direct Marketing Management from New York University.
Robert N. Paltos joined the Company in May 1996 as Vice-President. He was
National Sales Manager for Prodigy Services Company from 1984 through 1996,
with responsibility for advertising and marketing national accounts. From
1984 through 1988, he was Regional Vice-President for Western Union
Corporation, with responsibility for managed sales/marketing activities for
Western Union's Network Services division. Mr. Paltos received a BA degree
with honors from St. John's University. He also attended New York
University's Graduate Program, Government & Business Studies.
James D. Pyden joined the Company in May 1996 as its Chief Financial
Officer. Prior thereto, Mr. Pyden was Corporate Controller for Computron
Software, Inc. from October 1995 through May 1996 and held various positions
with Allerion Inc., from 1981 through September 1995, including
Vice-President and Controller. From 1981 through 1984, Mr. Pyden also worked
as an auditor in the Morristown, New Jersey offices of Deloitte & Touche. Mr.
Pyden holds a BA degree from Michigan State University.
Nina Palmieri joined Index Stock in May 1996 as its library manager. Prior
thereto, Ms. Palmieri was Director of Customer Service at The Stock Market,
another major stock photo agency, where she was employed for five years. In
addition, she has several years of experience in retail management. Ms.
Palmieri holds a bachelors of fine arts degree from the School of Visual
Arts.
Susan Fournier has been a director of the Company since May 1996. Since
1994, she has been an Assistant Professor of Business Administration at the
Harvard Business School. From 1985 through 1989, Ms. Fournier was a
Vice-President and Associate Research Director at Young & Rubicam
Advertising. She specializes in the study of customer relationship building.
Kent Lawson has been a director of the Company since May 1996. Mr. Lawson
is the founder and president of Magna Software Corporation, a 20-year old
software development tools company. Mr. Lawson holds a BA degree in Economics
from Beloit College and an MBA degree from Washington University. He has
attended the American Management Associations's Executive Management Course
and completed the Harvard Business School's Owner/President's Management
program.
Arthur M. Schneck has been a director of the Company since May 1996. Mr.
Schneck is a senior partner in the law firm of Schneck Weltman Hashmall &
Mischel LLP, counsel to the Company. Mr. Schneck received an LLM degree in
taxation and JD degree from Brooklyn Law School, and a BBA degree from the
City College of the City University of New York.
BOARD OF ADVISORS
The Company has an advisory board that meets with its key management
quarterly to review the Company's performance and help it form its strategic
plans. Some members receive cash compensation, which is currently fixed at
$250 per meeting, and stock option grants. All members receive reimbursement
for any travel and lodging costs.
The following persons presently serve on the Board of Advisors:
Joanna Ferrone was the founder of Index Stock International, Inc., the New
York based photo stock photography agency from which the Company acquired
certain assets in 1991. She is also the co-owner of the Fido-Dido and other
cartoon characters. Ms. Ferrone owns an extensive image collection that is
represented by the Company.
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<PAGE>
Raeanne Rubinstein was the founder of Telephoto, Inc., a New York based
stock photo agency, some of whose assets the Company acquired in March 1992.
She is a well-known photographer who specializes in images of musical
personalities. Her non-celebrity work is represented by the Company.
Philip Schaeffer is Senior Vice-President of Robert Fleming Inc., in
charge of the Special Credits Group. Prior to joining Robert Fleming, Mr.
Schaeffer founded and operated his own fund management company in partnership
with Cowen & Co. From 1981 through 1985, Mr. Schaeffer worked with the
Taubman Group of Companies in positions of successive responsibility,
including Chief Financial Officer of A&W Restaurants, Inc. Mr. Schaeffer
received an MBA degree with high distinction from Harvard Business School in
1981 and is a Certified Public Accountant (CPA).
Allen Russell was the founder of ProFiles West, a Colorado-based agency
that specialized in images that portrayed the Western lifestyle. He joined
the board in January 1996 following completion of the Company's acquisition
of selected assets from his company. Mr. Russell is a well-known photographer
and authority on the stock photo industry. The majority of his work is
represented by the Company.
BOARD COMMITTEES
The Board of Directors plans to establish a Compensation Committee and
Audit Committee following the completion of this Offering, the majority of
which will be comprised of non-employee directors. The Compensation Committee
will make recommendations to the Board concerning salaries and incentive
compensation for the Company's officers and employees, including
administration of the Company's 1992 Non-Qualified Stock Option Plan. The
Audit Committee will review the results and scope of the audit and other
accounting related services and review and evaluate the Company's internal
audit and control functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee or Audit Committee
during the fiscal year ended October 31, 1995. Mr. Gidwani participated in
establishing his officer's compensation during such fiscal year.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded or paid by the
Company for services rendered to the Company by the Company's Chief Executive
Officer ("Named Executive Officer") in all capacities during the fiscal year
ended October 31, 1995. No executive officer of the Company received more
than $100,000 in salary, bonus or other compensation during the fiscal year
ended October 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------------------------------------
Name and Principal Position Salary
----------------------------- ------ ---------
<S> <C> <C>
Bahar Gidwani, Chief Executive 1995 $90,000
Officer .................... 1994 90,000
1993 90,000
</TABLE>
1992 NON-QUALIFIED STOCK OPTION PLAN
The Company's 1992 Non-Qualified Stock Option Plan, as amended (the "1992
Plan"), provides for the grant to employees, directors and consultants of
nonstatutory stock options to purchase an aggregate of 198,600 shares of
Common Stock. At January 31, 1996, there were outstanding under the 1992 Plan
131,076 options to purchase shares of the Company's Common Stock.
The 1992 Plan is administered by the Board of Directors (the
"Administrator"). Options are not transferable by the recipient except by
will or by the laws of descent and distribution, and are exercisable during
the lifetime of the recipient only by such recipient. The Options granted
under the 1992 Plan must be exercised within three months of the end of
optionee's status as an employee or consultant of the Company, or within
32
<PAGE>
twelve months after such optionee's termination by death or disability, but
in no event later than the expiration of the option term. The exercise price
of all stock options granted under the Plan is determined by the
Administrator, based upon fair market value thereof as of the date of grant.
The maximum term of an option granted under the Plan may not exceed ten years
from the date of grant. The Company retains a right of first refusal to buy
any shares obtained through the exercise of the options that are subsequently
offered for sale.
In November 1995, the Company granted Mr. Bahar Gidwani, Chairperson of
the Board and Chief Executive Officer, a five year option to purchase 13,240
shares at a price per share of $4.53, of which 6,620 shares were immediately
exercisable and the balance exercisable one year from the date of grant.
MANAGEMENT-EMPLOYEE AGREEMENTS
The Company has entered into an employment agreement with Mr. Bahar
Gidwani. The agreement provides that Mr. Gidwani will serve the Company as
Chief Executive Officer and Chairperson of the Board for a three-year period
commencing July 1, 1996. During this period, Mr. Gidwani will be paid an
annual salary of $120,000 and be entitled to bonuses payable in cash or
stock, as determined by the Board of Directors in its discretion, upon the
recommendation of the Compensation Committee. Mr. Gidwani will also be
entitled to benefits made available generally to senior level personnel of
the Company, including without limitation, participation in any stock option
or incentive programs established by the Board of Directors.
