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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 1999
REGISTRATION NO. 333-72221
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BUTTERFIELD & BUTTERFIELD AUCTIONEERS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 5999 94-1719097
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OR ORGANIZATION)
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220 SAN BRUNO AVENUE
SAN FRANCISCO, CA 94103
(415) 861-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN GALLO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BUTTERFIELD & BUTTERFIELD AUCTIONEERS CORPORATION
220 SAN BRUNO AVENUE
SAN FRANCISCO, CA 94103
(415) 861-7500
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
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KARYN R. SMITH STEPHEN M. GRAHAM
ALEXIS RONDELL RHORER MICHAEL C. PIRAINO
ANGELIQUE C. TREMBLE NATHAN D. WEBB
COOLEY GODWARD LLP PERKINS COIE LLP
ONE MARITIME PLAZA, 20TH FLOOR 1201 THIRD AVENUE, 48TH FLOOR
SAN FRANCISCO, CALIFORNIA 94111-3580 SEATTLE, WASHINGTON 98101-3099
(415) 693-2000 (206) 583-8888
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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 effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective 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. [ ]
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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 THAT 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.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 2, 1999
1,500,000 SHARES
[BUTTERFIELD & BUTTERFIELD LOGO]
COMMON STOCK
Butterfield & Butterfield Auctioneers Corporation is offering 1,500,000
shares. This is our initial public offering and no public market currently
exists for our common stock. We estimate that the initial offering price to the
public will be between $10.00 and $12.00 per share.
We have applied to have our common stock listed on the Nasdaq National
Market under the symbol "BFLD."
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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<CAPTION>
PER SHARE TOTAL
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Public offering price...................................... $ $
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Underwriting discount...................................... $ $
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Proceeds, before expenses, to Butterfields................. $ $
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The underwriters have agreed to purchase all of the shares if any are
purchased. We have also granted the underwriters the right to purchase up to
225,000 additional shares at the public offering price to cover over-allotments.
------------------------------
First Security Van Kasper expects to deliver the shares against payment in
San Francisco, California on , 1999.
FIRST SECURITY VAN KASPER
, 1999
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(INSIDE FRONT COVER)
Butterfield & Butterfield
Auctioneers and Appraisers since 1865
Bringing Buyers and Sellers Together
For Over 130 Years
right side of page:
American & California Paintings and Sculpture
American and European Prints
Antique Arms and Armor
Asian Works of Art
Autographs
Automobiles
Books, Manuscripts and Maps
Collectibles
Dolls, Toys and Trains
European and Old Master Paintings
Fine Musical Instruments
Furniture and Decorative Arts
Hollywood & Entertainment Memorabilia
Jewelry, Gemstones and Watches
Modern & Contemporary Paintings and Sculpture
Native American, Pre-Columbian and Tribal Art
Natural History
Photographs
Rugs and Carpets
Silver and Objects of Vertu
Sports Memorabilia
Stamps and Coins
Wine
left side of page:
Established in 1865, Butterfields began as a resource for Gold Rush-era
Californians. Today, Butterfields is the third largest auction company in the
United States, conducting more than 100 specialty auctions each year.
Butterfields is recognized both as an innovator and a leader in the auction
world. The company has conducted simultaneous auctions in multiple cities for
over ten years, and has been among the first of the traditional auction houses
to embrace emerging technologies. Butterfields' appraisal clinics can be viewed
throughout the nation on HGTV, and customers can access Butterfields'
catalogues and participate in auctions through the company's Web site at
www.butterfields.com. The firm is recognized internationally as the leader in
the arms and
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armor category, and was among the first to offer entertainment memorabilia and
natural history properties.
Across bottom of page:
Butterfield & Butterfield is our registered trademark and the Butterfield &
Butterfield logo is our trademark. All other trademarks or service marks
appearing in this prospectus are the property of their respective owners.
SAN FRANCISCO o LOS ANGELES o CHICAGO
Background graphic of one-quarter of an antique globe.
2
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[INSIDE COVER GATEFOLD]
Leadership
o Conducting more than 100 auctions annually
o Galleries in San Francisco, Los Angeles and the Chicago area. Representatives
in eight other U.S. cities, as well as London, Brussels and Munich
Innovation
o Simultaneous auctions in multiple cities providing broad exposure of property
to both buyers and sellers
o Co-founded the International Auctioneers Association (IAA), to form an
international database of buyers and sellers
o All catalogues fully illustrated online
o Completely digital in-house photography and catalogue department
o Extensive educational programs and appraisal clinics
Specialist Departments
o Professional expertise of more than 50 specialists
o Expertise in every major category of art and collectibles
Appraisals
o Complimentary walk-in fair market appraisal clinics
o Complimentary mail-in photo appraisals
o Complimentary private specialist appraisals
o Benefit appraisal clinics
o Insurance appraisals
Television
o Butterfields is the only auction house on Appraise It!, featured on the HGTV
Network
o Reaches nationwide audience of 50 million
Online Auctions
o Online absentee bidding
o Online auctions conducted through agreements with Internet partners
o Online live bidding available since February 1999
o Among the first auction companies to offer authenticated property warranties
for middle market items
Photograph of chest of drawers with following caption below:
Dorr Family Queen Anne japanned
flat-top highboy, Boston, circa 1730-50
Sold for $772,500 on November 4, 1997
Photograph of three rifles with following caption below:
3.
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Selection of Indian matchlock rifles
Sold on August 24, 1998 for
(left to right) $31,050, $12,650 and $167,500
Photograph of cup with following caption below:
Fine doucai enameled porcelain deep
cup, Kangxi mark and period
Sold for $37,375 on May 26, 1998
Photograph of painting with following caption below:
Guy Rose, On Point Lobos, oil on canvas, 24"x29"
Sold for $508,500, a new world record price for the artist,
on June 25, 1998
Photograph of earrings with following caption below:
Pair of sapphire, diamond,
platinum earrings
Sold for $14,950 on June 26, 1998
Screen shot of Butterfields' web page.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus. Except as otherwise specified, all information in this
prospectus reflects our reincorporation in Delaware in March 1999 and assumes no
exercise of the underwriters' over-allotment option.
BUTTERFIELDS
Established in 1865, we are the third largest auctioneer of fine and
decorative art and collectibles in the United States. We are recognized
throughout the industry for our ability to appraise and auction items ranging in
value from several hundred dollars to over $1 million in every major category of
art and collectibles, including paintings, furniture, jewelry, arms and armor,
rare books, fine wine and entertainment memorabilia. We conduct over 100
specialty and estate auctions annually, serving a network of over 200,000
domestic and international fine art dealers, galleries, museums, foundations and
private collectors.
We compete in the high end and middle market for fine and decorative art
and collectibles. Over the years, we have held auctions in which record prices
were established in various auction categories, including antique arms and armor
and furniture. We provide our customers with a full range of services, including
the expertise provided by our more than 50 specialists, who are able to appraise
and market every major category of art and collectibles. Unlike most auction
companies, including Christie's International plc and Sotheby's Holdings, Inc.,
our two largest competitors, we will process the entire contents of an estate,
rather than only select items.
We have introduced a number of innovations designed to broaden our customer
base and increase the bidding activity at our auctions. Since 1988, we have
regularly used video conferencing to conduct simultaneous auctions in multiple
cities across the United States. In 1993, we co-founded the International
Association of Auctioneers, a consortium of six leading regional auction houses
in Europe, Australia and the United States that provides member firms with
access to a database of international buyers. We began conducting cyber auctions
in January 1999, and in March 1999, we entered into a non-binding letter of
intent with eBay Inc. to create a new co-branded category of premium items to be
offered on the eBay Web site. This arrangement is subject to the completion and
execution of a definitive agreement. In February 1999, we offered real-time
access to one of our live auctions over the Internet for the first time. Based
on the results of this auction, we intend to further develop this approach and
we expect to begin applying it to additional auctions by the end of 1999. In
addition, we have arrangements with eBay, Yahoo! Inc. and Zing Network, Inc.
that are intended to increase our ability to conduct auctions, deliver services
and execute marketing campaigns on the Internet.
We believe that our reputation, broad geographic reach and full service
capabilities will allow us to take advantage of growth opportunities within the
auction market for middle market properties, items generally ranging in value
from $300 to $10,000. Although numerous regional auction companies focus on
middle market properties, most specialize in a single or limited number of
auction categories and many lack the access to outside capital required to
significantly grow their operations. We believe that our established name and
long-standing reputation will enable us to have an immediate presence as we
enter new geographic markets. Toward this end, in June 1998, we acquired
Dunnings, a prominent regional auction company in the Chicago area founded in
1896.
We believe that auctioning middle market properties over the Internet
represents a significant growth opportunity for us. We believe that our ability
to authenticate and evaluate every major category of art and collectibles, as
well as our ability to provide warranties to buyers, will give us a significant
competitive advantage in auctioning higher priced and middle market properties
over the Internet. We further believe that our established name and
long-standing reputation will enable us to quickly establish an online presence
and that our existing dealer network will provide us with high quality
properties for our online auctions.
References in the prospectus to "Butterfields," "we," "our" and "us" refer
to Butterfield & Butterfield Auctioneers Corporation, a Delaware corporation,
and its subsidiary. Our executive offices are located at 220 San Bruno Avenue,
San Francisco, California 94103 and our telephone number is (415) 861-7500. Our
Web site is located at www.butterfields.com. Information contained on our Web
site does not constitute part of this prospectus.
3
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THE OFFERING
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Common Stock offered......................... 1,500,000 shares
Common Stock to be outstanding after this 6,252,364 shares(1)
offering...................................
Use of proceeds.............................. To fund S corporation distributions to
stockholders, further develop online
capabilities and remodel the Chicago gallery
and for working capital
Proposed Nasdaq National Market Symbol....... BFLD
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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YEAR ENDED DECEMBER 31,
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1996 1997 1998
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CONSOLIDATED STATEMENT OF INCOME DATA(2):
Revenues.................................................... $17,068 $20,271 $20,702
Expenses.................................................... 14,627 16,378 18,352
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Income from operations...................................... 2,441 3,893 2,350
Other income, net........................................... 192 329 226
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Income before income taxes.................................. 2,633 4,222 2,576
Pro forma provision for income taxes(3)..................... (1,053) (1,689) (1,030)
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Pro forma net income(3)..................................... $ 1,580 $ 2,533 $ 1,546
======= ======= =======
Pro forma net income per share(3)(4)........................ $ 0.29
=======
Weighted average shares used in computing pro forma net
income per share(4)....................................... 5,264
=======
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AS OF DECEMBER 31, 1998
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PRO FORMA AS
ACTUAL ADJUSTED(5)
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CONSOLIDATED BALANCE SHEET DATA(2):
Working capital............................................. $ 2,927 $11,889
Total assets................................................ 16,484 25,733
Long-term debt, net of current portion...................... 819 819
Total stockholders' equity.................................. 6,340 15,589
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(1) Excludes 914,841 shares of common stock reserved for issuance pursuant to
our 1999 Equity Incentive Plan.
(2) Our financial statements and those of our subsidiary, Butterfield's Credit
Corporation, Inc. ("BCCI"), were previously presented on a combined basis.
On March 31, 1999, the shareholders of BCCI contributed their shares of BCCI
stock to Butterfields. The previously issued combined results are presented
as consolidated.
(3) Assuming a combined federal and state tax rate of 40%, which we believe
approximates the statutory tax rates that would have applied if we had been
taxed as a C corporation during those periods. In connection with this
offering, our S corporation status will be terminated and we will become
subject to federal and state income taxes.
(4) Reflects the sale of 511,946 shares of stock, as of January 1, 1998,
required to fund $5.0 million of S corporation distributions through
December 31, 1998. See Note 1 of Notes to Consolidated Financial Statements
for an explanation of the method employed to determine the number of shares
used to compute per share amounts.
(5) Gives effect to (a) $1.0 million of S corporation distributions made
subsequent to December 31, 1998 and (b) $5.1 million of accumulated S
corporation earnings to be distributed upon the completion of this offering,
as if the distributions had occurred on December 31, 1998. Total
distributions subsequent to December 31, 1998 are expected to be
approximately $6.1 million. Reflects application of the estimated net
proceeds from the sale of the 1,500,000 shares of common stock offered in
this offering, after deducting the estimated underwriting discount and
estimated offering expenses. See "Use of Proceeds."
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below in addition to the other information in this
prospectus before deciding to invest in shares of our common stock.
WE NEED TO GROW IN ORDER TO CREATE MORE VALUE FOR OUR STOCKHOLDERS.
We may be unable to increase our customer base or the number and size of
our auctions. We need to accomplish both of these objectives if we are to
continue to grow. We must continue to grow in order to capitalize on the
opportunities that exist in the business of auctioning fine and decorative art
and collectibles and to create more value for our stockholders. To accomplish
these objectives, we will have to do most, if not all, of the following:
- expand into geographic regions unserved or underserved by us by growing
internally or acquiring auction companies, with an initial focus on the
midwestern United States;
- conduct auctions and deliver services on the Internet;
- expand our marketing programs by, among other things, using the Internet;
- expand and enhance our existing services; and
- acquire auction companies that auction property in categories that we
have not traditionally auctioned.
We may be unable to complete any of the above activities successfully.
OUR GROWTH WILL DEPEND ON OUR ABILITY TO CONDUCT AUCTIONS AND MARKET AND DELIVER
SERVICES ON THE INTERNET.
