<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-23747
GETTY IMAGES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 98-0177556
(State of Incorporation) (I.R.S. Employer Identification No.)
---------------------------------------
2101 FOURTH AVENUE
FIFTH FLOOR
SEATTLE, WASHINGTON 98121
(206) 695 3400
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
---------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes X No
As of August 5, 1999, there were 35,434,676 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.
<PAGE> 2
GETTY IMAGES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE
THREE MONTHS ENDED JUNE 30, 1999
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
2
<PAGE> 3
GETTY IMAGES, INC.
PART I.
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GETTY IMAGES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
JUNE 30, 1999 JUNE 30, 1998
$ $
(IN THOUSANDS (IN THOUSANDS
EXCEPT PER EXCEPT PER
SHARE DATA) SHARE DATA)
<S> <C> <C>
Sales $ 54,957 $ 48,126
Cost of sales 14,764 13,909
------- -------
GROSS PROFIT 40,193 34,217
------- -------
Selling, general and administrative expenses 32,072 25,837
Amortization of intangibles 16,797 10,007
Depreciation 5,455 3,547
Non-recurring integration and restructuring costs -- 9,137
------- -------
54,324 48,528
------- -------
OPERATING LOSS (14,131) (14,311)
Net interest expense (962) (768)
Net exchange gains 20 296
------- -------
LOSS BEFORE INCOME TAXES (15,073) (14,783)
Income taxes (733) 712
------- -------
Net loss before extraordinary items (15,806) (14,071)
Extraordinary items -- (830)
------- -------
NET LOSS $(15,806) $(14,901)
======= =======
Basic loss per share $(0.47) $(0.49)
======= =======
Diluted earnings per share N/A N/A
======= =======
</TABLE>
The accompanying notes on pages 7 to 10 are an integral part of these
consolidated financial statements.
3
<PAGE> 4
GETTY IMAGES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------
JUNE 30, 1999 JUNE 30, 1998(1)
$ $
(IN THOUSANDS (IN THOUSANDS
EXCEPT PER EXCEPT PER
SHARE DATA) SHARE DATA)
<S> <C> <C>
Sales $107,107 $ 86,057
Cost of sales 28,605 25,516
-------- --------
GROSS PROFIT 78,502 60,541
-------- --------
Selling, general and administrative expenses 60,796 45,585
Amortization of intangibles 27,021 16,903
Depreciation 10,061 6,445
Non-recurring integration and restructuring costs -- 9,137
-------- --------
97,878 78,070
-------- --------
OPERATING LOSS (19,376) (17,529)
Net interest expense (1,773) (1,319)
Net exchange loss (371) (59)
-------- --------
LOSS BEFORE INCOME TAXES (21,520) (18,907)
Income taxes (2,168) (369)
-------- --------
Net loss before extraordinary items (23,688) (19,276)
Extraordinary items -- (830)
-------- --------
NET LOSS $(23,688) $(20,106)
======== ========
Basic loss per share $ (0.74) $ (0.72)
======== ========
Diluted earnings per share N/A N/A
======== ========
</TABLE>
(1) Reflects the combination of the unaudited consolidated statement of
operations of Getty Communications plc (the predecessor company) for
the period January 1, 1998 through February 9, 1998 and the unaudited
consolidated statement of operations of Getty Images, Inc. for the
period February 10, 1998 through June 30, 1998.
The accompanying notes on pages 7 to 10 are an integral part of these
consolidated financial statements.
4
<PAGE> 5
GETTY IMAGES, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
$ $
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,394 $ 16,150
Accounts receivable, net 39,677 32,967
Prepaid expenses and other assets 28,389 17,258
Inventories, net 4,573 2,834
-------- --------
TOTAL CURRENT ASSETS 87,033 69,209
Fixed assets, net 68,612 62,757
Intangible assets, net 421,077 325,861
Deferred tax assets 4,875 5,036
-------- --------
TOTAL ASSETS $581,597 $462,863
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 31,444 26,232
Accrued expenses 23,386 20,148
Income taxes payable 308 --
Short-term debt 15,333 202
-------- --------
TOTAL CURRENT LIABILITIES 70,471 46,582
Long-term debt 72,778 72,354
-------- --------
TOTAL LIABILITIES 143,249 118,936
-------- --------
STOCKHOLDERS' EQUITY
Common stock 353 306
Additional paid-in capital 492,490 368,267
Retained losses (51,947) (28,259)
Cumulative translation adjustments (2,548) 3,613
-------- --------
TOTAL STOCKHOLDERS' EQUITY 438,348 343,927
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $581,597 $462,863
======== ========
</TABLE>
The accompanying notes on pages 7 to 10 are an integral part of these
consolidated financial statements.
5
<PAGE> 6
GETTY IMAGES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------------------
JUNE 30, 1999 JUNE 30, 1998(1)
$ $
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 2,689 $ 5,220
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Business acquisitions, net of cash acquired 429 (75,172)
Purchase of fixed assets (17,884) (8,495)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (17,455) (83,667)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt issuance 15,000 119,569
Payments of principal balance of debt 111 (67,093)
Proceeds from issuance of ordinary shares 1,276 32,477
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,387 84,953
-------- --------
Net increase in cash and cash equivalents 1,621 6,506
Exchange rate differences arising from translation of foreign
currency balances (3,377) 423
Cash and cash equivalents
- - beginning of period 16,150 29,234
-------- --------
- - end of period $ 14,394 $ 36,163
======== ========
</TABLE>
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------------------
JUNE 30, 1999 JUNE 30, 1998(1)
$ $
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Net loss $(23,688) $(20,106)
Other comprehensive income, net of tax:
Foreign currency translation adjustments (6,161) (6,774)
-------- --------
COMPREHENSIVE LOSS $(29,849) $(26,880)
======== ========
</TABLE>
(1) Reflects the combination of the unaudited condensed consolidated
statement of cash flows and the unaudited consolidated statement of
comprehensive income of Getty Communications plc (the predecessor
company) for the period January 1, 1998 through February 9, 1998 and
the unaudited condensed consolidated statement of cash flows and the
unaudited consolidated statement of comprehensive income of Getty
Images, Inc. for the period February 10, 1998 through June 30, 1998.
The accompanying notes on pages 7 to 10 are an integral part of
these consolidated financial statements.
6
<PAGE> 7
GETTY IMAGES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
The unaudited consolidated financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and note disclosures required by generally accepted accounting
principles. The statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 (the "Annual Report"),
Commission file No. 000-23747, that was filed with the Commission on March 31,
1999. In the opinion of management, the accompanying consolidated financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Company's financial position and
results of operations. The results of the operations for the three and six month
periods ended June 30, 1999 may not be indicative of the results that may be
expected for the full fiscal year.
The year end condensed balance sheet data was derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". The standard
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. The new rules will be
effective for fiscal years beginning after June 15, 2000.
2. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include Getty Images, Inc.
and its subsidiaries, all of which are 100% owned, from the date of acquisition.