The Company has non-disclosure and confidentiality agreements with each of
its executive officers, key personnel and persons who participated in the
development of the Telephoto System. These agreements prohibit disclosure of
confidential information to anyone outside of the Company both during and
subsequent to employment and require disclosure to the Company of ideas,
discoveries or inventions relating to or resulting from the employees' work
for the Company and assignment to the Company of all proprietary rights to
such ideas, discoveries or inventions. These agreements also provide that
these employees will refrain from accepting employment from any business that
competes with the Company for a period of one year following termination of
employment with the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation (the "Charter") contains
certain provisions permitted under the Delaware General Corporation Law
("DGCL") relating to the liability of directors. These provisions eliminate a
director's liability for monetary damages for a breach of fiduciary duty,
except in certain circumstances involving certain wrongful acts, such as the
breach of a director's duty of loyalty or acts or omissions that involve
intentional misconduct or a knowing violation of law. The Charter also
contains provisions indemnifying the directors and officers of the Company to
the fullest extent permitted by the DGCL. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such
indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
33
<PAGE>
CERTAIN TRANSACTIONS
In 1991, the Company sold shares of its Preferred Stock in a private
financing. Mr. Bahar Gidwani, Chief Executive Officer, a director and a
principal stockholder of the Company, purchased 74,475 shares, Polaris Fund
L.P., of which Messrs. James Lynch and Timothy Draper are general partners
(see "Principal Stockholders"), purchased 82,750 shares, Mr. Andrew Shechtel,
a principal stockholder of the Company (see "Principal Stockholders"),
purchased 66,200 shares and The Timothy C. Draper Revocable Living Trust, of
which Mr. Draper is trustee, purchased 16,500 shares for $3.02 per share, the
price paid by all investors in such offering. Mr. Draper's sister also
purchased 16,550 shares at the same price. Each of the Company's outstanding
shares of Preferred Stock will convert to one share of Common Stock upon the
closing of this Offering.
In 1993, the Company sold shares of Common Stock in a private financing.
Mr. Shechtel and Polaris Fund L.P. purchased 60,181 shares and 30,091 shares,
respectively, for $3.32 per share, the price paid by all investors in such
offering.
In 1995, the Company sold shares of its Common Stock in a private
financing. In such financing, Mr. Gidwani purchased 3,972 shares, Polaris
Fund L.P. purchased 3,972 shares, Ms. Joanna Ferrone, an independent
photographer represented by the Company, a principal stockholder of the
Company and a member of the Company's advisory board (see "Principal
Stockholders"), purchased 2,383 shares and Mr. Shechtel purchased 35,748
shares, each at a price of $4.52 per share, the price paid by all investors
in such financing. In January 1996, Mr. Shechtel also purchased 19,860 shares
and a warrant to acquire 9,930 shares, exercisable prior to January 24, 1999,
at $4.98 per share, for an aggregate purchase price of $99,000.
In April 1996, the Company issued to six investors for $500,000 an
aggregate of $500,000 principal amount of 10% notes (the "10% Notes") and
warrants to purchase in the aggregate 132,400 shares of Common Stock at a
purchase price per share of $6.04, exercisable prior to March 31, 2001. In
this transaction, Mr. Shechtel purchased $200,000 principal amount of the 10%
Notes, together with warrants to purchase 52,960 shares. Polaris Fund L.P.
purchased $70,000 principal amount of such notes, together with warrants to
purchase 18,536 shares. In addition, The Timothy C. Draper Revocable Living
Trust, of which Mr. Draper is trustee, and Mr. Draper's sister purchased
$30,000 principal amount of the 10% Notes and warrants to purchase 7,944
shares.
During the period of January 1994 through April 1996, the Company's Chief
Executive Officer made cash advances to the Company aggregating $230,750. A
portion of the proceeds of the sale by the Company of its 10% Notes in April
1996 was used to repay such indebtedness in full. No interest was charged or
accrued with respect to the advances.
The Company believes that all of the foregoing transactions were made upon
terms and conditions at least as favorable as those available from
disinterested third parties.
34
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock and is adjusted to reflect
the sale of the shares of Common Stock offered hereby, by (i) each person (or
group of affiliated persons) who is known by the Company to own beneficially
5% or more of the Company's Common Stock, (ii) each of the Company's
directors, (iii) the Named Executive Officer and (iv) all directors and
executive officers as a group. Except as indicated in the footnotes to the
table, the persons named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them.
<TABLE>
<CAPTION>
Percentage
Ownership
Number of Shares ------------------------
Beneficially Before After
Beneficial Owner - Name and Address Owned(1) Offering Offering
----------------------------------------------- ------------------- ---------- ----------
<S> <C> <C> <C>
Bahar Gidwani ................................. 747,067 54.1% 31.4%
126 Fifth Ave., New York, NY 10011
Andrew Shechtel ............................... 244,879(2) 17.7% 10.3%
33 Witherspoon Street, Princeton, NJ 08542
James Lynch ................................... 135,349(3) 9.8% 5.7%
James Yarmon
103 Laurel Hill Circle, Chapel Hill, NC 27514
Timothy Draper ................................ 184,337(4) 13.3% 7.7%
103 Laurel Hill Circle, Chapel Hill, NC 27514
Joanna Ferrone ................................ 112,716 8.2% 4.7%
155 Avenue of the Americas, New York, NY 10013
Susan Fournier ................................ 1,324(5) * *
Harvard Business School, Soldiers Field Road
Boston, MA 02163
Kent Lawson ................................... 0 * *
275 Seventh Avenue, New York, NY 10001
Arthur M. Schneck ............................. 9,930(6) * *
1285 Avenue of the Americas, New York, NY 10019 .
All directors and executive officers as a group
(4 persons) .................................. 766,265 55.5% 32.2%
</TABLE>
- ------
* less than one percent
(1) Includes 6,620 shares issuable upon exercise of an outstanding option
granted under the 1992 Plan.
(2) Includes 62,890 shares issuable upon exercise of outstanding warrants.
(3) Includes 18,536 shares issuable upon exercise of outstanding warrants.
Messrs. Lynch and Yarmon are general partners of Polaris Fund L.P., the
record owner of such shares. They share voting and investment power
respecting such shares with Timothy Draper, also a general partner of
Polaris Fund L.P. The Fund is a limited partnership formed to provide
venture capital to early-stage development companies.
(4) Mr. Draper is a general partner of Polaris Fund L.P., the beneficial
owner of 135,349 shares, and shares voting and investment power
respecting such shares with James Lynch and James Yarmon, also general
partners of Polaris Fund L.P. Mr. Draper is also the beneficial owner of
48,988 shares as to which he has sole voting and investment power. Of
such shares, 3,972 shares are issuable to him upon exercise of
outstanding warrants, 20,522 shares are owned of record by his sister,
and 3,972 shares are issuable to his sister upon exercise of outstanding
warrants. Mr. Draper disclaims any economic interest in the shares or
warrants owned of record by his sister.
(5) Shares issuable upon exercise of outstanding options granted under the
1992 Plan.
(6) Such shares are beneficially owned by Schneck Weltman Hashmall & Mischel
LLP, of which Mr. Schneck is a partner; includes 6,620 shares issuable
upon exercise of options granted under the 1992 Plan.
35
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, $.0001 par value, and 2,000,000 shares of Preferred Stock,
$.01 par value.
COMMON STOCK
As of May 15, 1996, there were 1,366,523 shares of Common Stock
outstanding, held of record by 28 stockholders (assuming the conversion to
Common Stock of all outstanding shares of Preferred Stock upon the closing of
this Offering and excluding any shares issuable upon exercise of outstanding
options or warrants aggregating 273,406 shares). The holders of Common Stock
are entitled to one vote per share on all matters to be voted on by the
stockholders. Subject to preferences that may be applicable to Preferred
Stock issuable in the future, if any, the holders of Common Stock are
entitled to receive ratably such dividends as may be declared from time to
time by the Board of Directors out of funds legally available therefor. In
the event of the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior liquidation rights of
Preferred Stock then outstanding, if any. The Common Stock has no preemptive,
conversion or other subscription rights. There are no redemption or sinking
funds provisions applicable to the Common Stock. All outstanding shares of
Common Stock are fully paid and non-assessable.