Our ability to grow and therefore to create more value for our stockholders
will be limited if we are unable to successfully conduct auctions and deliver
services on the Internet. Until recently, we exclusively operated on a business
model that attracted sellers and buyers through traditional means of commerce.
The auction of goods on the Internet, particularly fine and decorative art, is a
new and unproven market. To achieve growth through the Internet, we must
successfully integrate this new medium into our current operations and then
convince existing and potential buyers and sellers to accept the Internet as a
medium through which they can participate in the auction of fine and decorative
art and collectibles. Rapid growth in the use of and interest in the Internet is
a recent development, and this use and interest may not continue to develop.
Even if it does, we may face increased competition from other companies
currently using the Internet to facilitate the sale of property or companies
that decide to use it in that manner in the future.
OUR ACQUISITION OF AUCTION COMPANIES WOULD INVOLVE MANY RISKS.
Acquisitions involve many risks and challenges that we might not
successfully overcome. We may in the future acquire companies with businesses
complementary to ours. Risks associated with acquisitions include the following:
- diversion of management's attention from other business concerns;
- increased fixed costs, which could cause profits to decrease;
- disruption of our ongoing business and operations, which could, among
other things, impair our reputation and our relationships with customers
and employees and potentially cause the loss of our own key employees or
those of an acquired company;
- integration of an acquired company's personnel and operations with our
personnel and operations;
- maintenance of our standards, controls, procedures and policies; and
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- entry into new geographic markets or auction property categories in which
we have limited experience.
We have only made two acquisitions in the last seven years and we therefore
have limited experience with completing and integrating acquisitions. In
addition, we incurred substantial costs when we acquired Dunnings Auction
Service, Inc. in June 1998, and we would expect to incur substantial costs in
connection with any future acquisitions. We may be unable to successfully
integrate any business or personnel that we might acquire in the future. Future
acquisitions also could result in the following:
- negative impact on earnings;
- issuances of equity securities that may dilute stockholders' interest in
our company;
- taking on additional debt;
- becoming responsible for significant liabilities of companies we acquire;
or
- large one-time write-offs and amortization expenses related to goodwill
and other intangible assets.
We currently do not have any agreements, nor are we conducting
negotiations, with respect to any acquisition. Nonetheless, we continually
evaluate acquisition opportunities.
WE MAY EXPERIENCE LOSSES IN THE FUTURE.
Although historically we have operated our business at a profit, our past
performance may not be indicative of our future results. Our future operating
results will depend on many factors, including the following:
- general economic conditions;
- the availability of auction properties;
- the costs associated with and the success of any current or future
acquisitions;
- the costs associated with and the success of our efforts to conduct
auctions and deliver services on the Internet;
- consumer spending habits;
- changes in competitive conditions; and
- conditions in the market for fine and decorative art and collectibles.
Any one of these factors could cause our operating results to vary
significantly in the future. We plan our operating expenditures based on
anticipated revenues. As a result of the uncertainties associated with the
factors listed above, we may be unable to accurately forecast our revenues.
Because we have many fixed operating expenses, if revenues in a particular
period do not meet expectations, our operating results may suffer.
WE MAY BE UNABLE TO MANAGE OUR GROWTH.
If we experience significant growth in the future, we may strain our
existing management, operational, financial and other resources. As we add
marketing, sales and other personnel, expand our capability to conduct auctions
and deliver services on the Internet, establish additional offices, and expand
and enhance our services, we expect to undergo significant growth in all areas
of operation. To manage this growth we must do the following:
- upgrade or replace existing operational, financial and management
systems;
- train, manage and motivate a growing employee base;
- hire additional finance, administrative and operations personnel; and
- hire additional fine art and other specialists and appraisers.
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We may not complete in a timely manner the improvements to our systems,
procedures and controls necessary to support our future operations. In addition,
we may be unable to attract or retain required personnel, and our management may
be unable to develop the additional expertise required to, among other things,
conduct auctions, deliver services and execute marketing campaigns on the
Internet.
AUCTION SALES ARE DEPENDENT ON DISCRETIONARY CONSUMER SPENDING.
A decline in consumer spending could harm our business. Sales of fine and
decorative art and collectibles are dependent on discretionary consumer spending
and are affected by general market conditions. Many factors affect discretionary
consumer spending, including employment levels, business conditions, interest
rates, inflation and tax rates. Spending on the types of luxury items that we
typically auction are impacted by these factors more than sales of consumer
products in general.
MARKET CONDITIONS AFFECT THE AMOUNT SPENT ON DECORATIVE ARTS AND COLLECTIBLES.
Market conditions impact the dollar volume spent on the types of luxury
items we auction. Some of the market conditions that could cause the dollar
volume spent in our auctions to decrease include the following:
- fewer works of art offered for sale at auction;
- decline in the prices buyers are willing to pay; and
- shifts in consumer trends.
As buyers' tastes change and economic conditions fluctuate, the supply,
demand and dollar volume of fine and decorative art and collectibles available
to be sold at auction could decrease.
THE AUCTION BUSINESS TYPICALLY EXPERIENCES PEAKS IN THE SECOND AND FOURTH
QUARTERS.
Quarterly fluctuations in our operating results could affect our ability to
sustain profitability. Our operating results have varied from quarter to quarter
in the past and we expect to experience fluctuations in the future. One of the
reasons for this variation is the seasonality that results from traditional fall
and spring auction seasons. Typically, we incur losses in the first and third
quarters and experience peaks in our auction revenues and operating income in
the second and fourth quarters of each year.
OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE.
We expect that our quarterly revenues, expenses and operating results will
vary significantly in the future. The following factors will affect our
quarterly results:
- the timing of our auctions in comparison to our competitors' auctions;
- the popularity and availability of certain categories of art and
collectibles; and
- the unpredictability of our ability to attract large collections and
estates.
Quarterly fluctuations and seasonality make it difficult to forecast our
revenues and operating results. We believe that period-to-period comparisons of
our results are not necessarily indicative of future performance. It is likely
that in some future quarters or years our operating results will fall below the
expectations of securities analysts or investors. In that event, the trading
price of our common stock would almost certainly decline. See "--We may
experience losses in the future," "--Auction sales are dependent on
discretionary consumer spending;" and "--Market conditions affect the amount
spent on decorative arts and collectibles."
WE MAY BE UNABLE TO ACQUIRE HIGH QUALITY AUCTION PROPERTY ON A CONSISTENT BASIS.
The number of pieces available for auction is limited, and we compete
intensely with other auction companies and art dealers for the acquisition of
high quality auction properties. Our future success will depend in large part on
our ability to maintain an adequate inventory of high quality auction property,
particularly fine and decorative art and collectibles. We rely on our highly
trained staff to establish and
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<PAGE> 12
maintain relationships with the primary sources of auction property, including
fine art dealers, fiduciaries of estates, museums and private collectors. Our
ability to maintain a sufficient inventory of high quality auction properties
also will depend on the ongoing satisfaction of both sellers and buyers with our
services.
CAPACITY CONSTRAINTS COULD ADVERSELY AFFECT OUR INTERNET AUCTIONS AND OTHER
INTERNET SERVICES.
We may be unable to accurately project the rate or timing of increases in
the volume of traffic and transactions on our Web site that may result if we
successfully implement our Internet strategy. In addition, we may be unable to
expand and upgrade our systems and infrastructure in a timely manner to
accommodate any increases. We currently are expanding and upgrading our systems
in anticipation of increased traffic on our Web site and increased numbers of
participants in our Internet auctions. Any substantial increase above the
expected traffic volume and participant numbers will require us to further
expand and upgrade our technology, transaction processing systems and network
infrastructure. The satisfactory performance, reliability and availability of
our Web site, processing systems and network infrastructure will be critical to
our ability to attract and serve the large numbers of buyers and sellers that we
expect will participate in our auctions and utilize our services on the
Internet.
WE DEPEND ON THIRD PARTIES TO PROVIDE INTERNET CAPACITY.
One or more of the third parties on which we depend to provide us with
Internet capacity and other services may fail to provide us with the capacity or
other services we require. The failure of any of these third-party systems or
any interruption of the services that these third parties provide to us could
result in the interruption of our Internet auctions or other online services.
Any disruption that results in the unavailability of our services or reduced
customer access to our Web site or the Web site of any of our Internet partners
would diminish the attractiveness of our Internet auctions or other online
services.
OUR INTERNET AUCTION BUSINESS IS DEPENDENT ON THE PERFORMANCE AND RELIABILITY OF
THE INTERNET.
If the Internet continues to experience significant growth in the number of
users, frequency of use and amount of data transmitted, the Internet
infrastructure may be unable to support the demands placed on it and the
performance or reliability of the Internet may suffer. In addition, the Internet
could lose its commercial viability as a form of media due to delays in the
development or adoption of new standards, security measures and ways to process
increased levels of Internet activity. The infrastructure or complementary
products and services necessary to establish and maintain the Internet as a
viable commercial medium may not be developed. Even if they are developed, the
Internet may not become a viable commercial medium for us or our buyers and
sellers. Our future success will depend in part on the maintenance of the
Internet infrastructure, such as a reliable network backbone that provides
adequate speed, data capacity and security. Our success also will depend on the
timely development of products such as high speed modems that enable reliable
Internet access and services.
OUR INTERNET AUCTIONS MAY BE SUBJECT TO SECURITY RISKS.
Concerns over the security of transactions conducted on the Internet and
other online services and the privacy of users may inhibit the growth of the
Internet and other online services as a means of conducting commercial
transactions. As we expand our electronic commerce services, we will rely on
encryption and authentication technology licensed from third parties in an
effort to secure transmission of confidential information, such as a buyer's
credit card number. Advances in computer capabilities, new discoveries in the
field of cryptography or other events or developments may result in a compromise
of the methods we use to protect buyers' and sellers' transaction data. We may
need to spend significant funds or other resources to protect against the threat
of security breaches or to address problems caused by breaches. Although we
intend to implement industry-standard security measures, these measures may not
be effective. If our activities or those of our business partners involve the
storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage our reputation and expose us to a risk
of loss or litigation.
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OUR INTERNET OPERATIONS MAY BE INTERRUPTED OR DISRUPTED.
Despite the implementation of security measures, our networks and those of
our business partners may be vulnerable to unauthorized access, computer viruses
and other disruptions. Anyone who is able to avoid our security measures or
those of our business partners could misappropriate our proprietary information
or cause interruptions in our Internet operations. Internet and online service
providers have in the past experienced, and may in the future experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees or others.
CHANGES IN GOVERNMENT REGULATION COULD LIMIT OUR ABILITY TO CONDUCT INTERNET
AUCTIONS.
Due to the increasing popularity and use of the Internet and online
services, laws and regulations may be adopted with respect to the Internet or
online services that could significantly limit our Internet auction business.
These laws or regulations could subject us to significant liability,
significantly limit the growth of Internet usage, prevent us from offering
certain Internet products or services, or otherwise harm our business. Issues
that are likely to be addressed by laws and regulations in this area include
user privacy, pricing, taxation, distribution and the characteristics and
quality of products and services. Regulations like these could limit growth in
use of the Internet generally and decrease the acceptance of the Internet as a
commercial medium. Our Internet operations also may be subject to other federal,
state, local or foreign laws, regulations and policies, either now existing or
that may be adopted in the future.
WE COULD SUFFER LOSSES FROM PRICE GUARANTEES THAT ARE TOO HIGH.
A significant increase in losses that result from guaranteeing prices for
properties we auction could harm our business. From time to time we give price
guarantees to sellers. In these instances, a seller receives the guaranteed
amount from us following the auction, regardless of the actual proceeds we
receive from the auction. If the auction proceeds are less than the amount
guaranteed, we will incur a loss. In 1996, we lost a total of $190,000 due to
guarantees, and in 1997, we lost a total of $90,000 due to guarantees. We did
not experience a loss due to guarantees in 1998.
WE MAY BE UNABLE TO RECOVER AMOUNTS ADVANCED TO SELLERS.
A significant increase in losses that result from advancing funds to
sellers could harm our business. In certain situations we will advance funds to
a seller based on the estimated value of the property consigned. We secure
advances with the property to be auctioned. We advance funds only after we have
taken physical possession of the property to be auctioned. If we do not receive
sufficient proceeds from the auction to cover the amount of the advance, plus
accrued interest, the seller is required to repay the difference. If we are
unable to recover this difference, we incur a loss. We did not experience any
losses from advances in 1996. Total losses from advances were $41,000 in 1997
and were $12,000 in 1998. Total advances outstanding as of December 31, 1998
were $1.3 million.
OUR OPERATING RESULTS COULD BE HARMED IF WE EXPERIENCE AN INCREASE IN
RESCISSIONS OF SALES.
Our operating results could suffer if we experience a significant increase
in the number of sales that are rescinded due to questions about title,
provenance or authenticity of an item. We warrant the title, provenance and
authenticity of each item sold at auction. If the buyer believes that any of
these characteristics is in doubt, he or she must notify us in writing within
six months of the date of sale of the property, and must substantiate his or her
claim with written opinions from at least two experts. If we cannot substantiate
the questioned characteristics, the buyer may rescind his or her purchase and we
will refund the price paid at auction to the buyer. When a purchase is
rescinded, the seller is required to refund the hammer (the price for which an
item sells at auction) less sellers' commissions and other sellers' fees.
9
<PAGE> 14
THE AUCTION BUSINESS IS INTENSELY COMPETITIVE.