All material intercompany amounts and transactions have been eliminated in the
consolidated financial statements. The acquisitions of PhotoDisc and Allsport
in February 1998, and Art.com in May 1999, have been consolidated using the
purchase method of accounting.
7
<PAGE> 8
3. NON-RECURRING INTEGRATION AND RESTRUCTURING CHARGES
During the six months ended June 30, 1998, the Company approved and commenced a
program to integrate its businesses following the acquisitions of PhotoDisc and
Allsport in February 1998. This resulted in integration and restructuring
charges being incurred.
Integration costs in the six months ended June 30, 1998 amounted to $1.3 million
and were associated with the activities of teams responsible for integrating the
various businesses of the Company for the benefit of future operations. These
included items such as consulting and professional fees, systems and process
integration costs and contract renegotiation costs. These costs were expensed as
incurred.
Restructuring costs, which amounted to $7.8 million in the six months ended June
30, 1998, were for estimated exit costs associated with the closure of 10
facilities, asset write downs, employee termination costs and contract
termination costs.
4. EXTRAORDINARY ITEMS
On May 22, 1998, the Company completed the issue of $75 million, 4.75%
convertible subordinated notes due 2003, the proceeds of which were applied
partially to the repayment of $49 million of term debt due to Midland Bank plc.
The early payment of such debt resulted in an extraordinary charge of $830,000
($0.03 per share) net of an income tax benefit of $408,000.
5. PROVISION FOR INCOME TAXES
In accordance with generally accepted accounting principles, the Company
provides for income taxes on an interim basis using its estimated annual income
tax rate. The Company is providing for income taxes in 1999 at an effective
annual tax rate of 39.4% of net income before amortization of goodwill, which is
largely non-tax deductible. The comparative rate for the year ended December 31,
1998 was 38.0%.
6. EARNINGS PER SHARE
Diluted earnings per share are not given for the three or six month periods
ended June 30, 1999 or June 30, 1998 due to the loss incurred in those periods.
Basic loss per share for the three and six month periods ended June 30, 1999 are
computed on the basis of 33,603,000 and 32,134,000 weighted average number of
shares in issue respectively. Basic loss per share for the three and six month
periods ended June 30, 1998 are computed on the basis of 30,352,000 and
27,787,000 weighted average number of shares in issue respectively.
8
<PAGE> 9
7. FOREIGN CURRENCY TRANSLATION
Unrealized net exchange losses of $1,813,000 for the three month period ended
June 30, 1999 and $3,630,000 for the six month period ended June 30, 1999 (three
and six month period ended June 30, 1998: $nil) arose on the translation of
certain intercompany foreign currency transactions deemed to be of a long-term
nature. These transactions are not planned to be settled in the foreseeable
future and are reported in the same manner as foreign currency translation
adjustments in stockholders' equity in accordance with FAS52 `Foreign Currency
Translation'.
8. SEGMENT INFORMATION
Getty Images operates in one business segment and all intercompany transactions
are eliminated on consolidation.
As a result, revenues from external customers are $107,107,000 for the first six
months of 1999 and $54,957,000 for the quarter ended June 30, 1999 ($86,057,000
for the first six months of 1998 and $48,126,000 for the quarter ended June 30,
1998).
9. ACQUISITIONS
On May 4, 1999, Getty Images purchased the entire issued share capital of
Art.com, Inc. The purchase consideration was $135.3 million, satisfied as
follows:
<TABLE>
<CAPTION>
Art.com $
(IN THOUSANDS)
<S> <C>
4,252,271 shares of common stock of Getty Images at $27.21 per share $115,704
--------
Capital contribution made to Art.com 10,000
Getty Images' estimated transaction expenses 3,726
--------
Cash costs of the acquisition 13,726
--------
Fair value of options over shares of Art.com Common Stock exchanged for
options over shares of Getty Images Common Stock 5,910
--------
Total purchase price 135,340
Art.com net assets at May 4, 1999 (13,104)
--------
Excess of purchase price over net assets acquired allocated to goodwill
(amortized over three years) $122,236
========
</TABLE>
9
<PAGE> 10
10. SUBSEQUENT EVENTS
On August 9, 1999, the Company acquired all of the outstanding stock of EyeWire,
Inc. ("EyeWire"). Under the terms of the acquisition, EyeWire shareholders
received 1.85 million newly issued shares of Getty Images Common Stock at a
total market value of $32,375,000.
11. PRO FORMA INFORMATION RELATING TO ACQUISITIONS (UNAUDITED)
The following unaudited pro forma information shows the results of the Company
for the six month period ended June 30, 1999 and June 30, 1998 respectively, as
if the acquisitions of PhotoDisc and Allsport had occurred on January 1, 1998
and the acquisition of Art.com had occurred on January 1, 1999. The pro forma
information includes adjustments related to the financing of the acquisitions,
the effect of amortizing goodwill and other intangible assets acquired, as well
as the related tax effects. The pro forma results of operations are unaudited,
have been prepared for comparative purposes only and do not purport to indicate
the results of operations which would have actually occurred had the
combinations been in effect on the dates indicated or which may occur in the
future.
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED JUNE 30
1999 1998
$ $
(IN THOUSANDS (IN THOUSANDS
EXCEPT LOSS EXCEPT LOSS
PER SHARE DATA) PER SHARE DATA)
<S> <C> <C>
Sales $107,659 $ 92,596
Net loss (40,168) (20,339)
Basic loss per share $ (1.15) $ (0.63)
</TABLE>
10
<PAGE> 11
REPORT ON UNAUDITED INTERIM FINANCIAL INFORMATION
TO THE BOARD OF DIRECTORS OF GETTY IMAGES, INC.
We have reviewed the accompanying interim consolidated financial statements of
Getty Images, Inc. and subsidiaries as of June 30, 1999 and for the three month
and six month period then ended as set out on pages 3 to 10. These interim
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with generally accepted accounting principles.
PricewaterhouseCoopers
Chartered Accountants
LONDON
England
August 16, 1999
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS OF GETTY IMAGES, INC. ("GETTY IMAGES" OR THE
"COMPANY") AND THE NOTES THERETO, AND OTHER FINANCIAL INFORMATION CONTAINED
ELSEWHERE IN THIS REPORT ON FORM 10-Q.
THE STATEMENTS IN THIS SECTION THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 27E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS
QUARTERLY REPORT SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED
FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING THOSE
SET FORTH UNDER "ITEM 1: BUSINESS - H. FACTORS THAT MAY AFFECT THE BUSINESS" IN
THE COMPANY'S FORM 10-K.
THE FOLLOWING DISCUSSION DOES NOT INCORPORATE THE ACQUISITION OF EYEWIRE ON
AUGUST 9, 1999.
OVERVIEW
Getty Images (getty-images.com) is a leading international provider of visual
content to both the professional and consumer markets. The Company is
extensively involved in e-commerce, offering products and services over its
websites and through a diverse set of channels. Getty Images owns or controls
content products across most major categories of the visual content industry.