PREFERRED STOCK
Effective upon the closing of this Offering, the Company will be
authorized to issue 2,000,000 shares of undesignated Preferred Stock. The
Board of Directors will have the authority to issue the undesignated
Preferred Stock in one or more series, to determine the rights, preferences,
privileges, and restrictions granted to or imposed upon any wholly unissued
series of undesignated Preferred Stock and to fix the number of shares
constituting any such series and the designations of such series, without any
further vote or action by the stockholders. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. The issuance of Preferred Stock may also have the effect of delaying,
deferring or preventing a change in control of the Company. The Company has
no present plan to issue Preferred Stock.
In 1991, the Company issued 331,000 shares of Series A Preferred Stock in
connection with a private financing and 110,333 shares of Series B Preferred
Stock in connection with an acquisition. Upon the closing of this Offering,
each share of Preferred Stock outstanding automatically converts to one share
of Common Stock.
OUTSTANDING WARRANTS AND OPTIONS
There are 142,330 shares of Common Stock reserved for issuance upon the
exercise of outstanding common stock purchase warrants. Of such shares,
132,400 have been registered for sale under the Securities Act, although the
beneficial owners of such shares have entered into an agreement with the
Company and the Underwriters not to offer or sell any of such shares for a
period of 12 months following the date of this Prospectus, without the
written consent of the Representative. See "Underwriting." In addition, there
are 131,076 shares of Common Stock reserved for issuance under the Company's
1992 Plan.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Subject to certain exceptions, Section 203 prohibits
a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or unless the business combination is
approved in a prescribed manner.
36
<PAGE>
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or
more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer and Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
2,366,523 shares of Common Stock (excluding 273,406 shares of Common Stock
issuable upon conversion of all outstanding options and warrants). With
respect to the outstanding warrants, 132,400 shares underlying such warrants
have been registered for sale and are being offered hereby, subject to an
agreement with the holders thereof not to sell such shares for 12 months
following the date of this Prospectus (the "Effective Date") without the
consent of the Representative. See "Underwriting." Of the outstanding shares,
the 1,000,000 shares (and any shares sold if the Underwriter exercises its
over-allotment option) sold in this Offering will be freely tradeable without
restriction under the Securities Act, unless purchased by "affiliates" of the
Company.
The remaining 1,366,523 shares of Common Stock held by existing
stockholders are "restricted" shares under the Securities Act (the
"Restricted Shares"). Approximately 249,580 Restricted Shares will be
eligible for sale in the public market on the Effective Date pursuant to Rule
144(k), although the holders thereof have agreed not to sell such shares for
a period of 12 months following the Effective Date without the consent of the
Representative. Beginning 12 months after the Effective Date, upon the
expiration of 12-month lock-up agreements between existing stockholders of
the Company and the Representative, approximately 1,018,967 additional
Restricted Shares will become eligible for sale pursuant to Rule 144, subject
to certain volume and other resale restrictions.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years (and, with
respect to non-affiliates of the Company, who has beneficially owned
Restricted Shares for at least three years) will be entitled to sell in any
three-month period up to the greater of (i) 1% of the then outstanding shares
of the Company's Common Stock (approximately 23,599 shares immediately after
this Offering assuming no exercise of the Underwriters' over-allotment
option) or (ii) the average weekly trading volume of the Company's Common
Stock in The Nasdaq Stock Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities
and Exchange Commission. Such sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and the availability
of current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned Restricted Shares for at least three years is entitled
to sell such shares pursuant to Rule 144(k) without regard to the limitations
described above.
Following this Offering, an aggregate of 198,600 shares of Common Stock
will be subject to outstanding options or reserved for future issuance
pursuant to the Company's 1992 Plan. Within 90 days following the Effective
Date, the Company intends to file a Registration Statement on Form S-8 to
register such shares. Following the earlier of 90 days after the Effective
Date and the filing of the Form S-8, the shares of Common Stock issued under
the 1992 Plan will be eligible for sale in the public market upon vesting of
such shares, subject to contractual lock-up restrictions and, in the case of
affiliates, the Rule 144 volume limitations.
Prior to this Offering, there has been no prior public market for the
Common Stock and there is no assurance that a significant public market for
the Common Stock will develop or be sustained after this Offering. Sales of
substantial amounts of Common Stock in the public market could adversely
affect the market price of the Common Stock and could impair the Company's
future ability to raise capital through the sale of its equity securities.
37
<PAGE>
REGISTRATION RIGHTS
In connection with certain private financings prior to this Offering,
certain holders of the Company's Common Stock have the right to include
555,056 shares of Common Stock in any registration statement filed by the
Company subsequent to the closing of this Offering other than in connection
with a registration statement on Form S-4, S-8 or other comparable forms. The
costs and expenses of such registration will be paid for by the Company. The
Company may in certain circumstances defer inclusion of these shares in the
registrations, and the underwriters have the right, subject to certain
limitations, to limit the number of shares included in such registrations.
38
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Kaufman Bros., L.P. is acting as
the Representative (the "Representative"), have severally agreed, subject to
the terms and conditions contained in the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth opposite
their names.
<TABLE>
<CAPTION>
Underwriter Number of Shares
------------------- ----------------
<S> <C>
Kaufman Bros., L.P........................................
----------------
Total ................................................... 1,000,000
================
</TABLE>
The Underwriting Agreement provides that the several Underwriters are
obligated to purchase all of the 1,000,000 shares of Common Stock offered by
the Underwriters hereby (other than shares which may be purchased under the
over-allotment option), if any are purchased. The Representative has advised
the Company that the Underwriters propose to offer the shares to the public
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow selected dealers a concession of
$ per share and that such dealers may reallow a concession of $ per
share to certain other dealers. After the public offering, the offering price
and the concessions may be changed by the Representative.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 45th day after the date of the Underwriting
Agreement, to purchase up to 150,000 additional shares of Common Stock at the
public offering price less underwriting discounts and commissions, all as set
forth on the cover page of this Prospectus. The Underwriters may exercise the
option only to cover over-allotments, if any, in the sale of shares of Common
Stock in this Offering. To the extent that the Underwriters exercise the
option, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them as shown in the foregoing
table bears to the 1,000,000 shares of Common Stock offered hereby.
The Company has agreed to pay to the Representative, individually, and not
in its capacity as Representative, a non-accountable expense allowance of 2%
of the gross proceeds of this Offering, $180,000 if the Underwriters'
over-allotment option is not exercised, ($207,000 if the Underwriters'
over-allotment option is exercised in full), of which $25,000 has been paid
to date. If this Offering is not consummated, the Representative will be
entitled to be reimbursed for actual out-of-pocket expenses, on an
accountable basis only, up to $50,000, inclusive of the amount paid to date.
The Company has also agreed to pay all expenses in connection with
registering or qualifying the Common Stock offered hereby for sale under the
laws of the states in which the Common Stock is sold by the Underwriters) as
well as certain expenses associated with informational meetings.
The Company has agreed to sell to the Representative, or its designees,
warrants (the "Representative's Warrants") to purchase 100,000 shares of the
Company's Common Stock at an aggregate purchase price of $100. The exercise
price per Representative's Warrant, subject to anti-dilution adjustment, is
equal to 130% of the public offering price per share of Common Stock offered
hereby. The Representative's Warrants expire on the fifth anniversary of the
date hereof. The Representative's Warrants may not be transferred or
exercised for one year from the date of this Prospectus, except for transfers
to officers of the Representative or members of the underwriting or selling
group and/or their officers or partners, if any. The Representative's
Warrants become exercisable during the four-year period commencing one year
from the date of this Prospectus (the "Warrant Exercise Term"). During the
Warrant Exercise Term, the holders of the Underwriters' Warrants are given,
at nominal cost, the opportunity to profit from an increase in the market
price of the Company's Common Stock. The Company has granted the
Representative certain registration rights with respect to the
Representative's Warrants. All registration rights will terminate seven years
from the Effective Date.