We compete directly with international and regional auction companies and
indirectly with dealers. Our competitors include the two largest international
auction companies, Sotheby's Holdings, Inc. and Christie's International plc, as
well as many regional auction companies. Sotheby's and Christie's have
significantly greater name recognition and financial and marketing resources
than we do and each had total auction sales (hammer plus buyers' premiums) of
approximately $2 billion in 1998. To the extent either of these auction
companies increases its focus on middle market properties, our business could
suffer. In addition, any of the many regional competitors, as well as new
competitors of which we currently are not aware, could expand into new
geographic markets or the Internet auction market before we are able to
successfully execute our strategies in these areas.
As part of our growth strategy, we intend to expand our operations into
underserved geographic markets. Existing or new competitors may enter these
markets and establish successful operations before we do. Moreover, as we expand
our Internet operations, we will face new and often unfamiliar competitors, as
well as traditional auction companies. For example, Sotheby's recently announced
that it will begin conducting auctions online to sell art, jewelry and
collectibles. Few barriers to entry exist for conducting auctions online and
other traditional auction companies could easily and quickly do the same.
WE ARE DEPENDENT ON KEY EMPLOYEES, PARTICULARLY AUCTION PROPERTY SPECIALISTS AND
SENIOR MANAGEMENT.
If we do not continue to attract and retain key employees, we may be unable
to acquire auction properties or attract buyers in sufficient numbers in the
future. Due to the specialized nature of our business, our ability to succeed is
particularly dependent on our specialists and senior management. There is
significant competition for employees with the skills required to perform the
services we offer. In particular, qualified auction property specialists are in
great demand by other auction companies. Factors that will affect our ability to
attract and retain qualified employees include the following:
- continued supply of high quality properties;
- compensation and other incentives; and
- the level of internal support we provide.
The departure of one of our specialists to work for one of our competitors
could result in sellers consigning property with that competitor. Our success
will depend to a significant degree on sellers' willingness to consign property
for sale at our auctions. A seller's willingness to consign property often
depends in large part on the relationships that the seller has established with
certain of our employees, particularly our specialists. We may have to allocate
significant staff resources to redevelop relationships if any specialist leaves
our company, and despite such efforts, we may be unsuccessful in redeveloping
those relationships.
Our future performance also will continue to depend largely on the efforts
and abilities of our senior management team. We typically do not enter into
employment or non-competition agreements with our employees. The loss of the
services of a group of these individuals, especially to any existing or future
competitors, would harm our business.
THE AUCTION BUSINESS COULD BE SUBJECT TO NEW REGULATIONS THAT WOULD HARM OUR
BUSINESS.
Changes in the regulations or licensure requirements governing the auction
business could increase the complexity and costs of conducting auctions, which
might decrease our ability to attract sellers and buyers. Regulation of the
auction business in general varies from jurisdiction to jurisdiction. Numerous
states, including the state of California (in which our headquarters are
located), have regulations regarding the manner in which auctions may be
conducted and the liability of auctioneers for how they conduct auctions. In
addition, we are required to obtain a license in various jurisdictions with
respect to some of the properties we sell at auction.
10
<PAGE> 15
OUR BUSINESS COULD BE HARMED BY YEAR 2000 COMPLIANCE RISKS.
The "Year 2000 issue" could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. The Year 2000 issue is the result of computer programs
written using two digits rather than four to define the applicable year.
Computer programs that have this date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000.
We are heavily dependent upon the proper functioning of our own computer
and data-dependent systems. This includes, but is not limited to, our systems in
information, business, finance, operations, administration and service. Any
failure or malfunctioning on the part of these or other systems could harm our
business in ways that we currently do not know and cannot discern, quantify or
otherwise anticipate. In addition, if our key vendors experience Year 2000
compliance issues, then our business could be harmed.
We may be unable to implement the upgrades necessary to resolve any
significant problems we discover in our testing efforts. Even if we do make
these upgrades, they may not be effective in addressing the problems identified.
If required upgrades are not completed in a timely manner or are not successful,
our business could be harmed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000."
WE ARE CONTROLLED BY THREE STOCKHOLDERS WHO ARE ALSO OFFICERS OR DIRECTORS.
A significant majority of our stock is held by three stockholders, who,
acting together, could delay, defer or prevent acts that would result in a
change of control, which in turn could reduce the market price of our common
stock. Following the closing of this offering, these three stockholders, all of
whom are members of our board of directors and two of whom are officers, will
beneficially own a total of approximately 76.0% of our outstanding common stock
(73.4% if the underwriters' over-allotment option is exercised in full). Acting
together, these stockholders will be able to control all matters requiring
approval of our stockholders and thereby control our management and affairs.
Matters that typically require stockholder approval include the following:
- election and removal of directors;
- mergers or consolidation of our company; and
- sale of all or substantially all of our assets.
OUR PRIOR S CORPORATION STATUS COULD RESULT IN FUTURE TAX LIABILITY.
If our status as an S corporation is denied for any period for which we
have claimed or will claim such status, we will be subject to income tax as a C
corporation for those periods. Unlike a C corporation, an S corporation
generally is not subject to income tax at the corporate level. Our S corporation
status will terminate automatically upon the completion of this offering, after
which we will become a C corporation. We have been treated as an S corporation
for federal income tax purposes since November 1989.
MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE ALLOCATION OF PROCEEDS FROM THIS
OFFERING.
Management will have broad discretion in using the proceeds from this
offering. We plan to use the net proceeds of this offering for continued
expansion activities and general corporate purposes. Pending any specific needs,
we expect to invest the net proceeds in short-term, investment-grade obligations
for an indefinite period of time. We cannot guarantee that any invested proceeds
will yield a significant return. See "Use of Proceeds."
THERE HAS NEVER BEEN A PUBLIC MARKET FOR OUR COMMON STOCK.
We cannot predict the extent to which a trading market for our common stock
will develop or how liquid that market might become. Prior to this offering,
there has not been a public market for our common stock. The initial public
offering price of our common stock will be determined through
11
<PAGE> 16
negotiations between us and the representative of the underwriters and may not
be indicative of prices that will prevail in the trading market. You should read
the "Underwriting" section for a more complete discussion of the factors to be
considered in determining the initial public offering price of our common stock.
YOU MAY BE UNABLE TO RESELL SHARES AT OR ABOVE THE PRICE YOU PAY.
You may be unable to resell your shares at or above the initial public
offering price due to a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in earnings or other estimates made by securities analysts;
- our ability to successfully implement our strategy; and
- changes in business conditions affecting us, our customers and our
competitors.
In addition, the stock market in general has experienced extreme volatility
that has often been unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the trading
price of our common stock. Periods of volatility in the market price of a
company's securities often generate securities class action claims by
stockholders. Any litigation like this against us could result in substantial
costs and loss of resources.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF THE STOCK YOU PURCHASE.
The assumed initial offering price is substantially higher than the net
tangible book value of $2.39 per share that our outstanding common stock will
have immediately after this offering. Accordingly, if you purchase shares, you
will incur immediate and substantial dilution of approximately $8.61 in the net
tangible book value per share from the price you paid.
A SIGNIFICANT NUMBER OF SHARES ARE ELIGIBLE FOR SALE AND THEIR SALE COULD
DEPRESS OUR STOCK PRICE.
The sale of a large number of shares could harm our stock price. After this
offering, we will have outstanding 6,252,364 shares of common stock, a majority
of which will be held by existing stockholders and will become eligible for
resale shortly after this offering. Our existing stockholders have agreed not to
sell their shares for a period of 180 days after the date of this prospectus
without the prior written consent of First Security Van Kasper. Upon expiration
of the 180 day lock-up period, all of the 4,752,364 shares of our common stock
held by existing stockholders will become available for sale in the public
market (subject to certain volume restrictions imposed by the federal securities
laws).
SOME ANTI-TAKEOVER PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY
DELAY OR PREVENT A TAKEOVER OF BUTTERFIELDS.
Certain provisions of our charter documents and Delaware law may make it
more difficult for a third party to acquire control of us, even on terms that a
stockholder might consider favorable. Our board can issue up to 5,000,000 shares
of preferred stock without stockholder approval. The issuance of preferred stock
could make it more difficult for a third party to acquire our company. These
provisions could diminish the opportunities for a stockholder to participate in
tender offers, including tender offers at a price above the then-current market
value of our common stock.
In addition, our charter documents provide that special meetings of our
stockholders may be called only by the chairman of the board of directors, our
chief executive officer, a majority of the board of directors or, if we are
subject to corporate governance provisions of California law, by the holders of
at least 5% of our outstanding voting stock. Our charter documents also provide
for a classified board of directors, require advance notice of stockholder
proposals and nominations, and do not provide for cumulative voting in the
election of directors. These provisions may make it more difficult for
stockholders
12
<PAGE> 17
to replace current members of our board and may make the acquisition of our
company by a third party more difficult.
YOU SHOULD NOT UNDULY RELY ON FORWARD-LOOKING STATEMENTS.
This prospectus contains forward-looking statements. The outcome of the
events described in these forward-looking statements is subject to risks and our
actual results could differ materially. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
prospectus. This section and the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
contain a discussion of some of the factors that could contribute to those
differences.
13
<PAGE> 18
PRIOR S CORPORATION STATUS
Since November 1989, we have been treated for federal income tax purposes
as a corporation subject to taxation under Subchapter S of the Internal Revenue
Code of 1986 and comparable state tax laws. As a result, our earnings through
the day preceding the date of termination of S corporation status have been or
will be, as the case may be, taxed, with certain exceptions, for federal and
state income tax purposes directly to our current stockholders. Our S
corporation status will terminate automatically upon the completion of this
offering.
We have previously made distributions to our stockholders to provide them
with funds to assist in paying federal and state income taxes on our
undistributed earnings. Upon the completion of this offering, we will make an
additional S corporation distribution of $5.1 million to our current
stockholders, which approximately equals our estimated earned and previously
undistributed taxable S corporation income through the day preceding our S
corporation termination date. See Note 1 of Notes to Consolidated Financial
Statements. As of our S corporation termination date, we will no longer be
treated as an S corporation and will be fully taxable pursuant to federal and
state income tax laws. We will enter into a tax indemnification agreement with
our current stockholders providing that our current stockholders will indemnify
us with respect to any federal, state or local corporate income taxes we are
required to pay as a result of our failure to qualify as an S corporation with
respect to tax returns in which we reported our income as an S corporation. This
tax indemnification agreement also will provide that we will indemnify our
current stockholders on an after-tax basis with respect to any federal, state or
local income taxes (plus interest and penalties) paid or required to be paid by
our stockholders, and our stockholders will pay us any refunds of federal, state
or local income taxes (including interest received thereon) received by (or
credited to) our stockholders, as a result of a subsequent adjustment in our
income with respect to any tax return in which we reported our income as an S
corporation.
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<PAGE> 19
USE OF PROCEEDS
We are offering a total of 1,500,000 shares in this offering. The net
proceeds to us from the sale of the 1,500,000 shares of our common stock, at an
assumed public offering price of $11.00 per share, will be approximately $14.6
million ($16.9 million if the underwriters fully exercise their over-allotment
option), after deducting the estimated underwriting discount and estimated
offering expenses payable by us.
We expect to use net proceeds from this offering in the manner and
approximate amounts indicated below. The uses specified are listed in order of
their priority.
<TABLE>
<S> <C>
Undistributed S corporation retained earnings $ 5,100,000
Further develop online capabilities 1,000,000
Remodel Chicago gallery 800,000
Working capital 7,700,000
-----------
Total net proceeds $14,600,000
</TABLE>
Net proceeds used for working capital will be used, in part, as an
alternative to the occasional use of our existing lines of credit. Working
capital also may include acquisitions, although we are not engaged in any
acquisition negotiations as of the date of this prospectus, nor have we
allocated any portion of net proceeds for any specific acquisitions. Initially
we will focus our acquisition efforts in geographic regions of the United States
that have large populations with a demand for middle-market properties.
We believe that our available cash, cash equivalents and short-term
investments, together with the net proceeds of this offering, will be sufficient
to meet our capital requirements for the foreseeable future. Pending application
of the net proceeds as described above, we intend to invest the net proceeds in
short-term, investment-grade securities.
DIVIDEND POLICY
Historically, we made certain distributions to our stockholders as a result
of our status as an S corporation. See Note 1 to Consolidated Financial
Statements. Upon completion of this offering, we intend to retain any future
earnings to support operations and to finance the growth and development of our
business. We do not anticipate paying any cash dividends for the foreseeable
future.
