Getty Accounting Problems

455

July 11, 2002

EyeWire contributors recently began receiving huge windfall royalty payments from
Getty Images -- up to 20 times their normal average monthly payments -- as a result
of an internal audit by Getty.

EyeWire had developed a line of Royalty Free products with images supplied by
photographers and stock agencies. This company was sold to Getty Images in August,
1999. It appears that the royalties of all the EyeWire suppliers were affected. Also
sold on the EyeWire site were images of other Royalty Free brands such as Digital
Vision, Rubberball, Hollingsworth Studios, Artville, Birch Design Studios, Cartesia,
Image Club, etc. and there is evidence that at least some of the royalties owed these
companies had not been paid as well.

Given the size of the payments the accounting errors may go back to when Getty first
purchased EyeWire. Some of the individuals and organizations have not supplied new
images to the EyeWire product line for several years. There is no evidence that any
of this had anything to do with EyeWire's original management of the brand. All
indications are that it is solely a problem with Getty's tracking and accounting
systems. One supplier was told that the problem occurred at "one of our call
centers."

Getty should be given credit for making these payments for back royalties owed as
soon as the error was discovered. Sources at Getty claim that the audit of EyeWire
records is now complete and say that all problems have been discovered and the
suppliers notified of what they are owed. These same Getty sources also indicated
that all monies due had been paid in May, but some of the suppliers we checked with
have received notice of what they are owed, but no money as of early July.

Getty has refused to explain to Selling Stock how such discrepancies could have
occurred arguing that this would be "selective disclosure" which is prohibited by the
SEC. Getty also claims that I (Jim Pickerell) have a conflict-of-interest in
questioning them about accounting irregularities as I am currently an expert witness
in the case of Penny Gentieu vs. Getty Images which deals with an alleged series of
totally unrelated accounting irregularities.

What Caused The Problem

In letters to contributors Getty has tried to claim that the problems stem from the
integration of sales data from their old legacy accounting systems into their new
Oracle based "Alliant" accounting software. Getty has been integrating data from
approximately 20 different systems into Alliant, the EyeWire system being only one of
them.

Getty first started uploading data to the Alliant system in the summer of 2001 and
has been having major problems with royalty payments ever since. We first reported on
problems with the VCG brands in December 2001 (See story
446 ).

When Getty acquired EyeWire in August 1999, they did an immediate data dump of all
the images onto the Gettyone.com site. It appears the foreign distributors were also
told to start paying the royalties directly to Getty. Getty also continued to operate
the EyeWire.com site in Calgary, Canada. Thus, essentially, there were three sources
of revenue from the EyeWire images -- the EyeWire.com site, the Gettyone.com site and
foreign distributors.

The EyeWire.com site was physically located in Calgary until November 2001, and
continued to be operated, for the most part, by the people who had founded and built
EyeWire. Royalties generated by sales from this site continued to be paid to
contributors by the Calgary operation, just as had been the case before Getty took
over.

Getty has acknowledged in letters to contributors that the sales where royalty
payments were not passed through to rights holders in a timely manner were made on
Gettyone and by the foreign distributors. These were under the control of Getty's
accounting operation in Seattle.

In November 2001 the Calgray operation was closed down and all digital files and data
were transferred to Seattle. At that point the Calgary accounting records were
uploaded into Getty's new Alliant system.

Spotting The Problem

Contributors have been saying for some time that their Eyewire sales were falling
off. Many concluded that this drop resulted from a combination of a reduction in
advertising, the heavy discounting of images sold through GettyWorks, and the use of
a subscription sales strategy.

Getty stopped aggressively promoting the EyeWire.com site after they took over. Their
goal at that time seemed to have been to move all future sales to the Gettyone site,
and the new Gettyworks brand they created. The exact dates of these moves are
unclear, but this was the general trend of what they were doing.

Given the above explanations for why sales were falling, and since they were still
receiving regular monthly reports and checks, contributors assumed they were being
paid everything they were owed.

Dimensions of the Problem

Getty has been unwilling to explain how this problem developed, or how widespread it
is. All they will say is that it involves a "small" number of contributors and a
"small" amount of money. Small is a relative term. Because of the way EyeWire, a RF
company operated, the number of contributors may be small, but each one had
significant numbers of images involved. Millions of dollars could be considered
small, if we compare it to Getty's total revenue of $451 million in 2001.

I estimate that the total monthly royalties EyeWire should have been paying to all
contributors should have been in the range of $150,000 to $200,000. Since some of
those who are receiving payments are getting about 20 times their average monthly
royalty the total of the back royalties owed could be between $3 and $4 million, if
all rights holders were proportionally affected. On the other hand we have found at
least one rights holder who was only owed a small amount of money. It is unclear what
kind of systems error could have affected the sales of some rights holders in a major
way and others very minimally.

At first, sources at Getty tried to claim that all the problems arose as a result of
the integration into the Alliant system, and thus they would have begun after
November 2001. If this were the case, and given the size of some of the payments,
Getty's total EyeWire sales would have had to jump 200% to 300% in the last eight
months and we believe this was not the case.

Given that EyeWire contributors were receiving some royalties all along, the source
of the missing revenue must go back at least a year-and-a-half, if not much further.
This means that the problem had to be in Getty's original accounting methods long
before the Alliant system was introduced.

It is unclear how such a large amount of royalties could be overlooked for so long a
time. In the accrual accounting system whenever cash, or any kind of payment, is
received and credited as revenue a debit must also be automatically entered to
reflect a "cost of sales". That "cost of sales" should be automatically credited to
the photographer's account. For some reason it appears this didn't happen in a huge
number of individual sales. In countless talks with photographers people from Getty
have insisted that this kind of thing couldn't happen - that the photographer's
account would always be credited the instant a sale was booked, or any money was
collected.

The other possible explanation is that somehow this money was never recognized as
revenue. This is not suppose to happen either. And given that Getty is always looking
for every possible way to show that revenue is increasing, it is hard to imagine that
they would have money in the bank that they were not reporting. Not to mention that
this would be illegal.

We suspect that some of these payments were made by credit card because many of the
EyeWire sales are for small amounts of money and to small users. It is not easy to
explain how credit card sales could be made and not claimed as revenue.

While the indications to date are that this problem is only with the EyeWire brand,
we don't know enough to determine whether there
has been some fundamental flaw in their accounting system that will lead to the same
kind of errors showing up in the other brands once they are audited.

EyeWire contributors were asked in letters from Getty to, "please accept our
assurance that these problems are not expected to recur." Such problems were not
expected to happen in the first place and without some explanation as to what really
happened the "assurance" is not very comforting.

Why It Was Discovered Now

The accounting department has been fully occupied in dealing with the Alliant
integration problems for almost a year. Their first concern was to get current on all
royalty payments and that has taken almost a year. Until recently they had little
time to go back and audit their systems. According to Roger Ressmeyer, "Auditing is
accelerating now that royalty statements are back on schedule. Getty is committed to
auditing all the brands and hopes to have the work finished by mid-August." At worst
they expect it could take three or four months to do a total audit of the system.

Good News

One element of good news for the EyeWire contributors is that it now appears that
sales for their products -- many of them created three or more years ago -- are still
strong and have not been falling off as they had feared.

Also Getty has indicated that they are now listening carefully to photographers who
spot things on their sales reports that they think might be a inaccurate. They are
taking detailed comments and investigating each allegation. Ressmeyer said, "When the
photographers provide us with the details we investigate and fix any problems we
find. We are committed to correcting and straightening things out the instant we
become aware of the problem." Photographers who have felt that their complaints
weren't listened to in the past may find Getty more responsive now.