39
<PAGE>
Except as set forth below, the Company, its officers and directors and
stockholders have agreed that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer or sale,
contract of sale, grant any option to purchase or on other sale or deposit
any shares of Common Stock or other capital stock of the Company or any
securities convertible into, or exercisable or exchangeable, for, any shares
of Common Stock or other capital stock of the Company for a period of 365
days after the date of this Prospectus without the prior written consent of
the Representative, on behalf of the Underwriters. See "Shares Eligible for
Future Sale."
The public offering price of the Common Stock offered hereby will be
determined through negotiations between the Company and the Representative.
Among the factors to be considered in making such determination will be the
prevailing market condition, the Company's fiscal and operating history and
condition, the Company's prospects and the prospects of its industry, the
management of the Company, the market price of securities for companies in
businesses similar to that of the Company and the recent trading activity and
prices of shares of Common Stock on the Nasdaq SmallCap Market.
The Representative has advised the Company that sales of Common Stock to
discretionary accounts will not exceed 5% of the shares of Common Stock
offered hereby.
The Representative became registered as a broker-dealer in July 1995.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
SELLING STOCKHOLDERS
The following table sets forth the number of shares of Common Stock to be
offered for sale by each Selling Stockholder. The Company will not receive
any of the proceeds from the sale of such shares. The shares of Common Stock
offered hereby are issuable to the Selling Stockholders upon exercise of
warrants exercisable at $6.04 per share. Beneficial ownership of the shares
after this offering will depend on the number of shares sold by each Selling
Stockholder. The shares offered by the Selling Stockholders are not being
underwritten by the Underwriters
<TABLE>
<CAPTION>
Name and Address Shares of Common Stock Percentage of Outstanding
of Beneficial Owner Beneficially Owned Shares Offered Common Stock Owned
-------------------------- ---------------------- -------------- ---------------------------------
Before
Offering(1) After Offering
--------------- --------------
<S> <C> <C> <C> <C>
Polly Draper(2) 24,494 3,972 1.0% 1.0%
400 Seaport Ct. #250
Redwood City, CA 94063
Timothy Draper Living
Trust(2) 24,494 3,972 1.0% 1.0%
400 Seaport Ct. #250
Redwood City, CA 94063
Richard Friedman 26,480 26,480 1.1% 0
49 Fort Royle Isle
Ft. Lauderdale, FL 33308
Jeffrey Markowitz 26,480 26,480 1.1% 0
500 Fifth Avenue
Suite 5520
New York, NY 10010
Polaris Fund L.P.(2) 135,349 18,536 5.7% 4.9%
400 Seaport Ct. #250
Redwood City, CA 54063
Andrew Shechtel 244,879 52,960 10.3% 8.1%
33 Witherspoon Street
Princeton, NJ 08542
</TABLE>
- ------
(1) Assuming completion of Company Offering of 1,000,000 shares of Common
Stock.
(2) See Principal Stockholder for additional information on beneficial
ownership of shares beneficially owned by Timothy Draper, a general
Partner of Polaris Fund, L.P.
40
<PAGE>
PLAN OF DISTRIBUTION
Each Selling Stockholder is free to offer and sell his or her shares of
Common Stock at such times, in such manner and at such prices as he or she
shall determine. Such shares may be offered by the Selling Stockholders in
one or more types of transactions, which may or may not involve brokers,
dealers or cash transactions. The Selling Stockholders may also use Rule 144
under the Securities Act of 1933 (the "Securities Act"), to sell such
securities, if they meet the criteria and conform to the requirements of such
Rule. There is no underwriter or coordinating broker acting in connection
with the proposed sale of shares by the Selling Stockholders.
The Selling Stockholders have advised the Company that sales of shares may
be effected from time to time in transactions (which may include block
transactions) in the over-the-counter market, in negotiated transactions,
through the writing of options on the Common Stock, or a combination of such
methods of sale, at fixed price which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling
Stockholders have advised the Company that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities. The Selling
Stockholders may effect such transactions by selling Common Stock directly to
purchasers or to or through broker-dealers which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Stockholders and/or
the purchasers of Common Stock for whom such broker-dealers may act as agents
or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). The
Selling Stockholders and any broker-dealers that act in connection with the
sale of the Common Stock might be deemed to be "underwrites" within the
meaning of Section 2(11) of the Securities Act, and any commissions received
by them and any profit on the resale of the shares of Common Stock as
principal might be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Stockholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving
sales of the shares against certain liabilities, including liabilities
arising under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the Selling Stockholders will
be subject to prospectus delivery requirements under the Securities Act.
Furthermore, in the event of a "distribution" of his shares, any Selling
Stockholder, any selling broker or dealer and any "affiliated purchasers" may
be subject to Rule 10b-7 under the Exchange Act prohibits any "stabilizing
bid" or "stabilizing purchase" for the purpose of pegging, fixing or
stabilizing the price of Common Stock in connection with this offering.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Schneck Weltman Hashmall & Mischel LLP, New York, New York.
Partners of the firm beneficially own in the aggregate 9,930 shares of the
Company's Common Stock.
EXPERTS
The financial statements of the Company as of October 31, 1995 and 1994,
and the related statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended October 31, 1995 have been
included in this Prospectus in reliance upon the report of Ernst & Young LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect
to the Company and such Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning
the contents of any contract or any other document referred to are not
necessarily complete, and reference is made in each instance to the copy of
such con-
41
<PAGE>
tract or document filed as an exhibit to the Registration Statement. Each
such statement is qualified in all respects by such reference to such
exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the Securities and Exchange
Commission's principal office in Washington, D.C., and copies of all or any
part thereof may be obtained from such office after payment of fees
prescribed by the Securities and Exchange Commission.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
accountants, and quarterly reports for the first three fiscal quarters of
each fiscal year containing unaudited financial information. Prior to the
completion of this Offering, the Company will register the securities offered
hereby under Section 12(g) of the Securities Exchange Act of 1934, as
amended, and become subject to the reporting requirements of said Act.
Reports and other information filed by the Company with the Securities
Exchange Commission may be examined at the Commission at its principal office
located at 450 Fifth Street, N.W., Washington, D.C. 20549 or at its Northeast
Regional Office located at 7 World Trade Center, New York, New York 10048.
Copies may be obtained through the principal office of the Commission upon
payment of charges prescribed by the Commission.
The Commission maintains a World Wide Web Site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Members of the Board and Stockholders
Index Stock Photography, Inc.
We have audited the accompanying balance sheets of Index Stock Photography,
Inc. (the "Company") as of October 31, 1994 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for the each
of the three years ended October 31, 1995. 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 financial statements referred to above present fairly, in
all material respects, the financial position of the Company at October 31,
1994 and 1995, and the results of its operations and its cash flows for each
of the three years ended October 31, 1995 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
December 20, 1995
except for Notes 1 and 5, as to
which the date is May 31, 1996
F-1
<PAGE>
INDEX STOCK PHOTOGRAPHY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31 April 30
1994 1995 1996
------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Accounts receivable, less allowance for doubtful accounts
$22,300 (1995 and 1994 and April 1996) ................ $ 310,220 $ 422,816 $ 422,329
Prepaid expenses and other ............................... 65,098 93,092 68,582
------------- ------------- -------------
Total current assets ....................................... 375,318 515,908 490,911
Photographic stock, at cost, less accumulated amortization of
$68,260 (1994), $105,010 (1995), and $130,763 (April 1996) . 93,408 100,170 158,284
Fixed assets, at cost, less accumulated depreciation and
amortization ............................................. 132,397 105,440 90,601
Intangible assets, less accumulated amortization ........... 66,468 32,831 33,791
Deposits ................................................... 12,462 20,018 24,096
------------- ------------- -------------
Total assets ............................................... $ 680,053 $ 774,367 $ 797,683
============= ============= =============
Liabilities and stockholders' equity
Current liabilities:
Cash--overdraft .......................................... $ 59,737 $ 52,058 $ 14,242
Notes Payable:
Stockholders .......................................... -- -- 300,000
Others ................................................ -- - 200,000
Loan payable--bank ....................................... 99,000 19,800 19,800
Advances from stockholder ................................ 30,000 187,000 --
Commissions payable ...................................... 92,544 114,834 112,724
Accounts payable ......................................... 86,516 113,289 111,126
------------- ------------- -------------
Total current liabilities .................................. 367,797 486,981 757,892
Loan payable--bank, less current portion ................... -- 72,600 62,700
Stockholders' equity (deficiency):
Preferred stock, $.01 par value, 2,000,000 shares authorized:
$2 Series A convertible preferred stock, 1,250,000 authorized;
500,000 issued and outstanding (liquidation preference
of $1,000,000); with potential stockholder put of $8.49
per share ........................................... 2,127,347 2,744,232 3,078,667
Series B convertible preferred stock, 166,667 authorized;
166,667 issued and outstanding; with potential stockholder
put of $2 per share ................................. 92,914 142,239 179,992
Common stock, $.0001 par value, 10,000,000 shares authorized,
918,570 (894,297 in 1995, 822,801 in 1994) issued and
outstanding ........................................... 82 89 92
Additional paid-in capital ............................... -- -- --
Accumulated deficit ...................................... (1,908,087) (2,671,774) (3,281,660)
------------- ------------- -------------
Total stockholders' equity (deficiency) .................... 312,256 214,786 (22,909)
------------- ------------- -------------
Total liabilities and stockholders' equity (deficiency) .... $ 680,053 $ 774,367 $ 797,683
============= ============= =============
</TABLE>
See accompanying notes.