15
<PAGE> 20
DILUTION
Our actual net tangible book value as of December 31, 1998 was $5.7
million, or $1.19 per share. Net tangible book value per share represents the
amount of total tangible assets less total liabilities, divided by the number of
shares of common stock outstanding. After giving effect to the total $6.1
million distribution to be made to our existing stockholders of undistributed S
corporation earnings and to the increase in deferred tax assets related to the
termination of subchapter S status, our pro forma net tangible book value at
December 31, 1998 would have been $357,000, or $0.08 per share. After giving
effect to the sale of the shares of common stock offered hereby at an assumed
initial public offering price of $11.00 per share, and after deduction of the
estimated underwriting discount and estimated offering expenses, our pro forma
net tangible book value at December 31, 1998 would have been $14.9 million, or
$2.39 per share. This represents an immediate increase in net tangible book
value of $1.20 per share to our existing stockholders and an immediate dilution
of $8.61 per share to new investors purchasing shares in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Net tangible book value as of December 31, 1998........... $1.19
Increase per share attributable to new investors.......... 1.20
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.39
Dilution per share to new investors......................... $ 8.61
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1998, the difference between our existing stockholders and the new investors
purchasing shares in this offering with respect to the number of shares of our
common stock purchased, the total consideration paid and the average price paid
per share (based upon deducting the $6.1 million distribution of S corporation
earnings, the increase in deferred tax assets resulting from the termination of
S corporation status, an assumed initial public offering price of $11.00 per
share and before deducting the estimated underwriting discount and estimated
offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
-------------------- ---------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 4,752,364 76.0% $ 1,018,304 5.8% $ 0.21
New investors......................... 1,500,000 24.0 16,500,000 94.2 11.00
--------- ----- ----------- -----
Total....................... 6,252,364 100.0% $17,518,304 100.0%
========= ===== =========== =====
</TABLE>
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<PAGE> 21
CAPITALIZATION
The table below sets forth our capitalization as of December 31, 1998. The
pro forma column reflects $6.1 million of S corporation distributions
distributed or to be distributed subsequent to December 31, 1998 to our existing
stockholders in payment of previously undistributed accumulated S corporation
earnings and the increase in deferred tax assets resulting from the termination
of S corporation status. The pro forma as adjusted column reflects the sale of
the 1,500,000 shares of common stock offered hereby at an assumed initial public
offering price of $11.00 per share (after deducting the estimated underwriting
discount and estimated offering expenses and the application of estimated
proceeds from this offering). See "Prior S Corporation Status," "Use of
Proceeds" and Note 1 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings, including current portion of long
term debt................................................. $ 320 $ 320 $ 320
====== ======= =======
Long-term debt, net of current portion...................... $ 819 $ 819 $ 819
------ ------- -------
Stockholders' equity:
Preferred Stock, $.001 par value; no shares authorized
actual and pro forma; 5,000,000 shares authorized pro
forma as adjusted; no shares issued and outstanding.... -- -- --
Common Stock, $.001 par value; 15,000,000 shares
authorized, 4,752,364 shares issued and outstanding
actual and pro forma; 6,252,364 shares issued and
outstanding pro forma as adjusted...................... 48 48 62
Additional paid-in capital................................ 1,321 971 15,527
Retained earnings......................................... 4,971 -- --
------ ------- -------
Total stockholders' equity............................. 6,340 1,018 15,589
------ ------- -------
Total capitalization.............................. $7,159 $ 1,837 $16,408
====== ======= =======
</TABLE>
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<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The consolidated statements of income data for the years ended December 31,
1996, 1997 and 1998 and the consolidated balance sheet data as of December 31,
1996, 1997 and 1998 have been derived from our audited consolidated financial
statements included elsewhere in this prospectus that have been audited by BDO
Seidman, LLP, independent auditors. The data set forth below should be read in
conjunction with our consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA(1):
Revenues.................................................... $17,068 $20,271 $20,702
Expenses
Salaries and related costs................................ 8,389 9,590 10,572
General and administrative expenses....................... 4,161 4,391 4,751
Auction and sale operating expenses....................... 1,541 1,906 2,210
Loss on impairment of assets.............................. -- -- 200
Depreciation and amortization............................. 536 491 619
------- ------- -------
Total expenses.................................... 14,627 16,378 18,352
------- ------- -------
Income from operations...................................... 2,441 3,893 2,350
Other income, net........................................... 192 329 226
------- ------- -------
Income before income taxes.................................. 2,633 4,222 2,576
Pro forma provision for income taxes(2)..................... (1,053) (1,689) (1,030)
------- ------- -------
Pro forma net income(2)..................................... $ 1,580 $ 2,533 $ 1,546
======= ======= =======
Pro forma net income per share(2)(3)........................ $ 0.29
=======
Weighted average shares used in computing pro forma net
income per share(3)....................................... 5,264
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(1):
Working capital............................................. $ 1,136 $ 1,859 $ 2,927
Total assets................................................ 15,861 20,353 16,484
Long-term debt, net of current portion...................... -- 614 819
Total stockholders' equity.................................. 4,229 4,911 6,340
</TABLE>
- ------------------------------
(1) Our financial statements and the financial statements of our subsidiary,
BCCI, were previously presented on a combined basis. On March 31, 1999, the
shareholders of BCCI contributed their shares of BCCI stock to Butterfields.
The previously issued combined results are presented as consolidated.
(2) Assuming a combined federal and state tax rate of 40%, which we believe
approximates the statutory tax rates that would have applied to us if we had
been taxed as a C corporation during all periods indicated. In connection
with this offering, our S corporation status will be terminated and we will
become subject to federal and state income taxes.
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method employed to determine the number of shares used to compute per
share amounts.
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<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and notes included elsewhere in this prospectus. Our actual results could differ
materially from those anticipated or implied by the forward-looking statements
discussed here. Factors that could cause or contribute to differences include
those discussed in "Risk Factors" as well as those discussed elsewhere herein.
OVERVIEW
We are the third largest auctioneer of fine and decorative art and
collectibles in the United States, conducting over 100 specialty and estate
auctions annually. We appraise and auction items ranging in value from several
hundred dollars to over $1 million in every major category of art and
collectibles, including paintings, furniture, jewelry, arms and armor, rare
books, fine wine and entertainment memorabilia.
Our revenues from live auctions are primarily generated by commissions and
fees from the sale of property through auction. The variation of revenues from
year to year is largely a function of property availability and market demand
and conditions. Sellers of property generally make their own determinations as
to when to make their property available for auction. Auctions are held at our
galleries in San Francisco, Los Angeles and the Chicago area. In addition to
conducting simultaneous auctions by video conference at multiple locations, we
also have the ability to conduct several auctions at the same time at a single
location. "Hammer" represents the price for which an item sells at auction. A
buyer's premium of 15% of the first $50,000 of hammer and 10% of any excess
above $50,000 per lot is charged to all buyers. In addition to a seller's
commission, which typically ranges from 10% to 25% of hammer, sellers are
charged various fees depending on the auction format and marketing activities
that are used for the property. These fees include fees for photography,
insurance, reserve and cartage. We have only recently begun conducting cyber
auctions, and the terms and conditions related to cyber auctions may vary as we
gain experience with this new auction format. Additional revenues are derived
from appraisals of fine art and collectibles and sales of our catalogues.
The unaudited table below sets forth total auction sales (hammer plus
buyer's premium) for 1996, 1997 and 1998 for each property category.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
PROPERTY CATEGORIES 1996 1997 1998
------------------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and decorative art.......................... $24,265 $29,337 $25,627
Fine art.............................................. 10,140 15,310 19,293
Collectibles.......................................... 23,481 23,123 21,591
Estate and others..................................... 11,058 15,570 16,386
------- ------- -------
$68,944 $83,340 $82,897
======= ======= =======
</TABLE>
For financial reporting purposes, we deduct hammer from our total auction
sales. Reported revenues consist of buyers' premiums, sellers' commissions and
other sellers' fees. In addition to sellers' commissions and buyers' premiums
received from the sale of property consigned for auction, we also generate
revenues from the sale of inventory that we have purchased and loans to sellers.
Material purchases made over the past two years have included jewelry,
furniture, paintings and wine. Loans typically are made for 30% to 40% of the
low estimate of the value of the consigned property. Estimates of property value
are prepared by our specialists. As a result of competition and demand for
consigned property, we may make loans for more than 40% of the consigned
property's value. Interest typically is
19
<PAGE> 24
charged on all loans and the property consigned is used as collateral. Below are
tables reflecting the consignor advance portfolio and owned inventory balances
at December 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Consignor advance portfolio.............................. $3,805 $1,358 $1,342
Inventory owned.......................................... 437 1,851 1,139
</TABLE>
Most buyers of auctioned property are required to make payment in cash or
check prior to release of the property. Typically payment is received and the
property is shipped to the buyer within 15 days of the sale. Some buyers are
given credit terms and are permitted to take possession of the property before
payment is made. We grant credit to buyers who have an acceptable credit history
and a significant spending history with us, normally exceeding $100,000
annually. Credit terms generally require payment 30 days after the date of the
auction. Accounts receivable balances outstanding after 30 days typically are
charged interest.
The business cycle begins with a seller contracting with us to sell
property at auction. Typically these contracts are signed from 12 to 24 weeks in
advance of the scheduled auction date. A seller who wishes to take a loan
typically will do so at this time. Upon completion of an auction, we incur a
liability to the seller in the amount of the hammer price, less applicable
seller's commission and other seller's fees, and receive the cash proceeds of
the sale, which include the hammer price, buyer's premium and any applicable
sales taxes. We recognize revenues from auction commissions and the buyer's
premium on the date of the related sale. During this phase of the business
cycle, we have significant cash balances and short-term liabilities. We "settle"
a sale and pay the liability to the seller, less any outstanding loan balances,
on the 35th day following the sale, commonly known as the settlement date. Upon
payment to the seller, our cash balance drops significantly, as do our
short-term liabilities. The seasonal aspects of the fine art auction industry
typically result in higher cash receipts in the second and fourth quarters and
higher payments to sellers in the latter portions of the second and fourth
quarters and the early portion of the first and third quarters.
On occasion, the sale of a particular lot may be canceled due to
nonpayment, questioned authenticity or provenance (the origin of a property). We
typically do not pay a seller until payment is received from the buyer,
substantially reducing our risk of loss. If a buyer with credit terms purchases
an item at auction and fails to pay, any loss is charged to bad debt expense
rather than pursuing the seller for any sale proceeds disbursed. We did not have
any bad debt expense in 1996. Bad debt expense in 1997 was $351,000 and was
related to a default on a loan we made to a former joint venture partner and to
buyers' failure to pay. In 1998, bad debt expense was $76,000 and was related to
buyers' failure to pay. When a cancellation occurs due to provenance or
authenticity, we will refund the buyer's payment and seek refund from the seller
under the terms of the consignment agreement. Historically, sale cancellations
have not had a material impact on our net income.
We have been taxed as an S corporation since November 1984. As a result,
taxable income has been reported on our stockholders' individual income tax
returns and no federal tax has been imposed. Our S corporation status will
terminate upon completion of this offering, and we will be subject to state and
federal income taxes as a C corporation. The pro forma adjustments reflect
federal and state income taxes as if we had been taxed as a C corporation during
all periods shown.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data expressed as a percentage of revenues (unless otherwise noted).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues:
Auction commissions and fees.............................. 97.7% 98.6% 99.2%
Financial services revenues............................... 2.3 1.4 0.8
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
Expenses:
Salaries and related costs................................ 49.1 47.3 51.1
General and administrative expenses....................... 24.4 21.7 22.9
Auction and sale operating expenses....................... 9.0 9.4 10.7
Loss on impairment of assets.............................. -- 1.0
Depreciation and amortization............................. 3.1 2.4 3.0
----- ----- -----
Total expenses.................................... 85.6 80.8 88.7
----- ----- -----
Income from operations...................................... 14.4 19.2 11.3
Other income, net........................................... 1.1 1.6 1.1
----- ----- -----
Income before taxes......................................... 15.5 20.8 12.4
Pro forma provision for income taxes........................ (6.2) (8.3) (4.9)
----- ----- -----
Pro forma net income...................................... 9.3% 12.5% 7.5%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1998
Revenues. Revenues consist of buyers' premiums, sellers' commissions,
sellers' fees, catalogue subscriptions, appraisal fees and revenues generated by
financial services provided to auction buyers and sellers. These amounts are
adjusted for gains and losses from the sale of inventory. Revenues increased
slightly from $20.3 million in 1997 to $20.7 million in 1998.
Salaries and related costs. Salaries and related costs consist of payroll
and personnel expenses. Salaries and related costs increased 10.2% from $9.6
million in 1997 to $10.6 million in 1998. This increase resulted from additional
salaries for new management and personnel in the Chicago-area gallery. Salaries
and related costs as a percentage of revenues increased from 47.3% in 1997 to
51.1% in 1998, primarily as a result of costs related to the Dunnings operations
with no offsetting revenues from Dunnings.
General and administrative expenses. General and administrative expenses
consist of rent, supplies, travel and utilities expenses. General and
administrative expenses increased 8.2% from $4.4 million in 1997 to $4.8 million
in 1998. These increases were primarily the result of increased travel and
communication costs as well as other expenses associated with our acquisition of
Dunnings.
Auction and sale operating expenses. Auction and sale operating expenses
consist of marketing and advertising expenses. Auction and sale operating
expenses increased 15.9% from $1.9 million in 1997 to $2.2 million in 1998, and
increased as a percentage of revenues from 9.4% in 1997 to 10.7% in 1998. These
increases were due to costs associated with increased solicitation advertising
for consignments of property.
Loss on impairment of assets. We recognized a loss on impairment of assets
in 1998 in the amount of $200,000 due to a write down of real property that we
had held for sale, but for which we did not receive any acceptable offers to
purchase. The property was obtained in 1997 through a foreclosure on secured
receivables. During 1998, we determined that we could no longer realize the sale
of the property at its offering price and accordingly we reduced the carrying
value.
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<PAGE> 26
Other income, net. Other income, net consists of non-recurring items such
as gains on sales of fixed assets and legal settlements and interest on our
short-term investments, cash and cash equivalents, less interest expense
associated with our line of credit and long-term debt. Other income, net
decreased 30.9% from $328,000 in 1997 to $227,000 in 1998, primarily due to the
gain realized from the sale of an encumbered fixed asset in 1997.