Through its e-commerce enabled websites and international network of wholly-
owned offices, agents and distributors, Getty Images is able to provide its
customers access to image and footage products. Its visual content brands and
businesses include Allsport (allsport.com), a leading provider of global sports
photography; Energy Film Library (digital-energy.com), a leading provider of
stock footage; Liaison Agency (liaisonphoto.com), a leading provider of North
American news and reporting photography; Hulton Getty (hultongetty.com), one of
the largest commercially available collections of archival photography; Art.com
(Art.com), a premier online destination for custom framed and unframed art and
art-related products; and Tony Stone Images (tonystone.com) and PhotoDisc
(photodisc.com), leaders in contemporary stock photography.
Getty Communications commenced operations on March 14, 1995 with the acquisition
of Tony Stone Images, one of the world's leading providers of contemporary stock
photography. In April 1996, the Company broadened its visual content product
offerings with the acquisitions of Hulton Deutsch Collection Limited (now Hulton
Getty), one of the world's largest commercially available collections of
archival photography and Fabulous Footage, a leading North American provider of
contemporary stock footage. In March 1997, Getty Communications acquired
Liaison, a well-established leader in the photojournalism market. In July 1997,
the Company acquired Energy Film Library, one of
12
<PAGE> 13
the leading international providers of contemporary stock footage to the
advertising, television, feature film, corporate communications and
multimedia markets.
During September 1997, Getty Communications entered into an acquisition
agreement with PhotoDisc, Inc., leading to the formation of Getty Images and the
completion of the full acquisition in February 1998. PhotoDisc is a leading
provider of royalty-free imagery and one of the largest providers of imagery on
the Internet. Also in February 1998, the Company acquired Allsport Photographic
plc, a leading provider of worldwide sports photography.
The Company continued its global expansion in March 1998 with the acquisition of
Fototeca Stone, a leading stock photography agent based in Barcelona, Spain and
previously an exclusive agent for Tony Stone Images. The expansion in the
distribution network included the opening of wholly-owned offices in Brazil and
Dubai. The Company also appointed exclusive distributors in Costa Rica and
Colombia. During 1998, PhotoDisc opened wholly-owned offices in Sweden and
France. In May 1998, Allsport opened an office in Sydney, Australia with the
acquisition of images previously owned by Australian Picture Library. In
November 1998, the Company acquired Sporting Pix, a leading sports picture
agency based in Melbourne, Australia. These acquisitions significantly built the
Company's base in Australia ahead of the 2000 Summer Olympic Games as Allsport
has been selected as the official photographer of the US Olympic Committee and
the International Olympic Committee marketing partners.
In August 1998, the Company acquired Imageways, Inc., a noted archival footage
collection. Imageways' collection is comprised of industrial footage,
lifestyles, feature films and newsreels and is being marketed by Energy Film
Library. During 1998, Energy Film Library expanded its agency network into Italy
and commenced selling its product in the United Kingdom.
In March 1999, Getty Images announced the relocation of its corporate
headquarters in London, England to Seattle, USA; this move reflects the
Company's increasing emphasis on e-commerce as well as a desire to bring the
Company's senior management team closer to the majority of its customers,
stockholders, employees, photographers, and partners. The move will also enable
the senior management team to work under the same roof as the Company's
technology resources. The move is expected to be completed in the third quarter
of 1999.
In May 1999, the Company acquired Art.com, a premier online destination for art.
The acquisition marks the expansion of Getty Images' current online business
into the consumer art market, a move that management believes will significantly
increase the Company's potential customer base and market opportunity.
The Company's sales are primarily derived from the marketing of image
reproduction and broadcasting rights to a range of business customers. Sales
generally consist of a large number of relatively small transactions involving
the sale either of single images, video and film clips or of CD-ROM products
containing between 100 and 300 images. Getty Images utilizes a variety of
digital and analog distribution platforms, including
13
<PAGE> 14
the Internet, CD-ROM, 35mm film, video and traditional analog transparencies.
Price is determined by the extent of rights granted over the use of the
image or video clip and can vary significantly across geographic markets and
customer groups. Sales are also generated from subscription and bulk purchase
deals where customers are provided access to imagery online.
The Company experienced a significant increase in the rate of demand for
digital search, selection and fulfillment of imagery in the first six months
of 1999 particularly in North America. Digital sales, consisting of
e-commerce and CD-ROM sales, accounted for 42 percent of the Company's sales
in the six months to June 30, 1999, up from 32 percent in the same period
last year.
Getty Images' cost of sales primarily consists of commission payments to
contributing photographers and cinematographers. These suppliers are under
contract to the Company and receive payments of up to 50 percent of sales
depending on the product sold and the location of the sale. Minimal payments
are due for sales of Hulton Getty's and Allsport's imagery and certain images
of the other brands as most of the images are owned by the Company and do not
require commission payments. Also included in the cost of sales is the cost
of CD-ROM production at PhotoDisc.
The Company's selling, general and administrative expenses include salaries
and related staff costs, premises and utility costs and marketing and
catalog costs. In the case of Allsport, staff costs include salaries of
photographers who are employed directly by the Company.
Getty Images amortizes goodwill and other intangibles, and depreciates the
cost of the investment in digital files, duplicate transparencies, the
archival picture collection, computer systems and other fixed assets, over
their expected useful lives. The acquisitions of PhotoDisc, Allsport and Art.
com generated $364 million of goodwill, of which $242 million will be
amortized over twenty years and $122 million will be amortized over three
years, and $51 million of other intangibles that will be amortized over
periods varying from two to three years.
As a result of Getty Images' various acquisitions and their consequential
financial and accounting effects on net income, the Company believes that
EBITDA provides stockholders, investors and analysts with an appropriate
measure of the operating performance of Getty Images. Getty Images defines
EBITDA as earnings before interest, taxes, exchange gains/(losses),
depreciation, amortization, non-recurring integration and restructuring
costs, and extraordinary items. EBITDA should not be considered as an
alternative to operating income as an indicator of Getty Images' operating
performance or to cash flows as a measure of Getty Images' liquidity.