F-2
<PAGE>
INDEX STOCK PHOTOGRAPHY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
Year ended October 31 April 30
1993 1994 1995 1995 1996
------------- ------------- --------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Fee revenues ....................... $1,331,997 $1,717,644 $ 2,215,314 $ 993,306 $1,242,305
Other revenues ..................... 54,340 14,250 -- -- --
------------- ------------- --------------- ------------- -------------
1,386,337 1,731,894 2,215,314 993,306 1,242,305
Commission expense ................. 410,031 512,281 704,496 291,400 418,789
Selling, general and administrative
expenses .......................... 1,066,374 1,070,867 1,488,313 743,169 897,159
Research and development expenses .. 254,861 388,395 424,129 198,259 260,396
------------- ------------- --------------- ------------- -------------
Income (loss) from operations ...... (344,929) (239,649) (401,624) (239,522) (334,039)
Other income (expense):
Interest income .................. 1,158 633 18 9 9
Interest expense ................. (2,268) (7,501) (10,683) (5,254) (5,197)
Other ............................ (12,247) (8,564) (8,659) (685) (17,292)
------------- ------------- --------------- ------------- -------------
Net income (loss) .................. (358,286) (255,081) (420,948) (245,452) (356,519)
Accretion of Series A and Series B
preferred stock .................. (391,758) (510,433) (666,210) (333,105) (372,188)
------------- ------------- --------------- ------------- -------------
Net income (loss) attributable to common
shareholders ..................... $ (750,044) $ (765,514 $ (1,087,158) $ (578,557) $ (728,707)
============= ============= =============== ============= =============
Net income (loss) per common share . $ (.54) $ (.52) $ (.72) $ (.39) $ (.47)
Weighted average number of shares used
in calculation of earnings per share 1,392,321 1,478,302 1,520,220 1,484,260 1,549,798
</TABLE>
See accompanying notes.
F-3
<PAGE>
INDEX STOCK PHOTOGRAPHY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Additional
Stock Common Paid-in Accumulated
Series A Series B Stock Capital Deficit Total
----------- ------------ --------- -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1993 ....................... $1,649,134 $ 60,694 $82 $ -- $(1,142,573) $ 567,337
Net loss for 1994 ............................ -- -- -- -- (255,081) (255,081)
Accretion of preferred stock ................. 478,213 32,220 -- -- (510,433) --
------------ --------- -------- ------------ -------------- ---------
Balance at October 31, 1994 ....................... 2,127,347 92,914 82 -- (1,908,087) 312,256
67,524 shares of common stock issued through a
private placement in April 1995 ............ -- -- 7 305,471 -- 305,478
3,972 shares of common stock issued for
services in April 1995 ..................... -- -- -- 18,000 -- 18,000
Net loss for 1995 ............................ -- -- -- -- (420,948) (420,948)
Accretion of preferred stock ................. 616,885 49,325 -- (323,471) (342,739) --
------------ --------- -------- ------------ -------------- ---------
Balance at October 31, 1995 ....................... 2,744,232 142,239 89 -- (2,671,774) 214,786
4,413 shares of common stock issued in
conjunction with asset acquisition in
December 1995 .............................. -- -- 1 19,999 -- 20,000
19,860 shares of common stock issued through
a private placement in January 1996 ........ -- -- 2 98,822 -- 98,824
Net loss for the six months ended April 30,
1996 (unaudited) ........................... -- -- -- -- (356,519) (356,519)
Accretion of preferred stock ................. 334,435 37,753 -- (118,821) (253,367) --
------------ --------- -------- ------------ -------------- ---------
Balance at April 30, 1996 (unaudited) ............. $3,078,667 $179,992 $92 $ -- $(3,281,660) $(22,909)
============ ========= ======== ============ ============== =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
INDEX STOCK PHOTOGRAPHY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
Year ended October 31 April 30
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss ...................................................... $(358,286) $(255,081) $(420,948) $(245,452) $(356,519)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................ 83,911 101,682 114,625 55,022 68,488
Services rendered in exchange for issuance of common stock -- -- 18,000 18,000 --
Changes in operating assets and liabilities:
Accounts receivable ................................. 45,349 (42,261) (112,596) (8,842) 487
Other receivables ................................... (133,874) 133,874 -- -- --
Prepaid expenses and other .......................... (3,736) (38,806) (27,994) (63,238) 24,510
Commissions payable ................................. (13,945) 28,126 22,290 (270) (2,110)
Accounts payable .................................... 107,180 (57,040) 26,773 (16,456) (2,163)
--------- --------- --------- --------- ---------
Net cash used in operating activities ......................... (273,401) (129,506) (379,850) (261,236) (267,307)
Investing activities
Purchase of photographic stock ................................ (40,755) (20,788) (43,512) (31,205) (83,867)
Purchase of fixed assets ...................................... (58,077) (40,198) (17,281) (9,028) (8,856)
Deposits ...................................................... (3,795) (4,137) (7,556) (1,703) (4,078)
--------- --------- --------- --------- ---------
Net cash used in investing activities ......................... (102,627) (65,123) (68,349) (41,936) (96,801)
Financing activities
Cash--overdraft ............................................... -- 59,737 (7,679) (59,737) (37,816)
Advances from stockholder ..................................... -- 30,000 157,000 142,000 (187,000)
Payments of loan payable--bank ................................ -- -- (6,600) -- (9,900)
Proceeds from loan payable--bank .............................. 95,000 4,000 -- -- --
Proceeds from notes payable ................................... -- -- -- -- 500,000
Payments of debt .............................................. (11,486) -- -- -- --
Proceeds from issuance of common stock, net ................... 374,567 -- 305,478 305,478 98,824
--------- --------- --------- --------- ---------
Net cash provided by financing activities ..................... 458,081 93,737 448,199 387,741 364,108
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents .......... 82,053 (100,892) -- 84,569 --
Cash and cash equivalents at beginning of year ................ 18,839 100,892 -- -- --
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of year ...................... $ 100,892 $ -- $ -- $ 84,569 $ --
========= ========= ========= ========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest .................................................... $ 2,082 $ 7,501 $ 10,683 $ 5,254 $ 5,197
========= ========= ========= ========= =========
</TABLE>
In conjunction with an acquisition in December 1995, Index acquired certain
intangible assets in exchange for 4,413 shares of common stock valued at
$20,000.