YEARS ENDED DECEMBER 31, 1996 AND 1997
Revenues. Revenues increased 18.8% from $17.1 million in 1996 to $20.3
million in 1997, primarily due to more robust market conditions in 1997 as
compared to 1996, including the auction of two single-owner estates and a museum
deaccession auction in 1997.
Salaries and related costs. Salaries and related costs increased 14.3% from
$8.4 million in 1996 to $9.6 million in 1997 due to the implementation of a new
incentive bonus system, salary increases and additional salaries for new
personnel.
General and administrative expenses. General and administrative expenses
increased 5.5% from $4.2 million in 1996 to $4.4 million in 1997 due to
increased rents, maintenance and repairs to our facilities and computer hardware
and software purchases.
Auction and sale operating expenses. Auction and sale operating expenses
increased 23.7% from $1.5 million in 1996 to $1.9 million in 1997, primarily due
to an increase in bad debt expense related to a default on a loan to a former
joint venture partner.
Other income, net. Other income, net increased 71.5% from $191,000 in 1996
to $328,000 in 1997, primarily due to increased interest income on higher cash
balances in 1997 and the sale of an encumbered fixed asset in 1997.
QUARTERLY OPERATING RESULTS AND FLUCTUATIONS
The following table presents certain unaudited actual and pro forma
financial data for each of the three-month periods in the eight quarters ended
December 31, 1998. This information has been derived from our unaudited
consolidated financial statements and has been prepared on the same basis as the
audited consolidated financial statements contained in this prospectus, and, in
the opinion of our management, includes all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the information for
the periods presented. This data should be read in conjunction with our
consolidated financial statements and notes thereto included elsewhere in this
prospectus. Our operating results for any period are not necessarily indicative
of results to be expected for any subsequent period. The pro forma adjustments
reflect federal and state income taxes as if we had not elected S corporation
status for income tax purposes and instead had been taxed at C corporation rates
for all periods presented. See "S Corporation Distributions" and Notes 1 and 6
of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $3,866 $6,282 $3,407 $6,716 $4,005 $6,228 $ 3,149 $7,320
Income (loss) from operations.... 225 2,253 (272) 1,687 247 2,005 (1,432) 1,530
Income (loss) before income
taxes.......................... 398 2,257 (230) 1,796 338 2,021 (1,315) 1,532
Pro forma benefit (provision) for
income taxes................... (159) (903) 92 (719) (135) (809) 526 (613)
Pro forma net income (loss)...... 239 1,354 (138) 1,077 203 1,212 (789) 919
</TABLE>
The worldwide art auction market is most active in the spring and fall.
Accordingly, sales activity during the first and third quarters tends to be
lower than in the second and fourth quarters. We typically operate at a loss
until well into the spring auction season, which occurs in the second quarter.
At times we have been successful in reducing the effects of seasonality, as we
did in 1997 and 1998, when we
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<PAGE> 27
conducted additional specialty auctions. We expect that we will operate at a
loss into the spring auction season in future years.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our cash requirements to date primarily through cash
generated from operations, bank borrowings and borrowings from stockholders. Our
operating activities provided cash of $8.1 million in 1996 and $8.7 million in
1997, and used cash of $1.0 million in 1998. Investing activities, consisting of
the purchase and sale of property and equipment, used cash of $1.1 million in
1996, provided cash of $137,000 in 1997 and used cash of $755,000 in 1998.
Financing activities consist of proceeds from and payments on borrowings
and contributions from and distributions to stockholders. Financing activities
used cash of $5.8 million in 1996, $3.9 million in 1997 and $1.2 million in
1998. Historically we have paid distributions to our stockholders as a result of
our S corporation status. We did not make any S corporation distributions to
stockholders in 1996 and we made S corporation distributions totaling $3.7
million in 1997 and $1.4 million in 1998. Subsequent to 1998, we made additional
distributions totaling $1.0 million. We expect to make an additional S
corporation distribution in the amount of $5.1 million to our existing
stockholders, which will be paid from the proceeds from this offering. See
"Prior S Corporation Status."
We had $2.9 million in working capital at December 31, 1998, compared to
$1.9 million in working capital at December 31, 1997. Our working capital
requirements relate primarily to cash needed to fund operations as a result of
lower revenues in the first and third quarters. At December 31, 1998, we had
approximately $4.2 million in cash and cash equivalents and $6.0 million
available under two revolving lines of credit. Due to the seasonal nature of the
fine art auction industry, our cash balances and short-term liabilities can
change substantially from one date to another.
We believe that the net proceeds from this offering, together with our
existing cash and cash equivalents and funds generated from operations, will be
sufficient to meet our cash requirements for the foreseeable future. We intend
to use approximately $800,000 of the net proceeds to remodel a gallery that we
recently purchased in Chicago. We also will use some of the proceeds to further
develop our online capabilities and we may utilize some of the proceeds to
acquire or invest in complementary businesses. We do not currently have any
plans, proposals, arrangements or understandings with respect to any future
acquisitions. We will use cash generated from operations to fund a $250,000
payment due in June 1999 and a $250,000 payment plus accrued interest due in
June 2000, both of which are payments due in connection with our purchase of
Dunnings. If we require additional capital, we may sell additional equity or
debt securities or obtain additional credit facilities. The sale of additional
equity securities could result in additional dilution to our stockholders and
the incurrence of additional debt could result in additional interest expense.
YEAR 2000
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Computer programs that
have this date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
We own and use software that may be impacted by the Year 2000 issue. We
also rely upon vendors of equipment and services whose products and services may
be impacted by the Year 2000 issue. Our specific Year 2000 compliance issues
include:
- the computer hardware and software we use in the performance of services
for our customers (auction processing system);
- the computer hardware and software we use to process business
transactions and prepare financial reports (financial systems);
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<PAGE> 28
- the computer hardware and software we use for corporate administration;
and
- external services such as telecommunications, Internet and financial
services.
Our Year 2000 compliance project consists of three phases. In the first
phase, we tested all computer applications that are critical to our business
cycle. The second phase involves testing non-critical computer applications and
hardware. During the third phase we will attempt to identify vendors whose
services may be impacted by the Year 2000 issue. Each phase is being done in
parallel. We intend to complete the Year 2000 testing process by June 30, 1999
and to monitor all future activities for continued compliance.
We have begun the first phase of our Year 2000 compliance project. All
computer applications critical to the business cycle have been tested through
February 15, 2000. The test will be completed when all critical applications
have been tested through February 15, 2001. During the testing to date, we
determined that our general ledger, trade accounts payable and seller accounts
payable applications are not Year 2000 compliant. These applications will need
minor modifications of the programming that ages transactions. Our invoicing,
accounts receivable and auction systems all proved to be Year 2000 compliant
through February 15, 2000.
We currently are testing applications that are not critical to the business
cycle during the second phase of our Year 2000 compliance project. This second
phase focuses on testing personal computers and software purchased for
administrative purposes, including human resources systems, spreadsheets and
word processing. As part of the review of this software, we determined that our
fixed asset tracking and human resources systems were not Year 2000 compliant.
The fixed asset system was upgraded at a minimal cost and we are reviewing
options for replacing our human resources system.
The third phase of our Year 2000 compliance project will involve
identifying all vendors whose services may be impacted by Year 2000 compliance
issues. Upon identification, we will contact these vendors and determine whether
their products and services are Year 2000 compliant, and if not, whether they
have plans in place to make them Year 2000 compliant. We currently have only
limited information on the Year 2000 compliance of our key vendors. The
operations of our key vendors could be harmed if they do not successfully and
timely achieve Year 2000 compliance. Our business and results of operations
could also be harmed if our key vendors experience Year 2000 issues. If these
vendors are determined to not be Year 2000 compliant, several alternative
vendors could meet all of our current needs except those fulfilled by the local
utility companies that provide electricity and telephone services to all of our
offices and galleries, and gas to our gallery in Chicago.
Our staff will conduct all testing and programming modifications. Based
upon the testing and work completed to date, we anticipate that we will have a
complete and timely resolution for the Year 2000 issue by July 31, 1999.
Although the total cost of compliance has not yet been determined, we do not
believe that these costs will be material. We anticipate that costs associated
with Year 2000 compliance will be funded through normal operations and that no
other major computer-related projects will be deferred due to the Year 2000
related programming tasks.
Our plan may not adequately address the Year 2000 issue in a timely manner
or we may be unable to upgrade any or all of our major systems in accordance
with our plan. In addition, any upgrades may not effectively address the Year
2000 issue. If required upgrades are not completed on a timely basis or are not
successful, we may be unable to conduct our business. Furthermore, there can be
no guarantee that the systems of other companies on which our systems rely will
be timely converted. A failure to convert by another company, or a conversion
that is incompatible with our systems, could harm our business. We intend to,
but have not yet established a contingency plan detailing actions that will be
taken in the event that the execution of our Year 2000 plan is not successfully
completed on a timely basis.
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RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies
to recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, which would be done in
order to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (2) the earnings effect of
the hedged forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Historically, we have not entered into derivatives
contracts either to hedge existing risks or for speculative purposes.
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<PAGE> 30
BUSINESS
OVERVIEW
Established in 1865, we are the third largest auctioneer of fine and
decorative art and collectibles in the United States. We are recognized
throughout the industry for our ability to appraise and auction items ranging in
value from several hundred dollars to over $1 million in every major category of
art and collectibles, including paintings, furniture, jewelry, arms and armor,
rare books, fine wine and entertainment memorabilia. We conduct over 100
specialty and estate auctions annually, serving a network of over 200,000
domestic and international fine art dealers, galleries, museums, foundations and
private collectors. Currently we have three regional galleries and a network of
12 business development representatives located in the United States, Munich,
London and Brussels.
We were incorporated in California in July 1970 and reincorporated in
Delaware in March 1999. Prior to 1970, we operated as a family-owned business.
THE AUCTION INDUSTRY
Buyers and sellers of fine and decorative art and collectibles rely
extensively on auctions as a means to effect their transactions. Traditionally,
auctions of property have been conducted by auction companies before live
audiences, although the Internet has emerged recently as a new medium for
auctions.
The auction of fine and decorative art and collectibles is dominated by
Christie's and Sotheby's, which had combined worldwide auction sales of
approximately $3.9 billion in 1998. We believe that this amount represented
approximately 80% of the total value of fine and decorative art and collectibles
sold through auction in 1998. In addition to Christie's and Sotheby's, we and
numerous other mid-sized auction companies conduct auctions of fine and
decorative art and collectibles in the United States. The auction market for
middle market and lower valued properties is highly fragmented and made up of
hundreds of smaller and typically less sophisticated auction companies than us.
These auction companies are predominantly family-owned, operate in a limited
regional or local market, tend to specialize in limited auction categories and
typically lack the access to the capital required to significantly grow their
operations. We are the third largest auction company in the United States, after
Christie's and Sotheby's.
We concentrate on middle market auction properties, namely items ranging in
value from approximately $300 to $10,000. Although items that we sell at auction
range in price from several hundred dollars to over $1 million, the average
price of the more than 67,000 items that we sold in 1998 was approximately
$1,100. We believe that a majority of all fine and decorative art and
collectibles sold at auction are sold for $5,000 or less, placing most of the
properties sold at auction squarely within the market on which we focus.
With the growth of the Internet, many online auction companies have emerged
recently, several of which have announced intentions to expand into sales of
middle market fine and decorative art and collectibles. While the Internet
represents a potentially large market for fine and decorative art and
collectibles, the Internet format limits a buyer's ability to inspect and
evaluate properties. Consequently, buyer confidence in the authenticity of the
property and the settlement of sales presents a significant challenge to online
auction companies, particularly when properties are unique or of relatively high
value. In January 1999, Sotheby's announced its intention to begin auctioning
property on the Internet, further supporting our belief that the Internet
presents a significant expansion opportunity for the auction of fine and
decorative art and collectibles by nationally recognized auction companies.
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BUTTERFIELDS' PRINCIPAL STRENGTHS
We believe that our combination of principal strengths gives us a
significant competitive advantage and allows us to provide comprehensive
services to a broad base of sellers and buyers of fine and decorative art and
collectibles. These strengths include:
Established, Industry-Wide Reputation. In the more than 130 years since our
founding, we have established a reputation throughout the industry for
integrity, accuracy and excellent customer service. We believe that we are one
of the few mid-sized auction companies with worldwide name recognition. Our
established name and long-standing reputation provide a solid platform from
which to launch expansion initiatives focused on new geographic markets and new
auction mediums, such as the Internet, with an immediate market presence. In
addition, our reputation enhances our ability to attract fresh, high valued
auction properties as well as sophisticated buyers of fine and decorative art
and collectibles.
Broad Expertise and Comprehensive Auction Services. We are the third
largest fine and decorative art auction company in the United States, employing
more than 50 specialists who are able to appraise and market every major
category of art and collectibles, including, paintings, furniture, jewelry, arms
and armor, rare books, fine wine and entertainment memorabilia. We also have
conducted auctions with a wide variety of themes, including a natural history
auction in 1997 at which we auctioned fossils, prehistoric animal skeletons and
meteorites. Our broad expertise and experience in both specialty and general
estate sales enables us to process the contents of an entire estate, from high
end fine art and antiques to household goods and furnishings. Our willingness to
auction all of the contents of an estate distinguishes us from many other
auction companies, which typically auction only select items.