14
<PAGE> 15
UNAUDITED RESULTS OF OPERATIONS:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------------------------------------------------
% of % of
1999 NET REVENUES 1998 NET REVENUES
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $107,107 100.0% $86,057 100.0%
Gross profit 78,502 73.3% 60,541 70.3%
Selling, general and administrative expenses (60,796) (56.8%) (45,585) (53.0%)
Non-recurring integration and restructuring costs - - (9,137) (10.6%)
Amortization and depreciation (37,082) (34.6%) (23,348) (27.0%)
Operating loss (19,376) (18.1%) (17,529) (20.4%)
Net interest expense (1,773) (1.7%) (1,319) (1.5%)
Net exchange losses (371) (0.3%) (59) (0.1%)
Extraordinary items - - (830) (1.0%)
Net loss (23,688) (22.1%) (20,106) (23.4%)
OPERATING DATA:
EBITDA(1) $17,706 16.5% $14,956 17.4%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
--------------------------------------------------------------------
% of % of
1999 NET REVENUES 1998 NET REVENUES
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $54,957 100.0% $48,126 100.0%
Gross profit 40,193 73.1% 34,217 71.1%
Selling, general and administrative expenses (32,072) (58.4%) (25,837) (53.7%)
Non-recurring integration and restructuring costs - - (9,137) (19.0%)
Amortization and depreciation (22,252) (40.5%) (13,554) (28.2%)
Operating loss (14,131) (25.7%) (14,311) (29.7%)
Net interest expense (962) (1.8%) (768) (1.6%)
Net exchange gains 20 - 296 0.6%
Extraordinary items - - (830) (1.7%)
Net loss (15,806) (28.8%) (14,901) (31.0%)
OPERATING DATA:
EBITDA(1) $8,121 14.8% $8,380 17.4%
</TABLE>
(1) "EBITDA" is defined as earnings before interest, taxes, exchange
gains/(losses), depreciation, amortization, non-recurring integration
and restructuring costs, and extraordinary items. EBITDA should not be
considered as an alternative to operating income as an indicator of
Getty Images' operating performance or to cash flows as a measure of
Getty Images' liquidity.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------------------------
1999 1998
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Net cash provided by/(used in):
Operating activities $2,689 $5,220
Investing activities (17,455) (83,667)
Financing activities 16,387 84,953
Exchange differences arising from translation
of foreign currency balances (3,377) 423
------ -----
Net (decrease)/increase in cash
and cash equivalents $(1,756) $6,929
====== =====
</TABLE>
SALES
Getty Images' revenues increased from $86.1 million in the six month period
ended June 30, 1998 to $107.1 million in the six month period ended June 30,
1999, an increase of 24.5%, and from $48.1 million in the three month period
ended June 30, 1998 to $55.0 million in the three month period ended June 30,
1999, an increase of 14.2%. This increase was largely attributable to the
continued success of Getty Images' business-to-business brands, notably the
success of the Company's e-commerce websites.
Strong growth in digital sales, consisting of e-commerce and CD-ROM sales,
continued during the year, accounting for approximately 42% and 43% of the
Company's sales in the six and three month periods ended June 30, 1999 at $44.5
million and $23.5 million respectively. This represents growth of 86% and 54%
respectively over the equivalent periods in 1998.
E-commerce sales grew strongly, accounting for approximately 22.5% and 25.0% of
the Company's sales in the six and three month periods ended June 30, 1999 at
$24.1 million and $13.8 million respectively. This represents continued growth
from e-commerce sales of $11.5 million and $6.4 million, accounting for 13.4%
and 13.3% of sales, in the six and three month periods ended June 30, 1998.
Tony Stone Images reported sales growth in the six month period ended June 30,
1999 of 12% over the comparable period in 1998, and sales growth in the three
month period ended June 30, 1999 of 11% over the comparable period in 1998. This
growth was
16
<PAGE> 17
largely attributable to increased revenues from e-commerce sales on the
tonystone.com website which doubled in the second quarter of 1999 over the
first quarter of 1999. Importantly, the average license price on the Tony Stone
website was in line with the analog model.
PhotoDisc continued to perform strongly, increasing pro forma revenues by 30% in
the six months ended June 30, 1999 over the comparable period in 1998 and by 28%
in the three months ended June 30, 1999 over the comparable period in 1998.
Sales on the PhotoDisc website continued to account for the majority of sales
growth for the brand. E-commerce sales on the PhotoDisc website in the quarter
ended June 30, 1999 accounted for almost 45% of the brand's total sales - up
from 42% in the first quarter of this year.
Allsport increased pro forma revenues by 9% over the same period last year. At
June 30, 1999, Allsport had 1,050 subscribers on its website, an increase of 19%
over the number of subscribers at June 30, 1998. The brand also renewed all of
its existing contracts in the second quarter and signed a variety of new ones,
including Major League Baseball.
Whilst Art.com's revenues are not material in the context of the consolidated
financial statements, the business has performed well since acquisition,
particularly as it is essentially only six months old. User sessions on the
Art.com website increased 226% from 626,000 in the first quarter of 1999 to more
than 2.04 million in the second quarter of 1999. Unique users on the site
increased 118% from 370,000 in the first quarter of 1999 to 807,000 in the
second quarter of 1999 and registered users on the site grew 1,750% from 2,300
in the first quarter of 1999 to 42,700 in the second quarter of 1999.
GROSS PROFIT
The Company's gross profit margin was 73.3% for the six months ended June 30,
1999 and 73.1% for the quarter ended June 30, 1999. This represents an increase
from 70.3% in the six months to June 30, 1998 and 71.1% in the quarter ended
June 30, 1998. This increase reflects the increasing overall sales mix shift to
e-commerce as well as the higher gross margins being achieved at PhotoDisc and
Allsport. Margins in the second quarter of 1999 were lower than the first
quarter of 1999 primarily due to margins at Art.com being less than the
Company's other brands. Art.com was acquired in the second quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses accounted for 56.8% and 58.4% of
sales in the six and three month periods to June 30, 1999 respectively ($60.8
million and $32.1 million respectively). For the equivalent periods ended June
30, 1998, selling, general and administrative expenses accounted for 53.0% and
53.7% of sales ($45.6 million and $25.8 million respectively). The increase in
selling, general and administrative expenses over 1998 was largely attributable
to continued and accelerated investment in advertising and marketing costs
associated with the new websites as well as increased investment in management,
new sales offices, and the creation of new products and new business systems.
The Company will continue to make the investment necessary to migrate
successfully from an analog to a digital platform. The acquisition of Art.com
accounted for approximately half of the increase in selling, general and
administrative expenses in the second quarter of 1999 over the second quarter of
1998.
17
<PAGE> 18
AMORTIZATION OF INTANGIBLES AND DEPRECIATION
Amortization of intangibles increased from $16.9 million in the six month period
ended June 30, 1998 to $27.0 million in the six month period ended June 30,
1999, an increase of 59.9%, and from $10.0 million in the three month period
ended June 30, 1998 to $16.8 million in the three month period ended June 30,
1999, an increase of 67.9%. This increase in amortization over 1998 arose from
goodwill relating to the acquisitions of PhotoDisc and Allsport in February 1998
and of Art.com in May 1999. Intangibles of $242.3 million, $50.5 million and
$122.2 million respectively, arose on consolidation of these acquisitions. A
substantial part of these intangibles, $364.1 million, has been attributed to
goodwill - of which $241.9 million is being amortized over 20 years and $122.2
million is being amortized over 3 years. Other intangibles of $51.0 million are
being amortized over periods varying from two to three years. Based on the
current structure of the Company, amortization for the full year ended December
31, 1999, is expected to be approximately $65 million.
Depreciation increased from $6.4 million in the six month period ended June 30,
1998 to $10.1 million in the six month period ended June 30, 1999, an increase
of 56.1%, and from $3.5 million in the three month period ended June 30, 1998 to
$5.5 million in the three month period ended June 30, 1999, an increase of
53.8%. The increase primarily arose from the acquisitions of PhotoDisc and
Allsport in February 1998, together with increased investment in capital
expenditure related to the development of Getty Images' digital strategy.