See accompanying notes.
F-5
<PAGE>
INDEX STOCK PHOTOGRAPHY, INC.
Notes to Financial Statements
(UNAUDITED) WITH RESPECT TO THE SIX MONTH PERIODS
ENDED APRIL 30, 1995 AND 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
ImageNation, Inc. was incorporated on April 23, 1991, in the State of
Delaware for the purpose of acquiring and modernizing photography agencies. A
stock photography agency receives photographs from professional photographers
and licenses the use of these photographs to customers in the advertising,
design, corporate, and editorial markets worldwide.
On November 1, 1991, ImageNation, Inc. acquired certain assets and
liabilities of Index Stock International, Inc., a New York corporation, for
cash of $135,000, a $75,000 noncompetition agreement and 166,667 shares of
Series B convertible preferred stock (see Note 5), and incurred acquisition
costs of approximately $49,000. Shortly thereafter, ImageNation, Inc. changed
its name to Index Stock Photography, Inc. ("Index"). Prior to November 1,
1991, Index did not have operations.
On March 23, 1992, Index acquired certain assets and liabilities of a
stock photography agency, Telephoto, Inc., a New York corporation, for cash
of $25,000 and 22,133 shares of common stock. Index also obtained the right
to the name "Telephoto."
On December 16, 1995, Index acquired certain assets and liabilities of a
stock photography agency, ProFiles West, Inc., a Colorado corporation, for
cash of $35,000 and 4,413 shares of common stock. Index also obtained the
right to the name "ProFiles West."
These acquisitions were accounted for by the purchase method of accounting
and, accordingly, the purchase prices have been allocated to the assets
acquired and the liabilities assumed based on their estimated fair value at
the date of acquisition. The excess of purchase price over the estimated fair
value of the net assets acquired has been recorded as goodwill, and is being
amortized on the straight-line basis over five years. The operating results
of these acquisitions are included in Index's results of operations from the
dates of acquisition.
On May 31, 1996, Index effected a reverse stock split on common shares in
the ratio of .662 to 1. All references in the financial statements to
weighted average shares outstanding and related prices, per share amounts,
and stock option plan data reflect the split.
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 amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those
estimates.
INTERIM FINANCIAL INFORMATION
The unaudited interim information as of April 30, 1996 and for the six
months ended April 30, 1995 and 1996 has been prepared on the same basis as
the annual financial statements and, in the opinion of the Index's
management, reflects normal recurring adjustments necessary for a fair
presentation of the information for the periods presented. Operating results
for any quarter are not necessarily indicative of results for any future
periods.
CASH EQUIVALENTS
Index considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents.
F-6
<PAGE>
Index Stock Photography, Inc.
Notes to Financial Statements - (Continued)
1. Significant Accounting Policies - (Continued)
DEPRECIATION AND AMORTIZATION
Depreciation of computer equipment, software, office equipment, and
furniture is computed on the straight-line method over the estimated useful
lives (generally five to seven years) of the related assets. Amortization of
leasehold improvements is computed on the straight-line method over the
lesser of the terms of the related leases or their estimated useful lives.
Costs related to the (i) production of certain original photographic stock
and (ii) duplication of images are capitalized and amortized on the
straight-line basis over five years.
Goodwill, organization costs and the noncompetition agreements are being
amortized on the straight-line basis over three to five years.
REVENUE
Index derives revenue from (i) licensing photographs (domestic revenue),
and (ii) licensing photographs to foreign agents who, in turn, license the
photographs to customers in certain foreign markets (foreign revenue).
Domestic and foreign revenue is recognized upon receipt of notification
from customers of the intended use of the photographs.
RESEARCH AND DEVELOPMENT
Index is developing computer software to automate finding, storing and
distributing images. The costs incurred during the research and development
phase for the years ended October 31, 1993, 1994 and 1995 and the six months
ended April 1995 and 1996 were approximately $255,000, $388,000, $424,000,
$198,000 and $260,000, respectively, and such costs were expensed as
incurred. At the end of the research and development phase, certain costs may
begin to be capitalized in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." Research and development planned for the year
ending October 31, 1996 is related to testing and enhancement of existing
technology.
EXPENSE REIMBURSEMENTS
For the years ended October 31, 1993, 1994 and 1995, and the six months
ended April 30, 1995 and 1996, approximately $169,722, $0, $211,500, $150,000
and $14,000, respectively, of costs were incurred relating to catalogues and
duplicating photographs billed to foreign agents. The billings to the foreign
agents are recorded as credits against the related production costs which are
included in selling expense. There was no catalogue production during the
year ended October 31, 1994.
ADVERTISING COSTS
Index expenses the cost of advertising, including direct-response
advertising, as incurred. For the years ended October 31, 1993, 1994 and 1995
and the six months ended April 1995 and 1996, advertising expense totaled
$35,000, $35,000, $158,000, $24,000 and $71,000, respectively.
INCOME TAXES
Index accounts for income taxes using the liability method in accordance
with Statement of Financial Accounting Standards No. 109 ("FAS 109"),
"Accounting for Income Taxes."
In accordance with FAS 109, Index's deferred tax asset of approximately
$246,000, $327,000, $457,000, at October 31, 1993, 1994, 1995, respectively,
arising primarily from net operating loss carryforwards available, has been
reduced by valuation allowances of the same amounts. The valuation allowances
increased $106,000, $81,000, $130,000 during the years ended October 31,
1993, 1994 and 1995, respectively.
F-7
<PAGE>
Index Stock Photography, Inc.
Notes to Financial Statements - (Continued)
1. Significant Accounting Policies - (Continued)
As of October 31, 1995, Index has net operating loss carryforwards of
approximately $1,374,000 for income tax purposes which will expire commencing
in year 2006. In addition, Index has research activity credit carryforwards
of approximately $70,000 that will expire commencing in year 2007. The net
operating loss and research activity credit carryforwards may be limited by
the change in ownership rules pursuant to Sections 382 and 383, respectively,
of the Internal Revenue Code.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal
years beginning after December 31, 1995 and prescribes accounting and
reporting standards for all stock-based compensation plans, including
employee stock options, restricted stock, employee stock purchase plans and
stock appreciation rights.
SFAS 123 requires compensation expense to be recorded (I) using the new
fair value method or (ii) using existing accounting rules prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations with pro forma disclosure
of what net income and earnings per share would have been had the Company
adopted the new fair value method. The Company intends to continue to account
for its stock-based compensation plans in accordance with the provisions of
APB 25.
NET INCOME (LOSS) PER SHARE
Except as noted below, net income (loss) per common share is computed
using the weighted average number of common shares outstanding and dilutive
common stock equivalent shares, if any, from stock options during each year,
retroactively adjusted to give effect to the reverse stock split. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletins, common
stock and common stock equivalents issued by Index at prices below the public
offering price during the twelve-month period prior to Index's initial public
offering have been included in the calculation as if they were outstanding
for all periods presented.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Index to concentrations of
credit risk consist primarily of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers comprising Index's customer base. Management regularly monitors the
creditworthiness of its customer and believes that it has adequately provided
for any exposure to potential credit losses.
2. FIXED ASSETS
Fixed assets, at cost, consist of the following:
<TABLE>
<CAPTION>
October 31 April 30
1994 1995 1996
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Computer equipment and software ............... $173,956 $185,932 $191,713
Office equipment and furniture ................ 35,097 37,812 40,887
Leasehold improvements ........................ 9,540 12,130 12,130
----------- ----------- -----------
218,593 235,874 244,730
Less accumulated depreciation and amortization . 86,196 130,434 154,129
----------- ----------- -----------
$132,397 $105,440 $ 90,601
=========== =========== ===========
</TABLE>
F-8
<PAGE>
Index Stock Photography, Inc.