Extensive Geographic Reach. With galleries in San Francisco, Los Angeles
and the Chicago area, we are one of the few mid-sized auction companies to
operate galleries in multiple regions, giving us exposure to a broad base of
buyers and sellers. We have further extended our geographic reach by
periodically conducting simultaneous auctions via video conferencing, which
enables buyers to participate in selected auctions on a real-time basis from
multiple locations. In 1990, we co-founded the International Association of
Auctioneers (the "IAA"), an international consortium of auctioneers of fine and
decorative art that provides its members with access to an international
database of over 200,000 active bidders. We also are capitalizing on the
opportunities presented by the Internet. Customers can now view our fine sale
catalogues and leave absentee bids online. In January 1999, we began conducting
cyber auctions, which are conducted entirely online and are accessible through
www.butterfields.com. In March 1999, we entered into a non-binding letter of
intent with eBay to create a new co-branded category of premium items to be
offered on the eBay Web site. This arrangement is subject to the completion and
execution of a definitive agreement.
Access to Properties. Through our long-standing relationships with a wide
variety of fine art dealers, fiduciaries of estates, museums and private
collectors, we have established significant access to the primary sources of
auction properties. In addition, our specialists play a critical role in
attracting fresh, high valued properties through appraisal services and antique
clinics, and our network of sales representatives has enabled us to develop
relationships with key sources of property in many geographic regions.
Simultaneous Auctions. We were one of the first fine art auctioneers to
provide access to auctions through video conferencing, enabling geographically
dispersed buyers to participate in auctions simultaneously. Since 1988, we have
regularly linked auctions being conducted at one of our galleries with one or
more of our other galleries. In addition, we have periodically linked other
cities to our auctions, including Anchorage, Boston, Las Vegas, Napa and Santa
Fe. During the weeks prior to a simultaneous auction, we ship selected items for
exhibition to the cities to be linked. To enhance buyer interest, our
specialists are available at these exhibitions to answer questions. We believe
that our simultaneous auctions increase bidding activity, broaden our exposure
in new regions and provide increased convenience to customers in close proximity
to the linked locations. As we open new galleries, we believe that the value and
effectiveness of these simultaneous auctions will continue to increase.
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Tradition of Innovation. We have consistently conducted our business in an
innovative manner. We were one of the first to provide simultaneous auctions and
began using digital photography to produce our catalogues in 1994, reducing
costs and lead times and enabling us to take advantage of the emergence of the
Internet. We also recently began accepting absentee bids via e-mail and
conducting direct marketing through database mining. In January 1999, we began
conducting cyber auctions. In February 1999, we offered real-time access to one
of our live auctions over the Internet for the first time. Based on the results
of this auction, we intend to further develop this approach and we expect to
begin applying it to additional auctions by the end of 1999. We believe our
history of innovation and adoption of new technologies will allow us to more
easily identify and capitalize on future opportunities.
Full Service Capabilities. We provide our customers with a full range of
services, including:
- product evaluations and estimates of sales proceeds;
- flexible commission alternatives;
- financial services, such as advance payments and guarantees of minimum
gross sale proceeds;
- compilation of full color catalogues for specialty auctions;
- direct mail, print and electronic advertising;
- previews of selected auction properties in each of our three primary
galleries prior to sale; and
- ancillary services such as shipping and handling, insurance and expert
restoration. We believe that these services allow us to attract a wider
range of customers.
STRATEGY
Our objective is to leverage our reputation, broad geographic reach and
full service capabilities to become recognized as the leading auctioneer of
middle market properties. To achieve this objective, we have developed a
strategy with the following key elements:
Expand Geographically. Our industry is highly fragmented. We believe that
opportunities exist to expand geographically through new gallery openings,
acquisitions of regional auctioneers and by increasing our network of sales
representatives. In June 1998, we acquired Dunnings, a prominent regional
auction company founded in the Chicago area in 1896. Initially, we will focus on
further developing our network of sales representatives in the midwestern United
States to increase the volume of consigned properties available for auction at
the our Chicago area gallery.
Establish Online Auction Presence. We believe that the Internet represents
a significant new market for our services. Although the Internet provides access
to a potentially large market for fine and decorative art, the Internet format
presents limitations related to buyers' inability to adequately evaluate both
properties and a seller's identity and credibility. We believe that our
reputation and experience in the traditional auction industry will enable us to
overcome these limitations, as we can appraise, authenticate and warrant the
provenance of properties to be auctioned. We believe that our ability to provide
these services will become a critical factor for success when we auction higher
valued properties over the Internet. We began conducting cyber auctions, which
occur entirely on the Internet, at the end of January 1999 and provided
real-time access to one of our live auctions in February 1999. We estimate that
our first Internet-accessible live auction, at which we auctioned property of
O.J. Simpson's, attracted an online audience of over 40,000 viewers. In March
1999, we entered into a non-binding letter of intent with eBay to create a new
co-branded category of premium items to be offered on the eBay Web site.
Pursuant to the letter of intent, these premium properties would be sourced from
us and from other preeminent auction companies and dealers. This arrangement is
subject to the completion and execution of a definitive agreement. Both our
cyber auctions and our live auctions are accessible through
www.butterfields.com.
Further Integrate the Internet into Existing Operations. We intend to
increase our use of the Internet to gain greater access to buyers and sellers,
improve our services and increase operating efficiencies. Customers may now view
the entire contents of our fine sale catalogues online at www.butterfields.com
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and also leave absentee bids. We believe that the Internet provides an
opportunity to better serve the existing fine art community and to increase the
population of that community through the use of chat rooms, direct marketing
through e-mail and the creative use of other Web-based tools that allow the
targeted dissemination of information over the Internet. In addition, we
anticipate that the Internet will provide us with increased access to a more
focused group of customers at greatly reduced costs compared to direct mail
marketing. In addition to our internal Internet marketing activities, we have
agreements with eBay, Yahoo! and Zing, which we anticipate will generate more
traffic on our Internet site and provide exposure to a wider audience of
potential customers.
Increase Auction Property Categories. Our broad expertise enables us to
identify unserved and underserved property categories, while our flexibility and
full range of marketing capabilities and services gives us the ability to
capitalize on these categories. After we decide to pursue a new property
category, we are able to quickly produce high quality catalogues, launch
extensive marketing campaigns and conduct auctions that attract large numbers of
sellers and buyers. As an example, we developed the category of arms and armor
in the auction industry and we are now considered to be a leading authority on
these properties.
ACQUISITION AND SALE OF AUCTION PROPERTIES
Acquisition of Auction Properties
We believe that our ability to attract valuable and fresh properties
provides us with a significant competitive advantage. We source properties sold
in our auctions from domestic and international fine and decorative art and
antiques dealers, fiduciaries of estates, museums and private collectors. In
addition, our appraisal services and clinics further enhance our ability to
attract collections and individual items for sale.
We employ several strategies to solicit potential sellers of properties. In
addition to establishing relationships with individuals who attend bimonthly
clinics or individual appraisal appointments, we develop and maintain
relationships with bankers, trust officers and estate planning professionals,
all of whom provide valuable contacts to potential sellers of properties
typically sold at our auctions. We also solicit potential sellers of properties
through direct mail campaigns, advertisements that run in local newspapers and
magazines and database mining over the Internet.
Many factors influence a seller's or buyer's decision to work with a
particular auction company or dealer. These factors include the following:
- prior relationships;
- reputation and historic level of achievement in attaining high sale
prices in an item's specialized category;
- level of expertise with respect to a specialized product category;
- commission levels offered and buyers' premiums charged;
- ability to satisfy the expectations of the sellers;
- availability and breadth of related services offered, such as appraisal
services and short-term financing; and
- style and extent of pre-sale marketing.
We believe that our ability to meet the needs of sellers with respect to
these factors allows us to compete successfully with dealers and other auction
companies for the acquisition of available property.
Types of Auctions
We sell single properties and complete estates, conducting auctions for the
sale of items ranging from paintings by Renoir to the contents of Liberace's
estate. We auction a wide range of property, including paintings, furniture,
jewelry, arms and armor, rare books, fine wine and entertainment memorabilia. We
believe that we are the leading auctioneer of arms and armor in the world.
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<PAGE> 34
The table below sets forth an approximate breakdown by property category of
our total auction sales (hammer plus buyer's premium) in 1998:
<TABLE>
<CAPTION>
TOTAL % OF TOTAL
AUCTION SALES AUCTION SALES
---------------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Furniture and decorative art......................... $25,627 30.9%
Fine art............................................. 19,293 23.3
Collectibles......................................... 21,591 26.0
Estate and others.................................... 16,386 19.8
------- -----
$82,897 100.0%
======= =====
</TABLE>
Depending on the type of property to be auctioned and its source, we
currently use three auction formats: specialty auctions, monthly estate sales
and single-owner estate auctions. We believe that choosing the auction format
best suited to a particular property or collection of properties optimizes the
selling environment and maximizes the price for which properties sell. In
addition to our traditional types of auctions, in January 1999, we began
conducting cyber auctions, and in February 1999, we offered real-time access to
one of our live auctions over the Internet for the first time. Both cyber
auctions and online auctions are accessible through www.butterfields.com.
Specialty Auctions. Specialty auctions are held periodically and usually on
a recurring basis. These auctions include highly valued, distinctive lots
typically focused on a specific property category such as American and
California paintings and sculpture, fine photographs, Oriental rugs and carpets,
arts and crafts furniture and decorative art, arms and armor or carousel horses.
Many of our specialty auctions are broadcast simultaneously via a video
conferencing system to each of our primary galleries in San Francisco, Los
Angeles and the Chicago area. We conduct some specialty auctions simultaneously
in other selected cities throughout the United States. We conducted 79 specialty
auctions in 1998, representing approximately 80.2% of our total auction sales in
1998.
Monthly "Estate" Auctions. We conduct monthly estate auctions at each of
our regional locations. These auctions feature moderately valued fine and
decorative art, furnishings, books, jewelry and household goods, as well as
lower valued items. The range of properties and prices typically offered at
these auctions attracts a broad base of buyers and sellers. These auctions
historically have not been subject to the seasonality that typically affects
specialty auctions. We conducted 40 estate auctions in 1998, representing
approximately 19.8% of our total auction sales in 1998.
Single-Owner Estate Auctions. We periodically conduct auctions of all or a
portion of a single individual's estate. Individuals whose estates we have
auctioned include Liberace, Bing Crosby, Sammy Davis, Jr. and William Randolph
Hearst. Select single-owner estate auctions are conducted simultaneously via a
videoconferencing system. We generally conduct between one and four single-owner
estate auctions each year, although we did not conduct any in 1998.
Cyber Auctions. In January 1999, we began conducting auctions that occur
entirely online, with no actual auction room or floor bidding. In an effort to
ensure that properties offered at cyber auctions are available and authentic, we
will only accept properties for cyber auctions from sellers with whom we have an
established and successful history. We enter into contractual agreements with
sellers to consign properties for these auctions. As is our practice for live
auctions, we warrant title, provenance and authenticity of properties sold at
our cyber auctions. Toward this end, we do not pay sellers for properties sold
at cyber auctions until the buyer confirms receipt of property and that the
property fits the description that was provided at auction. To protect the
validity of the bidding process, all parties interested in submitting bids at
cyber auctions must pre-register with us. We check credit histories, and those
parties that meet minimum financial criteria receive identification numbers that
they must enter prior to submitting a bid at a cyber auction. Cyber auctions are
accessible through www.butterfields.com. Currently, we do not charge buyers any
fees for participation in cyber auctions but we do charge a seller's commission.
As of April 2, 1999, we had completed six cyber auctions.
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<PAGE> 35
The Auction Process
Prior to each auction, we hold a preview to provide customers an
opportunity to inspect each lot coming up for auction and to consult our
departmental specialists. We publish an illustrated color catalogue for each
specialty auction that describes each lot and provides a sale price estimate.
Following the appraisal and prior to each live auction, a seller may specify a
minimum bid price or reserve price, below which the property may not be sold.
Buyers who are present at live auctions submit bids using numbered cards
held up in view of the auctioneer. Buyers may participate in auctions from
remote locations on a real-time basis over the telephone or by simultaneous
video conferencing, depending on the auction. In February 1999, we allowed
buyers to participate in one of our live auctions on a real-time basis via the
Internet. Buyers also may participate in auctions by leaving absentee bids.
Bidding normally begins at approximately one-third to one-half of the estimated
sale price of an item. The final bid price may be more or less than the
estimated sale price. Bidding occurs in varying increments, depending upon the
value of the lot being sold. In the event the final bid is less than the reserve
price, lots will be withdrawn and either reoffered in a subsequent auction or
returned to the seller.
Our cyber auctions are currently ten days in length. Buyers view the
property with its descriptive information, estimated price range and bidding
information entirely online. Buyers then submit an electronic bid at any time
during the ten-day open bidding period. At the close of the cyber auction, the
winning bidders are notified, payment is made and the property is shipped to
them.
Buyer Services
We provide buyers with an array of services intended to make the bidding
process convenient and enjoyable. We offer absentee bidding services whereby our
personnel will seek to purchase lots at the lowest possible bid on behalf of a
customer. Buyers also may purchase lots through an agent or leave absentee bids
via telephone and on the Internet. We warrant the title, provenance and
authenticity of each property to buyers. In some instances, we also provide
credit terms to certain pre-approved bidders. Following the purchase of an item,
we will assist a buyer in arranging both international and domestic
transportation of properties, if necessary.
Seller Services
We sometimes provide other financial services to sellers. In special
circumstances, and after thorough evaluation of a property's auction potential,
we may guarantee a seller a minimum sale price for properties to be auctioned,
regardless of outcome. We also may advance funds to a seller. Advances are
secured by the property consigned and are subject to an interest charge. Total
advances at December 31, 1998 were $1.3 million.