Capital expenditure was $17.9 million for six months ended June 30, 1999 and
$10.3 million in the quarter ended June 30, 1999.
NET EXCHANGE LOSSES
Getty Images' operating results are affected by exchange rate fluctuations to
the extent that it or a subsidiary has receivables or payables that are
denominated in a currency other than the local currency, as the exchange gains
or losses arising on the translation of these balances into local currency or on
the settlement of these transactions are recognized in the income statement of
the relevant company.
The Company's policy is to hedge a substantial majority of its contracted net
receivables and payables using a combination of forward exchange contracts and
foreign currency term loans. Net exchange losses were $371,000 in the first six
months of 1999 and $59,000 in the same period of 1998. Net exchange gains were
$20,000 and $296,000 for the quarter ended June 30, 1999 and June 30, 1998
respectively. These net losses and gains are largely unrealized and arise from
revaluation of currency balances residing in the Company's subsidiaries.
INCOME TAXES
The tax charge for the six and three month periods ended June 30, 1999 was $2.2
million and $0.7 million respectively. This compares with a tax charge of $0.4
million in the six months ended June 30, 1999 and a credit of $0.7 million in
the second quarter of 1998. Excluding the effect of the amortization of
intangibles, which is largely non tax deductible,
18
<PAGE> 19
the Company has accrued tax at an effective rate of tax for the six months
ended June 30, 1999 of 39.4%, compared to 36.1% for the same period last
year, after allowing for a tax credit of $2.2 million arising on the
non-recurring integration and restructuring costs in 1998.
NET LOSS
Net losses for the six and three month periods ended June 30, 1999 were $23.7
million and $15.8 million, respectively, compared to net losses of $20.1 million
and $14.9 million in the six and three month periods ended June 30, 1998.
EBITDA
EBITDA increased from $15.0 million in the six month period ended June 30, 1998
to $17.7 million in the six month period ended June 30, 1999, and decreased from
$8.4 million in the three month period ended June 30, 1998 to $8.1 million in
the three month period ended June 30, 1999, an increase of 18.4% in the six
month period and a decrease of 3.1% in the three month period. EBITDA decreased
from $9.6 million in the three month period ended March 31, 1999 to $8.1 million
in the three month period ended June 30, 1999 as a result of the acquisition of
Art.com which had negative EBITDA in the two months since acquisition of $2.6
million. Excluding the impact of the acquisition of Art.com, the operations of
Getty Images generated EBITDA for the second quarter of 1999 of $10.7 million,
representing an increase of 28.0% over the second quarter of 1998. EBITDA as a
percentage of sales in the second quarter of 1999, excluding Art.com, was 19.7%,
up from 17.4% in the second quarter of 1998. For the six months to June 30,
1999, EBITDA margin, excluding Art.com, was 19.1%, up from 17.4% in the
equivalent period last year.
YEAR 2000
The Year 2000 issue refers to the risk that systems, products and equipment
having date-sensitive components will not recognize the Year 2000 as a result of
computer programs using two digits rather than four to define the applicable
year. The use of non-Year 2000 compliant programs or the inability of the
Company to update its systems successfully may result in system failures,
miscalculations or errors causing disruption of operations, the corruption of
data or other business problems, including, among other things, a temporary
inability to process transactions and invoices, or engage in similar normal
business activities. In addition to the Company's computer systems, the Year
2000 issue may affect certain embedded systems (alarms, gates and time locks,
lighting, security, electrical supply control and backup equipment) and
communication systems (switchboards, fax machines and cellular telephones).
In addition to Year 2000 issues related to the Company's systems, Getty Images
may be adversely affected if the Company's key suppliers or other material third
party service providers are unable or fail to address the Year 2000 issue
adequately. Such suppliers can include infrastructure suppliers in areas such as
utilities, communications, transportation and other services. While the Company
is developing alternate power generation sources for its most sensitive systems,
the likelihood and effects of failures in infrastructure systems and in the
supply chain cannot be estimated.
19
<PAGE> 20
Getty Images developed the Year 2000 Compliance Program (the "Program") to
identify and mitigate Year 2000 issues in its information systems, facilities
and suppliers. The Program can be divided into three phases: (1) Evaluation
(identify issues, inventory the systems affected and develop solutions to
address the issues); (2) Implementation (deploy program and software changes and
complete necessary contingency plans); and (3) Testing (perform applications and
acceptance testing and certification).
The goals of the Program are to ensure that Getty Images and its business
divisions can continue to function at optimal levels up to and beyond December
31, 1999; to provide Getty Images' customers and partners with the Company's
services throughout the affected period and to ensure that key suppliers are
Year 2000 compliant and that there will be no disruption in the supply of
services and products to Getty Images.
The Chief Executive Officer of the Company, subject to the Board of Directors'
oversight, is responsible for the overall implementation of the Program and
ensuring that the Company becomes Year 2000 compliant by December 31, 1999.
The Senior Vice President of Planning is responsible for the day to day
management of the Program and reports directly to the Board of Directors of the
Company. A dedicated team has been assembled to implement the Program.
As of June 30, 1999, Getty Images had completed Phase 1 of the Program and had
completed the majority of Phases 2 and 3. The Company expects that the bulk of
its systems will be Year 2000 compliant by the end of the third quarter of 1999,
with the remainder compliant during the fourth quarter of 1999. Contingency
plans have been developed for any matter not resolved in 1999 that may have a
material negative impact on the Company's final Year 2000 readiness.
EVALUATION. The Company has inventoried all of its major hardware and software
platforms, as well as the relevant computer, embedded and communication systems,
which may be affected by the Year 2000 issue and assessed the needs of the
Company to become Year 2000 compliant. The Company has completed a review of the
Year 2000 issues faced by its material suppliers and evaluated the risks and
dependencies associated with such suppliers. The review of the Year 2000 issued
faced by licensees and agents has been completed.
IMPLEMENTATION. The Company is well advanced in its deployment of software and
hardware changes. Year 2000 compliance measures have been incorporated into all
new Web initiatives, becoming the standard within the Company for all new
contracts and have been incorporated into the Company's due diligence program
when evaluating potential acquisitions and partnerships.
In addition, the Company has developed its first stage contingency plan which
addresses the identification of alternative suppliers and distribution channels
and the implementation of manual systems if it becomes necessary. This will be
kept under review.
20
<PAGE> 21
TESTING. The Company will continue its testing of its computer, embedded and
communication systems as it completes the implementation of its software and
hardware changes.
Getty Images estimates that the expected total aggregate costs for its Year 2000
activities and related systems changes will be approximately $2.5 million, of
which approximately $2.2 million has been spent as of June 30, 1999.