Notes to Financial Statements - (Continued)
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
October 31 April 30
1994 1995 1996
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Noncompetition agreement ..... $ 75,000 $ 75,000 $ 95,000
Goodwill ..................... 83,565 83,565 83,565
Organization costs ........... 10,852 10,852 10,852
---------- ---------- -----------
169,417 169,417 189,417
Less accumulated amortization . 102,949 136,586 155,626
---------- ---------- -----------
$ 66,468 $ 32,831 $ 33,791
========== ========== ===========
</TABLE>
4. LOAN PAYABLE--BANK
In October 1993, Index established a $99,000 line of credit with Citibank.
Effective July 1995, Index converted the $99,000 outstanding loan balance
under a line of credit with Citibank into a five-year term loan. The
outstanding balance at April 30, 1996 amounted to $82,500 and is repayable in
equal monthly installments of $1,650. The interest is at the bank's Base Rate
(as defined) plus 1% per annum with interest payable monthly (9.75% at
October 31, 1995 and 9.25% at April 30, 1996). All of Index's assets are
pledged as collateral against the term loan. The term loan is guaranteed by a
majority shareholder.
5. NOTES PAYABLE
On April 1, 1996, Index borrowed $500,000 from four stockholders and two
outside investors, evidenced by notes payable (the "Notes") with interest at
10% per annum payable semi-annually commencing October 1, 1996. The Notes
mature on the earlier of a debt or equity financing of Index, of at least
$3,000,000, or March 31, 1997. Simultaneously with the issuance of the Notes,
the noteholders received 132,400 common stock purchase warrants with an
exercise price of $6.04 per share. The warrants are exercisable at anytime
prior to March 31, 2001.
6. PREFERRED AND COMMON STOCK
In October 1991, Index issued 500,000 shares of $2.00 Series A Convertible
Preferred Stock ("Series A Preferred Stock") for $1,000,000.
Each share of Series A Preferred Stock is convertible into .662 of one
share of common stock at any time at the option of the holder and
automatically upon the successful completion of a public offering of its
securities. Commencing after the sixth anniversary of the issuance of the
Series A Preferred Stock (October 1997), holders thereof have the right to
require Index to repurchase such shares at $8.49 per share ($4,245,000 in the
aggregate), payable in three consecutive annual installments of $2.83 per
share, if Index has not effected a public offering of its securities. These
shares have a liquidation preference of $2.00 per share ($1,000,000 in the
aggregate), whether voluntary or involuntary liquidation. Each share is
entitled to a cumulative cash dividend of $.30 per annum commencing with the
fifth anniversary of the issuance of such shares (October 1997) and $.40 per
annum commencing with the seventh anniversary (October 1998). Series A
Preferred Stock does not have any voting rights except for those provided for
by law.
Each share of Series B Convertible Preferred Stock, independently valued
at time of issuance at approximately $.155, is convertible into .662 of one
share of common stock at any time at the option of the holder. Effective
October 31, 1997, holders of these shares have the right to require Index to
repurchase such shares at approximately $2.00 per share ($333,334 in the
aggregate) in two equal installments. If such right of redemption is not
exercised by the holders, Index has the right to purchase such shares at
$12.00 per share ($2,000,004 in the aggregate) starting October 31, 1997.
Series B Convertible Preferred Stock does not have any voting rights except
for those provided by law. Series B Convertible Preferred Stock shall not be
entitled to receive cash dividends.
F-9
<PAGE>
Index Stock Photography, Inc.
Notes to Financial Statements - (Continued)
6. Preferred and Common Stock - (Continued)
At October 31, 1995, Index has reserved 441,334 shares of authorized
common stock for the conversion of the preferred stock. The carrying values
of the preferred stock have been increased by periodic accretions, based on
the interest method, of the difference between the fair value at the dates of
issuance and the redemption values until the redemption dates at which time
both amounts shall be equivalent.
7. STOCK OPTIONS AND WARRANTS
In fiscal 1992, Index granted an employee options to purchase 22,517
shares of common stock in conjunction with an employment agreement. In May
1993, these options were exercised for $500. In fiscal 1992, Index adopted
the "1992 Non-Qualified Stock Option Plan" whereby officers, directors,
advisory directors or consultants can be granted options to purchase up to
198,600 reserved shares of common stock of Index. The option price per share
shall not be less than the fair market value, as determined by management, on
the date the option is granted. The exercise price and the option period vary
for each option.
In fiscal 1992, Index granted stock options to purchase 22,243 shares of
common stock at prices ranging from $.88 to $1.51.
In fiscal 1993, Index granted stock options to purchase 9,268 shares of
common stock at $2.27 per share. Options to purchase 7,745 shares were
canceled.
In fiscal 1994, Index granted stock options to purchase 16,681 shares of
common stock at $2.27 per share. Options to purchase 3,773 shares were
canceled.
In fiscal 1995, Index granted stock options to purchase 15,424 shares of
common stock at $2.27 per share. Options to purchase 3,111 shares were
canceled.
In first quarter 1996, Index granted stock options to purchase 81,889
shares of common stock at $4.53 per share.
As of April 30, 1996, an aggregate of 131,076 options were outstanding
(23,766, 36,873 and 37,238 at October 31, 1993, 1994 and 1995, respectively)
of which 90,131 are exercisable at prices ranging from $.88 to $4.53.
In January 1996, Index sold 19,860 shares of common stock and, in
conjunction therewith, issued warrants to purchase 9,930 shares of common
stock at an exercise price of $4.98 per share, for an aggregate price of
$99,000. The warrants are exercisable at anytime prior to January 24, 2001.
8. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is calculated based on (i) net income
(loss) attributable to common shareholders after deducting the accretion of
Series A and Series B preferred stock, (ii) the preferred stock being treated
as if converted to common stock and outstanding since the date of issuance of
the preferred stock and included in the weighted average number of shares
outstanding, and (iii) the common stock, stock options and stock warrants
issued between May 31, 1995 and May 31, 1996, which were at prices below the
offerers price, being treated as outstanding since inception and included in
the weighted average number of shares outstanding.
F-10
<PAGE>
Index Stock Photography, Inc.
Notes to Financial Statements - (Continued)
8. Net Income (Loss) Per Common Share - (Continued)
Historical earnings per common share which did not reflect items (i) and
(iii) above was as follows:
<TABLE>
<CAPTION>
Year ended October 31, Six months
- --------------------------------------------------- April 30
1993 1994 1995 1996
------- ------- ------- ------------
<S> <C> <C> <C>
(.30) (.20) (.32) (.26)
</TABLE>
9. COMMITMENTS
LEASES
Index leases office space and computer equipment under noncancellable
operating leases. Future base rental payments as of October 31, 1995 are as
follows:
Fiscal year:
1996 ............... $137,000
1997 ............... 73,000
1998 ............... 40,000
1999 ............... 18,000
2000 ............... 8,000
-----------
$276,000
===========
Index is also responsible for rent escalations based upon increases in
certain building operating costs. Office rent expense for the years ended
October 31, 1993, 1994 and 1995 was approximately $70,000, $70,000 and
$78,000, respectively, and $38,000 and $40,000 for the six months ended April
30, 1995 and 1996, respectively.
10. RETIREMENT PLAN
Index provides retirement benefits for its employees under a defined
contribution plan. All employees are eligible to make voluntary contributions
to the Plan upon completion of three months of service. Index stopped
matching contributions to the Plan in April 1994. Employees become fully
vested in Index's matching contribution after three years of service. Index's
contributions for the years ended October 31, 1993, 1994, and 1995 totaled
approximately $9,000, $5,000 and $0, respectively.
11. RELATED PARTY TRANSACTIONS
For the years ended October 31, 1993, 1994 and 1995, Index incurred
commission expenses of approximately $200,000, $89,000 and $200,000,
respectively, and $91,000 and $74,460 for the six months ended April 30, 1995
and 1996, respectively, for images owned by shareholders/photographers who
are not employees of the Company.