Fees and Commissions
We receive payments from both sellers and buyers of items sold through our
live auctions. Sellers typically pay a commission fee ranging from 10% to 25% of
the gross sales price of each lot sold, depending on the auction value of the
property and the particular auction at which the property is sold. Sellers also
are required to purchase risk insurance on all property placed in auction and
may be required to pay additional fees such as packing, transportation and
handling fees, as well as photography fees if an item is included in an auction
preview catalogue. All buyers pay a fee, known as a buyer's premium, equal to
15% of the first $50,000 of hammer and 10% of amounts greater than $50,000.
Currently, we do not charge any buyer's premium for cyber auctions. Terms and
conditions related to cyber auctions may vary as we gain experience with this
new auction format. Revenues from sellers' commissions represented 36.7% and
revenues from buyers' premiums represented 55.9% of our total revenues in 1998.
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<PAGE> 36
SALES AND MARKETING
We provide a full range of marketing services to our customers. We tailor
individualized marketing strategies for each specialty department and conduct
customized marketing campaigns for each specialty auction and single-owner
estate auction. Marketing activities include direct mail, print and electronic
advertising, illustrated catalogues, public relations, special events and
personal attention to individual collectors. Our in-house art and advertising
department produces a full color catalogue for specialty and single-owner estate
auctions, with detailed descriptions, provenance, condition information and
estimated prices for each lot. Our catalogues may be viewed on the Internet at
www.butterfields.com or purchased by annual subscription or on an individual
basis.
We are a founding member of the International Association of Auctioneers,
or IAA, one of the auction industry's largest collective base of buyers and
sellers. IAA is comprised of six leading regional fine art auction companies in
Europe, Australia and the United States, including us, Etude Tajan in Paris,
Swann in New York City, Lawsons in Sydney, Kohler in Zurich and Dorotheum in
Vienna. IAA members have access to over 200,000 buyers worldwide and share the
benefits of certain collective marketing and auction activities with other IAA
members. IAA members participate in joint previews, reciprocal advertising in
catalogues and an internationally circulated newsletter, which provides
extensive exposure for our auctions. We believe that our membership in IAA has
extended the scope of our business and reputation and increased our
effectiveness in marketing and selling consigned properties.
We currently have 12 representatives located in the United States, Munich,
London and Brussels. Our business development professionals and representatives
play an important role in sourcing auction properties and in establishing
relationships with buyers and sellers, including local art dealers and private
collectors.
We are featured on "Appraise It!," a weekly program on HGTV, the Home and
Garden television station, on which invited individuals bring their property to
one of our galleries to have it appraised by one of our specialists. All
episodes of "Appraise It!" are filmed at our galleries and only Butterfields'
specialists perform the appraisals. HGTV reportedly is accessible to a
nationwide audience of over 50 million households and we are the only auction
company featured on HGTV. "Appraise It!" recently was extended for a second
season and, beginning April 1999, two of the three weekly episodes will be moved
from a mid-day time slot to a "prime time" evening time slot.
We have updated our Web site in anticipation of conducting more business
electronically. Customers can view the entire contents of our fine sale
catalogues online and can leave absentee bids online. Entertainment and
educational material related to our auctions also are available online. We
intend to significantly increase our marketing activities through our agreements
with online service and entertainment providers, such as eBay, Yahoo! and Zing.
We have begun the transfer of our customer contact activities to e-mail and
Web-based vehicles, from the direct mail vehicles that we have used
traditionally. Our Web site is located at www.butterfields.com.
APPRAISAL SERVICES
We provide both fair market value and insurance appraisal services. We
employ over 50 specialists with expertise in a wide range of fine art and
collectibles categories. These specialists' depth and breadth of knowledge
enable us to appraise and market property in every major category of art and
collectibles.
We periodically offer complimentary appraisals in our San Francisco, Los
Angeles and Chicago area galleries. Our specialists also appraise properties for
a fee based on photographs or during private appointments at our galleries. For
large collections, our specialists will travel to the seller's site to conduct
an appraisal. In addition to appraisal services, we conduct periodic clinics in
cities nationwide, where specialists assess properties free of charge for
individual collectors. After appraisal, a seller may include its property in the
next appropriate auction. Our staff assists sellers in each step of the auction
process, including arranging transportation of items, providing accurate and
detailed inventory of consigned
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<PAGE> 37
properties and reporting prices realized for each lot. We keep items in our
warehouses prior to sale and are fully insured throughout the auction process.
Our specialists also provide appraisal services for insurance purposes to
property owners for a wide range of properties. In addition to generating
additional revenues, we believe that providing insurance appraisals increases
our visibility to sellers of properties and strengthens our relationship with
insurers, both of which represent an important source of auction properties.
COMPETITION
Competition in the fine and decorative art market is intense. A fundamental
challenge facing all auction companies and dealers in this market is to obtain
high quality and valuable property for sale. We compete with a number of
domestic and international auction companies, several of which have greater
resources than we do, including Christie's and Sotheby's, the two largest
auction companies in the world. Christie's and Sotheby's each had total auction
sales of approximately $2 billion in 1998. Sotheby's also recently announced
that it will begin conducting auctions online for art, jewelry and collectibles.
GOVERNMENT REGULATION
Regulation of the auction business varies from jurisdiction to
jurisdiction. Numerous states, including the state of California (where our
headquarters are located), have regulations regarding the manner in which
auctions may be conducted and the liability of auctioneers in conducting
auctions. In addition, we are subject to licensure requirements in various
jurisdictions with respect to some of the properties we sell at auction. For
example, we must maintain a current license to deal in firearms in order to
auction arms and armor. These regulations and licensure requirements have not
imposed a material impediment to our business to date, but do affect the market
generally, and changes in these regulations could harm our business. In
addition, in the event that we begin to conduct auctions internationally, we
would be subject to laws and regulations that are not directed solely toward the
auction business, including, but not limited to, import and export regulations
and value added sales taxes. As we begin to conduct business over the Internet,
we will be subject to regulations relating to Internet or online services. The
failure to comply with any current or future laws and regulations could subject
us to civil or criminal penalties.
FACILITIES
Our corporate headquarters are located in San Francisco, California and we
have galleries and offices in Los Angeles, California and the Chicago area. We
lease our property in San Francisco and Los Angeles from two groups controlled
by our stockholders. Our leases expire beginning in June 1999 through 2005. We
have the right to extend the lease that is expiring in June 1999 for two
additional years on similar terms as the existing lease. We recently purchased a
gallery in Chicago, Illinois, which we plan to remodel prior to occupying. We
believe that our primary facilities are in good operating condition and
adequately serve our current business operations.
EMPLOYEES
At December 31, 1998, we had 245 full-time employees. We employed
approximately 100 additional persons on a temporary basis during 1998. We are
not subject to any collective bargaining agreements and we believe that we
maintain good relationships with our employees.
LEGAL PROCEEDINGS
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of business. Such claims,
even if lacking merit, could require the use of significant financial and
managerial resources. We are not aware of any legal proceedings or claims that
we believe will harm our business.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our directors
and executive officers as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bernard A. Osher(1).................... 71 Director and Chairman of the Board of
Directors
John D. Gallo.......................... 51 President, Chief Executive Officer and
Director
John C. Fallini........................ 50 Chief Operating Officer
Kenneth G. Stupi....................... 38 Chief Financial Officer
John R. DiMatteo(1)(2)................. 67 Director
Irving Rabin........................... 68 Director
Will K. Weinstein(1)(2)................ 58 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Bernard A. Osher has served as chairman of the board of directors since
July 1970 and served as Butterfields' president from the time we were purchased
from the Butterfield family in 1970 until 1990. Prior to 1970, Mr. Osher was a
co-founder of Golden West Financial Corporation, a publicly traded financial
services company headquartered in California, and he currently serves as a
director of Golden West. Mr. Osher serves as an Honorary Trustee of the Fine
Arts Museums of San Francisco and Vice Chairman of the Jewish Museum. Mr. Osher
attended Bowdoin College.
John D. Gallo has served as our president and chief executive officer since
May 1990 and has served as a director since December 1994. Mr. Gallo joined us
as a general appraiser in 1969 and has held various positions since then,
including general manager from 1974 to 1979 and executive vice president from
1979 to 1990. In addition to his responsibilities with us, Mr. Gallo has served
as chairman of the Oakland Museum, chairman of the board of the St. Francis
Hospital Foundation and vice chairman of the board of trustees of the St.
Francis Hospital. Mr. Gallo attended San Francisco State University. Mr. Gallo's
continuing education has included studies at the Asian Art Museum, the de Young
Museum and the University Art Museum of Berkeley, as well as involvement in an
M.B.A. degree program at the University of London. Mr. Gallo has taught courses
on fine and decorative art and has lectured extensively on various art topics,
including "Art as an Investment" and "The Economic Factors of Auctions."
John C. Fallini has served as our chief operating officer since September
1998. Prior to joining us, Mr. Fallini served as the vice president and chief
financial officer of Pacific Bell Network Integration, a data networking
services provider and a subsidiary of Pacific Bell, from May 1995 to September
1998. From August 1976 to May 1995, Mr. Fallini held various positions with
Pacific Bell, a regional telephone and telecommunications provider, including
executive director of financial management from August 1989 to May 1995. Mr.
Fallini is a certified management accountant and holds a B.S. degree in
engineering and applied sciences from the University of California, Los Angeles
and a M.B.A. degree from Oklahoma City University.
Kenneth G. Stupi has served as our chief financial officer since June 1994.
Prior to joining us, Mr. Stupi was corporate controller at Bay Alarm Company,
the nation's largest privately held security company, from October 1991 to June
1994. Prior to that, Mr. Stupi was a manager in the Audit and Business Advisory
Division of Arthur Andersen & Co. Mr. Stupi is a certified public accountant and
holds B.S. degrees in accounting and business information systems and an M.S.
degree in taxation from San Francisco State University.
John R. DiMatteo has served as a director of our company since January 1999
and as a management consultant to us since January 1992. Mr. DiMatteo served as
president of Gannett Publishing Company
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<PAGE> 39
from 1978 to 1991 and was an executive there from 1971 to 1978. Prior to 1971,
he was a partner of the accounting firm of Jordan & Jordan. Mr. DiMatteo
attended Babson College.
Irving Rabin has served as a director of our company since July 1970. Mr.
Rabin is the chairman of Rabin Brothers Worldwide, an international auction
firm, and has more than 40 years of experience in the commercial and industrial
auction industry. Mr. Rabin attended the University of California, Berkeley and
served in the U.S. Air Force during the Korean War. Mr. Rabin serves on the
boards of directors of numerous local and national philanthropic organizations.
Will K. Weinstein has served as a director of our company since January
1999. Mr. Weinstein has been an executive managing member of Jackson Square
Partners, L.P., a private investment partnership, since October 1998. Prior to
that, Mr. Weinstein served as the chairman and chief executive officer of
Genesis Merchant Group Securities, an investment banking firm, which he founded
in 1989 and of which he currently serves as a director. From 1982 to 1986, he
was the managing partner and chairman of the Investment Policy Committee of
Montgomery Securities, an investment banking firm. Prior to that, Mr. Weinstein
managed the trading department and was a member of the executive committee of
Oppenheimer & Company, an investment banking firm, which Mr. Weinstein joined in
1962. He is a former governor of the American Stock Exchange and the Midwest
Stock Exchange and has served on the board of directors of DHL Incorporated and
Beverly Enterprises. Mr. Weinstein received a B.A. degree in psychology from
Hobart College and an M.A. degree in psychology from Ohio State University.
Our board of directors currently consists of five directors. Directors are
elected by the stockholders at each annual meeting of stockholders to serve
until the next annual meeting of stockholders or until their successors are duly
elected and qualified. Our certificate of incorporation provides that, effective
upon the closing of this offering, the board will be divided into three classes:
Class I, Class II and Class III, with each class serving three-year terms. The
Class I directors, initially Messrs. Gallo and Weinstein, will stand for
reelection or election at the 2000 annual meeting of stockholders. The Class II
directors, initially Messrs. DiMatteo and Rabin, will stand for reelection or
election at the 2001 annual meeting of stockholders. The Class III director,
initially Mr. Osher, will stand for reelection or election at the 2002 annual
meeting of stockholders.
BOARD COMMITTEES
The board of directors has an audit committee and a compensation committee.
The audit committee, currently comprised of Messrs. DiMatteo and Weinstein,
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent auditors. The compensation committee,
currently comprised of Messrs. DiMatteo, Osher and Weinstein, determines the
compensation and benefits we offer. The compensation committee also administers
the issuance of stock options and other awards under our 1999 Equity Incentive
Plan.
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their services as
members of the board of directors, although they are reimbursed for certain
expenses incurred in connection with attendance at board and committee meetings.
From time to time, directors may receive grants of options to purchase shares of
our common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before February 1999, we did not have a compensation committee, and the
entire board participated in all compensation decisions. In February 1999, the
board formed the compensation committee to determine the compensation and
benefits for our executive officers and administer our stock incentive plans.
Our directors will hold an aggregate of 76.0% of our outstanding stock after
this offering. See "Principal Stockholders."