RISKS RELATED TO THE YEAR 2000 ISSUE
Although the Company's efforts to be Year 2000 compliant are intended to
minimize the adverse effects of the Year 2000 issues on the Company's operations
and business, the actual effects of the Year 2000 issue will not be known until
2000. The failure by the Company and or its material suppliers to become Year
2000 compliant in a timely manner could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company's
capital requirements may differ materially from the foregoing estimate as a
result of regulatory, technological and competitive developments in the
Company's industry.
The Year 2000 disclosure set forth above is intended to be a "Year 2000
statement" as such term is defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent such disclosure
relates to Year 2000 processing of the Company or to products or services
offered by the Company, is intended to be a "Year 2000 readiness disclosure" as
such term is defined in the Year 2000 Act.
THE EURO CONVERSION
A new European currency was implemented in January 1999 to replace the separate
currencies of eleven Western European countries. This is requiring changes in
the Company's operations as it modifies systems and commercial arrangements to
deal with the new currency. Modifications are necessary in operations such as
payroll, benefits and pension systems, contracts with suppliers and customers
and internal financial reporting systems, and have a particularly significant
impact on the Company's European subsidiaries. Although a three-year transition
period is expected during which transactions may also be made in the old
currency, this is requiring dual currency processes for the Company's
operations. The Company has identified the issues involved and is developing and
implementing solutions. The Company does not expect the cost of this effort to
have a material effect on its business or results of operations. However, there
can be no assurance that all problems will be foreseen and corrected or that no
material disruption of the Company's business will occur.
LIQUIDITY AND CAPITAL RESOURCES
Getty Images' cash resources decreased by $1.8 million in the six months ended
June 30, 1999 compared to an increase of $6.9 million in the six months ended
June 30, 1998.
Net cash provided by operating activities amounted to $2.7 million in the six
months to June 30, 1999 compared to $5.2 million in the six months to June 30,
1998. The decrease is due to increased spend on marketing and advertising,
particularly at Art.com, and the production of contemporary stock photography
catalogs.
21
<PAGE> 22
Net cash used in investing activities in the six months ended June 30, 1999 was
$17.5 million, compared to $83.7 million in the same period last year. The
decrease primarily reflects the business acquisitions made in each period,
offset by increased investment in technology and related infrastructure. Net
cash provided by financing activities was $16.4 million, primarily as a result
of a $15 million short-term revolving credit facility obtained by the Company in
April 1999 to fund additional working capital requirements and the acquisition
of Art.com.
RECENT DEVELOPMENTS
On July 15, 1999, the Company announced an internal re-organization which will
arrange its seven distinct brands into four customer focused groups. These
customer focused groups will address the needs of the Company's four key
markets: creative professionals, editorial and press businesses, the emerging
and growing business user market and the consumer market. The Creative division
is composed of Tony Stone Images, PhotoDisc and Energy. The Editorial division
consists of Allsport, Liaison Agency and Hulton Getty. Art.com forms the
Consumer division and the newly acquired EyeWire will form the foundation of the
Business User division.
On August 9, 1999, the Company acquired all of the outstanding stock of EyeWire,
Inc., one of the largest providers of royalty-free photography, video, audio,
typefaces, software and other design resources to creative professionals and
business users.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Getty Images is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments and foreign currency fluctuations.
In the normal course of business, the Company employs established policies and
procedures to manage its exposure to fluctuations in interest rates and foreign
currency values.
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's debt instruments, most of which are fixed-rate
borrowings.
22
<PAGE> 23
FOREIGN CURRENCY RISK
The Company has entered into forward foreign currency exchange contracts to
hedge its contracted net receivables denominated in foreign currencies. Getty
Images' functional currency is the US dollar. The forward foreign currency
contracts typically have a term of less than six months. All forward foreign
currency exchange contracts at June 30, 1999 are designated and accounted for as
hedges.
The criteria used by the Company for designating a contract as a hedge include
the contract's effectiveness in risk reduction and one-to-one matching to the
underlying transactions. Gains and losses on these contracts, relating to the
hedged risk, are recognized in income as incurred.
If an underlying hedged transaction is terminated earlier than initially
anticipated, the offsetting gain or loss on the related forward foreign exchange
contract would be recognized in income in the same period. In addition, since
the Company enters into forward contracts only as hedges, any change in currency
rates would not result in any material gain or loss, as any gain or loss on the
underlying foreign currency denominated balances would be offset by the loss or
gain on the forward contract.
The following tables present certain information regarding the Company's use of
financial instruments and should be read in conjunction with Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
23
<PAGE> 24
INTEREST RATE RISK
(US DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MATURITIES
---------------------------------------------------------------------------
1999 2000 2003 TOTAL FAIR VALUE
JUNE 30, 1999
DEBT INCLUDING CURRENT PORTION
<S> <C> <C> <C> <C> <C>
Fixed rate 75,000 75,000 75,000
Average interest rate 4.75%
Other borrowings 15,333 15,333 15,333
Average interest rate 6.30%
</TABLE>
FOREIGN EXCHANGE RISK
(CURRENCY AND US DOLLAR EQUIVALENTS IN THOUSANDS EXCEPT AVERAGE CONTRACTUAL
EXCHANGE RATE WHICH IS TO THE NEAREST SECOND DECIMAL POINT)
<TABLE>
<CAPTION>
MATURITIES FAIR VALUE U.S.
DOLLAR EQUIVALENT
JUNE 30, 1999
--------------------------------------------
U.S. DOLLAR
1999 EQUIVALENT
<S> <C> <C> <C>
Buy Pound Sterling/sell French Franc 7,200 1,178 (20)
Average contractual exchange rate
(French Franc/Pound Sterling) 9.80
Buy Pound Sterling/sell Deutschmark 3,700 2,005 (9)
Average contractual exchange rate
(Deutschmark/Pound Sterling) 2.96
Buy Pound Sterling/sell Italian Lire 1,050,000 591 (18)
Average contractual exchange rate
(Italian Lire/Pound Sterling) 2,850.16
Buy Pound Sterling/sell Japanese Yen 24,000 201 2
Average contractual exchange rate
(Japanese Yen/Pound Sterling) 191.44
Buy Pound Sterling/sell Spanish Pesetas 65,000 422 (9)
Average contractual exchange rate
(Spanish Pesetas/Pound Sterling) 246.84
</TABLE>
24
<PAGE> 25
There are further forward exchange contracts at June 30, 1999 that are together
considered immaterial. The US dollar equivalent maturity value of these are
$513,000. All foreign exchange risk contracts are foreign currency forward
exchange contracts between the indicated currency and the United Kingdom
Sterling (Pound Sterling).
Forward foreign exchange contracts between United Kingdom Sterling and German
Deutschmark, French Francs, Italian Lire, Spanish Pesetas and Japanese Yen
account for 41 percent, 24 percent, 12 percent, 9 percent and 4 percent
respectively of the Company's total US dollar equivalents in forward foreign
exchange contracts.