12. CUSTOMER AND GEOGRAPHICAL AREA INFORMATION
No customer accounted for more than 10% of revenues during the years ended
October 31, 1993, 1994 and 1995.
Through catalog distributions, internet access and foreign agents Index
also provides its images to end users outside the United States. Revenues
from customers outside the United States represented approximately 35%, 35%
and 39% of total revenues during the years ended October 31, 1993, 1994 and
1995, respectively. No single geographic area accounted for more than 10% of
total revenues.
F-11
<PAGE>
===============================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied on as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy, by
any person in any jurisdiction in which it is unlawful for such person to
make such offer or solicitation. Neither the delivery of this Prospectus nor
any offer, solicitation or sale made hereunder, shall under any circumstances
create an implication that the information herein is correct as of any time
subsequent to the date of the Prospectus.
------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary .............................................. 3
Risk Factors .................................................... 6
Use of Proceeds ................................................. 11
Divided Policy .................................................. 12
Capitalization .................................................. 12
Dilution ........................................................ 13
Selected Financial Information .................................. 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ..................................................... 15
Business ........................................................ 19
Management ...................................................... 30
Certain Transactions ............................................ 34
Principal Stockholders .......................................... 35
Description of Capital Stock .................................... 36
Shares Eligible for Future Sale ................................. 37
Underwriting .................................................... 39
Plan of Distribution ............................................ 41
Legal Matters ................................................... 41
Experts ......................................................... 41
Additional Information .......................................... 41
Financial Statements ............................................ F-1
</TABLE>
Until , 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in the distribution thereof, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotment or subscriptions.
===============================================================================
<PAGE>
===============================================================================
132,400 SHARES
COMMON STOCK
INDEX STOCK
PHOTOGRAPHY, INC.
------
P R O S P E C T U S
------
JULY , 1996
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Statement Filing Fee .. $ 4,275.74
Legal Fees and Expenses* ............... 2,500.00
Printing ............................... 2,000.00
------------
Total ................................ $ 4,775.74
============
- ------
* Indicates expenses that have been estimated for the purpose of filing.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Section 145 of the General Corporation Law of the
State of Delaware. As permitted by Delaware law, the Company's Certificate of
Incorporation contains an article limiting the personal liability of
directors. The Certificate of Incorporation provides that a director of the
Company shall not be personally liable for any damages from any breach of
fiduciary duty as a director, except for liability based on a judgment or
other final adjudication adverse to him establishing that his acts or
omissions were committed in bad faith, or the result of active or deliberate
dishonesty and were material to the cause of action so adjudicated, or that
he personally gained a financial profit or other advantage to which he was
not legally entitled.
In accordance with Section of the Underwriting Agreement, directors and
officers of the Company may under certain circumstances be entitled to
indemnification from the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
There have been no issuances of the registrant's securities within the
past three years, except for the following:
In May 1993, the Company sold for $500, 22,516 shares upon the exercise of
a non-qualified option granted to an employee of the Company.
In July 1993, the Company sold 112,842 shares of its Common Stock to 4
persons at a price per share of $3.32.
In April 1995, the Company sold 67,524 shares of its Common Stock to 10
persons at a price per share of $4.53.
In December 1995, the Company issued 4,412 common shares to one person in
connection with the purchase of certain assets of ProFiles West, a photo
stock agency. The individual was the sole proprietor of the acquired
business.
In January 1996, the Company sold to an existing stockholder 19,860 shares
and a warrant to purchase 9,930 shares for an aggregate purchase price of
$99,000. The warrants are exercisable at $4.98 per share.
In April 1996, the Company issued to 6 persons in the aggregate $500,000
principal amount of 10% notes and warrants to purchase in the aggregate
132,400 shares of Common Stock exercisable at a price per share of $6.04.
In May 1996, the Company issued 6,620 common shares to one person as
consideration for certain agreements made by the Registrant and the
individual involving noncompetition and nonsolicitation. The individual was
the sole proprietor of the acquired business.
The foregoing transactions were exempt from registration pursuant to
section 4(2) of the Securities Act of 1933. All share amounts set forth above
have been adjusted to reflect a reverse split of the Company's Common Stock
effected in May 1996.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
16A. EXHIBITS
Nos. Description of Exhibit
- ----- -----------------------
1a Underwriting Agreement*
1b Form of Selected Dealers Agreement*
3a Restated Certificate of Incorporation*
3b By-laws, as amended*
4a Form of Common Stock Certificate*
4b Form of Warrant expiring January 24, 1999*
4c Form of Warrant expiring March 31, 2001*
5a Opinion of Schneck Weltman Hashmall & Mischel LLP*
10a Employment Agreement by and between Index Stock Photography Inc. and
Bahar Gidwani dated as of July 1, 1996*
10b Stock Option Plan, as amended*
10c Cupertino National Bank Credit Agreement*
10d Lease for 126 Fifth Avenue, New York, New York 10011*
10e Lease for 6500 Wilshire Blvd., Los Angeles, CA 90048*
10f Microsoft Corporation Nondisclosure Agreement (Pre-Release
Product-General) with Registrant*
10g Photodisc, Inc. & Index Stock Photography Inc. Master
Licensing/Distribution Agreement dated November 1993*
10r Form of Registration Rights Agreement*
10s Lease for 22 West 19th Street, New York, NY.*
10r E-Data License Agreement*
24a Consent of Ernst & Young LLP
24b Consent of Schneck Weltman Hashmall & Mischel LLP
(reference is made to Exhibit 5)
27 Financial Data Schedules
- ------
* To be filed by amendment.
16B. FINANCIAL STATEMENT SCHEDULES
Schedule of Fixed Assets
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
A. CERTIFICATES
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment filed as part of this
Registration Statement shall be deemed a new registration statement
relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of securities being registered which remain unsold at the termination
of the offering hereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officer and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on June 28, 1996.
INDEX STOCK PHOTOGRAPHY, INC.
By: /s/ Bahar Gidwani
-----------------------------------
Bahar Gidwani, President,
Chief Executive Officer,
Chairperson of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bahar Gidwani Chief Executive Officer, and June 28, 1996
- -------------------------- Chairperson of the Board of
Bahar Gidwani Directors
/s/ Kent Lawson Director June 28, 1996
- --------------------------
Kent Lawson
/s/ Arthur M. Schneck Director June 28, 1996
- --------------------------
Arthur M. Schneck
/s/ Susan Fournier Director June 28, 1996
- --------------------------
Susan Fournier
/s/ James D. Pyden Chief Financial Officer June 28, 1996
- -------------------------- (Principal Financial Officer)
James D. Pyden
</TABLE>
II-4
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated December 20, 1995 (except Note 1 and 5, as to which the
date is May 31, 1996) in the registration statement (Form S-1 No. 33-00000) and
related Prospectus of Index Stock Photography, Inc. for the registration of
132,400 shares of its common stock.
/s/ ERNST & YOUNG LLP
-------------------------
ERNST & YOUNG LLP
New York, NY
July 3, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE OCTOBER
31, 1995 BALANCE SHEET AND THE STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> OCT-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 445,116
<ALLOWANCES> (22,300)
<INVENTORY> 0
<CURRENT-ASSETS> 515,908
<PP&E> 235,874
<DEPRECIATION> 130,434
<TOTAL-ASSETS> 774,367
<CURRENT-LIABILITIES> 486,981
<BONDS> 0
0
2,886,471
<COMMON> 89
<OTHER-SE> (2,671,774)
<TOTAL-LIABILITY-AND-EQUITY> 774,367
<SALES> 2,215,314
<TOTAL-REVENUES> 2,215,314
<CGS> 0
<TOTAL-COSTS> 2,616,938
<OTHER-EXPENSES> 8,659
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,683
<INCOME-PRETAX> (420,948)
<INCOME-TAX> 0
<INCOME-CONTINUING> (420,948)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (420,948)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