25
<PAGE> 26
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter, the Company issued an aggregate of 4,252,271 shares of its
common stock pursuant to a merger in exchange for all of the outstanding
capital shares of Art.com held by 10 shareholders. The shares were issued
pursuant to an exemption by reason of Section 4(2) of the Securities Act of
1933. These exchanges were made without general solicitation or advertising.
Each purchaser represented that he, she or it was an accredited investor with
access to all relevant information necessary. The Company has filed a
Registration Statement on Form S-3 covering such securities (which is not
yet effective).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 4, 1999. The
following nominees were elected as directors, each to hold office until his or
her successor is elected and qualified, by the vote set forth below:
NOMINEE FOR WITHHELD
Christopher Sporborg 21,351,861 3,544,121
Mark H. Getty 24,680,334 215,648
The proposal to ratify the appointment of PricewaterhouseCoopers as independent
auditors of the Company for the 1999 fiscal year was approved by the vote set
forth below:
FOR AGAINST ABSTAIN BROKER NONVOTES
24,894 1,200 471 -
ITEM 5. OTHER INFORMATION
On August 5, 1999, Getty Images acquired all of the outstanding stock of
EyeWire, Inc. in a stock for stock merger transaction. EyeWire, Inc. is an
entirely digital business that provides royalty-free photography, video, audio,
typefaces and other design resources to professionals and business users. The
merger and the transactions contemplated thereby were approved by the
stockholders of EyeWire, Inc. and the directors of Getty Images on August 3,
1999. Getty Images issued 1,850,000 shares of Getty Images common stock to the
former stockholders of EyeWire, Inc. in exchange for all of the issued and
outstanding capital stock of EyeWire, Inc. Required financial statements for
EyeWire, Inc. will be filed separately within 60 days of the filing of this
Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Reference is made to the Index of Exhibits beginning on page 27 for a list of
all exhibits filed as a part of this report.
REPORTS FILED ON FORM 8-K
No report on Form 8-K has been filed during this quarter.
26
<PAGE> 27
GETTY IMAGES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
2.1 (1) Agreement and Plan of Merger, dated as of
May 4, 1999, among Getty Images, Merger
Sub and Art.com
3.1.1 (3) Amended and Restated Certificate of Incorporation
of Getty Images
3.1.2 (2) Certificate of Amendment to the Certificate of
Incorporation of Getty Images
3.2 (3) Bylaws of Getty Images
10.1.1 (1) Contingent Deferred Payment, Exhibit
2.01(f)of Agreement and Plan of Merger
10.1.2 (1) Form of Registration Rights Agreement between
Getty Images and each of the individual
stockholders of Art.com
10.2 Consent to sublease premises at Plaza
Building, 701 North Thirty Fourth Street, Seattle,
Washington, U.S.A.
27.1 Financial Data Schedule
</TABLE>
- ----------------------------
(1) Incorporated by reference from the Exhibits to the Form 10-Q dated
May 17, 1999. (Exhibit number in the Form 10-Q is set forth in italics.)
(2) Incorporated by reference from the Exhibits to the 8-K dated November 10,
1998. (Exhibit number in the 8-K is set forth in italics.)
(3) Incorporated by reference from the Exhibits to the Form S-4 Registration
Statement No. 333-38777 of the Registrant. (Exhibit number in the
Form S-4 is set forth in italics.)
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GETTY IMAGES, INC.
/s/ Christopher J. Roling
Date: AUGUST 16, 1999 By: ...................................
Name: Christopher J. Roling
Title: Chief Financial Officer
28
<PAGE> 1
EXHIBIT 10.2
B E D F O R D P R O P E R T Y I N V E S T O R S
CONSENT TO SUBLEASE
RE: BUILDING OR COMPLEX: Plaza Building
LANDLORD: Bedford Property Investors, Inc.
TENANT: Adobe Systems Inc.
PREMISES: Plaza Building
SUBLET PREMISES: 2nd & 4th Floors of Plaza Building
DATE OF MASTER LEASE: October 31, 1996
PROPOSED SUBLESSEE: Getty Images, Inc.
Dear Tenant:
Pursuant to the terms of your lease ("Master Lease") covering the
above-captioned Premises, you have requested the Landlord's consent to a
sublease to the above-captioned Master Lease, a true, correct and complete copy
of which Tenant and Sublessee warrant is attached hereto as Exhibit "A" (the
"Sublease").
Landlord hereby grants its consent to the Sublease upon the following express
terms and conditions:
1. The Sublease is subject and subordinate to the Master Lease and to all of
its terms, covenants, provisions and agreements, and to all of the terms
and provisions of this consent to sublease ("Consent"). Sublessee shall
not do or permit anything to be done in or around the Sublet Premises
which would violate any provisions of the Master Lease or this Consent.
Sublessee and Tenant agree that this Consent is given solely for the
purpose of allowing Tenant to sublease the Sublet Premises and to specify
the terms and conditions under which Tenant may do so.
<PAGE> 2
2. The Sublessee shall perform faithfully and be bound by all of the terms,
covenants, conditions, provisions and agreements of the Master Lease, for
the period covered by the Sublease and to the extent of the Sublet
Premises. In the event that Sublessee shall fail to abide by the terms of
the Master Lease, it shall be deemed a default by Tenant and Sublessee
under the Master Lease entitling Landlord to exercise all of its rights
and remedies under the Master Lease as against Tenant and Sublessee.
3. Neither the Sublease nor this Consent shall:
(a) release or discharge Tenant from any liability, whether past,
present or future, under the Master Lease; or
(b) operate to obligate Landlord to any of the terms, covenants or
conditions of the Sublease as between Tenant and Sublessee and
Landlord shall not be bound thereby; or
(c) be construed as a consent to or approval or ratification of any
particular provisions of the Sublease, it being agreed that
Landlord has not and will not review or pass upon any of the
provisions of the Sublease and that Landlord shall not be bound or
estopped by any provision contained in the Sublease; or
(d) operate to extend the term of the Master Lease beyond its present
expiration date, notwithstanding the fact that the Sublease may
purport to be for a longer term; or
(e) be construed to modify, waive or affect any of the terms,
conditions, provisions or agreements of the Master Lease, or to
waive any breach thereof, or any of the Landlord's rights
thereunder, or to enlarge or increase Landlord's obligations
thereunder, or to diminish or decrease Tenant's obligations
thereunder; or
(f) allow Sublessee to utilize the Sublet Premises for any purpose
other than the use allowed under the Master Lease; or
(g) be construed as a consent by the Landlord to any further
subletting either by Tenant or by the Sublessee or to any
assignment by Tenant of the Master Lease or assignment by the
Sublessee of the Sublease, whether or not the Sublease purports to
permit the same and, without limiting the generality of the
foregoing, both Tenant and the Sublessee agree that the Sublessee
has no right whatsoever to assign, mortgage or encumber the
sublease nor to sublet any portion of the Sublet Premises or
permit any portion of the Sublet Premises to be used or occupied
by any other party, except in accordance with the terms of the
Master Lease.
<PAGE> 3
4. In the event of Tenant's default (after notice and the passage of any
applicable cure period) under the provisions of the Master Lease, the
rent and any other charges due from the Sublessee under the Sublease (the
"Sublease Payments") shall be, at the option of Landlord, deemed assigned
to Landlord and Landlord shall have the right, following such default, at
any time at Landlord's option, to give written notice of such assignment
to the Sublessee. Upon Sublessee's receipt of such notice, Sublessee
shall make all Sublease Payments due thereafter directly to Landlord,
without liability to Tenant for making such payments to Landlord rather
than to the Tenant. Landlord shall credit Tenant with any Sublease
Payments received by Landlord under such assignment but the acceptance of
any Sublease Payments from the Sublessee as the result of any such
default shall in no manner whatsoever be deemed an attornment by the
Sublessee to Landlord in the absence of a specific written agreement
signed by Landlord and Subtenant to such an effect, or serve to release
Tenant from any liability under the terms, covenants, conditions,
provisions or agreements of the Master Lease or this Consent. In the
event that Landlord does not elect to have Sublessee attorn to it as
specified above, Landlord shall have all rights and remedies as provided
under the Master Lease as against Sublessee in the event of any default
under the Master Lease, including without limitation the right to regain
possession of the Sublet Premises.
5. If the Master Lease is terminated by Landlord due to a default by Tenant
under the Master Lease, Sublessee shall have the right to negotiate with
Landlord to Lease the Sublet premises at terms to be consistent with
market but in no event shall the rent be less than the then current rent
due to Tenant under the Sublease Agreement. Landlord and Subtenant shall
negotiate in good faith for a period not greater than thirty (30) days
after the termination of the Master Lease. If the parties are unable to
come to agreement within the thirty (30) day period, Subtenant will
immediately vacate the Sublet Premises in accordance with terms of the
Master Lease.
6. Both Tenant and Sublessee shall be liable for the payment of all bills
rendered by Landlord for charges incurred by the Sublessee for services
and materials supplied to the Sublet Premises. In the event of any
default (after notice and the passage of any applicable cure period) by
Tenant or Sublessee in the full performance and observance of their
respective obligations under this Consent, such default may, at
Landlord's option, be deemed a default under the terms of the Master
Lease, entitling Landlord to exercise all rights and remedies contained
in the Master Lease with respect to such default, as well as any other
rights or remedies available to Landlord under this Consent, at law or in
equity, by statute or otherwise, with respect to such default.
<PAGE> 4
7. Landlord makes the following representations and warranties to Sublessee:
(a) Tenant has fulfilled all of its duties under the Master Lease and
is not in default under the Master Lease.
(b) To the best of Landlord's actual knowledge the Master Lease is in
full force and effect and has not been modified, altered or
amended other than by the first amendment thereto.
8. Landlord consents to Sublessee's use of the Sublet Premises for general
office use and ancillary uses by Sublessee, Sublessee's employees and
visitors including, without limitation, data center, production and
scanning, distribution, call center (operating 24 hours a day, seven days
a week), cafeteria and software laboratories.
9. The term of the Sublease shall expire and come to an end on its
expiration date or any premature termination date thereof, but in any
event no later than concurrently with the expiration date of the Master
Lease or any premature termination of the Master Lease (whether by
consent or other right, now or hereafter agreed to by Landlord and
Tenant, or by operation of law at Landlord's option in the event of a
default by Tenant).
10. Neither Landlord nor Sublessee shall be liable to the other or to any
insurance company (by way of subrogation or otherwise) insuring the other
party for any loss or damage to any building, structure or tangible
personal property of the other or of any third party occurring in or
about the Sublet Premises or the Building, even though such loss or
damage might have been occasioned by the negligence of such party, its
agents or employees, if such loss or damage would fall within the scope
of a fire and extended coverage (all risk) policy of insurance, whether
or not the party suffering the loss actually maintained such insurance.
Each party shall obtain from its respective insurer under each insurance
policy it maintains a waiver of all rights of subrogation that the
insurer of one party may have against the other party, and Landlord and
Sublessee shall each indemnity the other against any loss or expense,
including reasonable attorneys' fees, resulting from the failure to
obtain such a waiver.
11. Tenant hereby warrants that all of the terms and provisions of the Master
Lease are in full force and effect and that there are no defaults (or
matters that with the passage of time or the giving of notice, or both,
would constitute a default) by Landlord or Tenant under the Master Lease.
In the event of a conflict between the provisions of the (i) Master Lease
and the Sublease, the provisions of the Master Lease shall prevail, and
(ii) this Consent and the Master Lease or Sublease, the provisions of
this Consent shall prevail.
<PAGE> 5
12. This consent is not assignable, nor shall this Consent be a consent to
any amendment or modification of the Sublease, without Landlord's prior
written consent.
13. Tenant and Sublessee covenant and agree that under no circumstances shall
Landlord be liable for any brokerage commission or other charge or
expense in connection with the Sublease, and Tenant and Sublessee both
agree to indemnify, defend and hold Landlord harmless from and against
same and against any cost or expense (including, but not limited to,
attorneys' fees) incurred by Landlord in resisting any claim for any such
brokerage commission.
14. Tenant and Sublessee understand and acknowledge that Landlord's consent
hereto is not a consent to any improvement or alteration or work to be or
being performed in the Premises, that Landlord's consent must be
separately sought if and to the extent provided in the Master Lease.
15. Tenant agrees to abide by the terms of the Master Lease as the same
contemplates a sharing with Landlord of "bonus" or "key" rent received by
Tenant in excess of the minimum rent due Landlord under the Master Lease.
16. Tenant and Sublessee agree that the terms and provisions of the Sublease
shall not, without the prior written consent of Landlord, be amended or
modified.
17. This Consent constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and shall not be operative or
binding unless and until executed by all parties hereto. This Consent may
not be modified, altered, amended or changed except by an agreement in
writing signed by all parties hereto. This Consent for all purposes shall
be construed in accordance with the laws of the State of Washington. The
terms and provisions of this Consent shall be binding upon and inure to
the benefit of the parties hereto and to the successors and assigns of
Landlord and, to the extent approved in writing by Landlord, the
successors and assigns of Tenant and Sublessee.
18. The execution of a copy of this Consent by Tenant and the Sublessee shall
indicate the joint and several confirmation by Tenant and Sublessee of
the foregoing conditions and of Tenant's and Sublessee's agreement to be
bound thereby and shall constitute Sublessee's acknowledgement it has
received a copy of the Master Lease from Tenant.
<PAGE> 6
Very truly yours,
BEDFORD PROPERTY INVESTORS, INC.
a Maryland corporation
By: /s/ Phillipe Wood
Its: Vice President
Date: 4.11.99
CONFIRMED AND AGREED:
TENANT: SUBLESSEE:
ADOBE SYSTEMS INC. GETTY IMAGES, INC.
a California corporation a Delaware corporation
By: /s/ By: /s/ Heather Redman
Its: Director of Facilities Its: General Counsel
Date: 4.6.99 Date: 4.5.99
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999.
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 438,348
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<INCOME-PRETAX> (21,520)
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