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<PAGE> 40
EXECUTIVE COMPENSATION
The table below sets forth the compensation paid to our president and our
two other most highly compensated officers whose annual salary and bonus
exceeded $100,000 in fiscal year ended December 31, 1998 (the "Named Executive
Officers"). The compensation described in this table does not include medical,
group life insurance or other benefits received by the Named Executive Officers,
which are available generally to all of our salaried employees or certain
perquisites and other personal benefits, which do not exceed the lesser of
$50,000 or 10% of any officer's salary and bonus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
--------------------------- --------- --------
<S> <C> <C>
Bernard Osher............................................... $240,242 --
Chairman
John Gallo.................................................. 150,242 $35,000
President and Chief Executive Officer
George Noceti............................................... 121,637 10,000
Senior Vice President
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to any Named Executive Officer in 1998.
AGGREGATE OPTION EXERCISES IN FISCAL 1998 AND DECEMBER 31, 1998 OPTION VALUES
There were no options exercised by any Named Executive Officer in 1998.
1999 EQUITY INCENTIVE PLAN
Our 1999 Equity Incentive Plan was approved by our board of directors in
February 1999 and our stockholders in March 1999. An aggregate of 914,841 shares
of common stock currently are reserved for issuance under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options, as
defined by Section 422 of the Internal Revenue Code of 1986 to employees
(including officers and employee directors) and for the grant of nonstatutory
stock options, restricted stock purchase awards and stock bonuses to our
employees (including officers and employee-directors), directors and consultants
and employees, directors and consultants of any of our affiliates. The Incentive
Plan will be administered by the board of directors or a committee of the board
of directors (the "Administrator"). The Administrator has the power to determine
the recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award, the exercisability of the award and the
form of consideration payable on exercise of the award. In addition, the
Administrator has the authority to amend, suspend or terminate the Incentive
Plan, provided that no such action may affect any share of common stock
previously issued and sold or any option or share of restricted stock or stock
bonus previously granted under the Incentive Plan.
The exercise price for an incentive stock option cannot be less than 100%
of the fair market value of the common stock on the date of the option grant.
While nonstatutory stock options are not subject to the same limitations as
incentive stock options, with respect to those nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Tax Code, the exercise price must be at least equal to the
fair market value of the common stock on the date of grant. No incentive stock
option (and prior to our stock being publicly traded, no nonstatutory stock
option or restricted stock award) may be granted to any person who, at the time
of the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of our company or any of our affiliates unless the
option exercise price is at least 110% of the fair market value of the stock
subject to
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<PAGE> 41
the option on the date of grant and the term of the option does not exceed five
years from the date of grant.
Options granted under the Incentive Plan vest at the rate specified in the
option agreement. Generally, the optionee may not transfer a stock option other
than by will or the laws of descent or distribution unless the optionee holds a
nonstatutory stock option that provides otherwise. However, an optionee may
designate a beneficiary who may exercise the option following the optionee's
death. An optionee whose service relationship with us or any of our affiliates
ceases for any reason may exercise vested options for the term provided in the
option agreement.
The terms of all other incentive stock options (and, prior to our stock
being publicly traded, the terms of nonstatutory stock options) granted under
the Incentive Plan may not exceed ten years from the date of grant.
The aggregate fair market value, determined at the time of grant, of the
shares of common stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year (under
the Incentive Plan and all of our other stock plans and plans of our affiliates)
may not exceed $100,000. In addition, when we become subject to Section 162(m)
of the Tax Code (which denies a deduction to publicly held corporations for
certain compensation paid to our chief executive officer and our four other most
highly-compensated executive officers in a taxable year to the extent that the
compensation exceeds $1,000,000), no person may be granted options under the
Incentive Plan covering more than 100,556 shares of common stock in any calendar
year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the Incentive Plan. Under its general authority to grant options,
the Administrator has the implicit authority to reprice outstanding options or
to offer optionees the opportunity to replace outstanding options with new
options for the same or a different number of shares. Both the original and new
options will count toward the Section 162(m) limitation set forth above.
Restricted stock purchase awards granted under the Incentive Plan may be
granted pursuant to a repurchase option in favor of us in accordance with a
vesting schedule and at a price determined by the Administrator. Stock bonuses
may be awarded in consideration of past services without a purchase payment.
Rights under a stock bonus or restricted stock bonus agreement generally may not
be transferred other than by will or the laws of descent and distribution,
during the period that the stock awarded pursuant to the agreement remains
subject to the agreement.
If there is any sale of substantially all of our assets, any merger or any
consolidation in which we are not the surviving corporation, all outstanding
options, awards and bonuses under the Incentive Plan either will be substituted
for or assumed by any surviving entity. If the surviving entity determines not
to substitute for or assume such awards, the time during which awards held by
persons still serving us or one of our affiliates may be exercised will be
accelerated and the awards terminated if not exercised prior to the sale of
assets, merger or consolidation.
In addition, after our stock is publicly traded, if there is an acquisition
by certain persons, entities or groups of fifty percent (50%) or more of our
stock, then the time during which awards held by persons still serving us or one
of our affiliates may be exercised will be accelerated.
No options, stock bonuses or restricted stock have been granted under the
Incentive Plan. The Incentive Plan will terminate in February 2009 unless sooner
terminated by the board.
401(K) PLAN
On December 20, 1990, we adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of our employees. Pursuant to
the 401(k) Plan, employees may elect to reduce their current compensation by up
to the lesser of 15% of eligible compensation or the statutorily prescribed
annual limit ($10,000 in 1999) and have the amount of reduction contributed to
the 401(k)
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<PAGE> 42
Plan. The trustee under the 401(k) Plan, at the direction of each participant,
invests the assets of the 401(k) Plan in any of ten investment options. The
401(k) Plan is intended to qualify under Section 401 of the Tax Code so that
contributions by employees to the 401(k) Plan, and income earned on plan
contributions, are not taxable to employees until withdrawn, and so that we can
deduct the contributions by employees when made. We may make matching or
additional contributions to the 401(k) Plan, in amounts to be determined
annually by the board of directors.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
As permitted by Section 145 of the Delaware General Corporation Law, our
bylaws provide the following:
- we are required to indemnify our directors and executive officers to the
fullest extent permitted by Delaware law;
- we may, in our discretion, indemnify other officers, employees and agents
as set forth in Delaware law;
- to the fullest extent permitted by the Delaware General Corporation Law,
we are required to advance all expenses incurred by our directors and
executive officers in connection with a legal proceeding (subject to
certain exceptions);
- the rights conferred in the bylaws are not exclusive; and
- we may not retroactively amend the bylaws provisions relating to
indemnity.
In February 1999, the board authorized us to enter into indemnity
agreements with each of our directors and executive officers. The form of
indemnity agreement provides that we will indemnify against any and all expenses
of the director or executive officer who incurred such expenses because of his
or her status as a director or executive officer, to the fullest extent
permitted by our bylaws and Delaware law. A copy of the form of indemnity
agreement has been filed as an exhibit to the registration statement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted for our directors, officers and controlling persons
pursuant to these provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
38
<PAGE> 43
CERTAIN TRANSACTIONS
A number of the transactions described in this section involve inherent
conflicts of interest because they were with an officer, director, significant
stockholder, promoter or other person with whom we have a material business or
professional relationship. All future transactions, including loans, between us
and our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested directors, and will be on terms no less favorable
to us than could be obtained from unaffiliated third parties.
We lease office and warehouse space from HBJ Partners, LLC. Pursuant to
these leases, we made aggregate rent payments in 1998 of $638,000 and $51,000
for our headquarters and headquarter's annex, respectively, both of which are
located in San Francisco. In January 1997, we sold real property to HBJ
Partners, LLC for $652,000 and we gave HBJ Partners a non-interest bearing note
not to exceed $279,000, for the total estimated cost to pay for toxic clean-up
work required to be done on the property. The amount due on this note was
reduced each time we paid for costs associated with toxic clean-up work and the
note matured in 1998 when Los Angeles County declared that the property was no
longer contaminated. Messrs. Osher and Rabin are members of HBJ Partners, LLC.
Mr. Osher is our chairman of the board and Mr. Rabin is one of our directors. In
addition, Mr. Osher and Mr. Rabin and his wife, Varda Rabin, as co-trustees of
the Rabin Trusts each beneficially holds more than 5% of our outstanding equity.
We lease office and warehouse space from 111 Potrero Partners, LLC. In 1996
we financed the expansion of this space by loaning 111 Portrero $1.4 million
plus interest at 8.25%, the floating prime rate as reported by Wells Fargo, N.A.
during the term that the loan was outstanding. The loan balance was absorbed by
offsetting our periodic rental payments due to 111 Potrero Partners.
Accordingly, we reduced the outstanding balance on the loan by $542,000 in 1996
and $1.0 million in 1997. The total amount paid under the leases in 1998 was
$335,000 for the West Gallery in San Francisco and $863,000 for our offices and
showrooms in Los Angeles. Bernard Osher and several trusts, of which Irving
Rabin serves as trustee, are members of 111 Potrero Partners, LLC.
In January 1999, we purchased a building in Chicago from HBJ Partners, LLC,
of which Messrs. Osher and Rabin are members. The total purchase price for the
building was approximately $3.0 million.
In 1997, we paid S corporation distributions of $2.1 million to Mr. Osher,
$1.5 million to Mr. Rabin and $91,000 to Mr. Gallo. In 1998, we paid S
corporation distributions of $805,000 to Mr. Osher, $560,000 to Mr. Rabin and
$35,000 to Mr. Gallo. In January 1999, we paid S corporation distributions of
$575,000 to Mr. Osher, $400,000 to Mr. Rabin and $25,000 to Mr. Gallo. Mr. Gallo
is the president and chief executive officer as well as a director of our
company.
We intend to enter into indemnity agreements with our directors and
executive officers for the indemnification of and advancement of expenses to
such persons to the full extent permitted by law. We also intend to execute
indemnity agreements with our future directors and executive officers. See
"Management--Limitation on Directors' and Officers' Liability."
39
<PAGE> 44
PRINCIPAL STOCKHOLDERS
The table below sets forth the beneficial ownership of our common stock as
of March 31, 1999, including actual percentage of ownership and percentage of
ownership as adjusted to reflect the sale of the common stock being offered
hereby (assuming no exercise of the underwriters' over-allotment option).
The number and percentage of shares beneficially owned are based on
4,752,364 shares of common stock outstanding on March 31, 1999. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes shares over which the holder has
voting or investment power, subject to community property laws.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED
SHARES --------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNED OFFERING OFFERING
------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Bernard A. Osher(1)......................................... 2,732,500 57.5% 43.7%
220 San Bruno Avenue
San Francisco, CA 94103
Irving and Varda Rabin(2)................................... 1,900,727 40.0 30.4
3825 Paradise Drive
Tiburon, CA 94920
John Gallo.................................................. 119,137 2.5 1.9
George Noceti............................................... -- -- --
John R. DiMatteo............................................ -- -- --
Will K. Weinstein........................................... -- -- --
All directors and executive officers as a group (7 4,752,364 100.0% 76.0%
persons)..................................................
</TABLE>
- ------------------------------
* Less than one percent.
(1) All of these shares are held by the Bernard A. Osher Revocable Trust Dated
March 8, 1988. As trustee of the Osher Trust, Mr. Osher has sole voting and
investment power with respect to these shares.
(2) All of these shares are held by: (a) the Irving and Varda Rabin, Trustees
U/T/A dated 2/26/99, fbo Irving Rabin Trust; and (b) the Varda and Irving
Rabin, Trustees U/T/A dated 2/26/99 fbo Varda Rabin Trust. As co-trustee of
the Rabin Trusts, Mr. Rabin shares voting and investment power with his
wife, Varda Rabin.
40
<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 15,000,000 shares of common stock,
$.001 par value, and 5,000,000 shares of preferred stock, $.001 par value.
COMMON STOCK
As of March 31, 1999, there were 4,752,364 shares of common stock
outstanding held by three holders of record. The holders of common stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders. Unless there are fewer than 800 stockholders, the
holders of common stock will not be entitled to cumulative voting rights with
respect to the election of directors, and as a consequence, minority
stockholders may not be able to elect directors on the basis of their votes
alone. Subject to preferences that may be applicable to any shares of preferred
stock issued in the future, holders of common stock are entitled to receive
ratably such dividends as may be declared by the board of directors out of funds
legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of our company, holders of the common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of common stock have no preemptive rights and no right to convert
their common stock into any other securities. There are no redemption or sinking
fund provisions applicable to the common stock. All outstanding shares of common
stock are, and all shares of common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of preferred stock could adversely
affect the voting power of holders of common stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of our
company. We have no present plans to issue any shares of preferred stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute 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
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
Our certificate of incorporation and our bylaws include a number of
provisions that may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of our company when we have more
than 800 stockholders and are exempt from California foreign corporation laws.
First, the certificate provides that all stockholder action must be effected at
a duly called meeting of holders and not by a consent in writing. Second, our
bylaws provide that unless there are fewer than 800 stockholders, special
meetings of the holders may be called only by the following:
- the chairman of the board of directors;
- the chief executive officer; or
- the board of directors pursuant to a resolution adopted by the board of
directors.
41
<PAGE> 46
Third, our certificate and bylaws provide for a classified board of directors.
Finally, our bylaws establish procedures, including advance notice procedures
with regard to the nomination of candidates for election as directors and
stockholder proposals. These provisions of our certificate and bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in the management our company. However, these protective provisions may only be
effective if we are exempt from the California foreign corporation laws as
described above. See "Risk Factors--Some anti-takeover provisions of our charter
documents and Delaware law may delay or prevent a takeover of our company."
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A. has been appointed as the transfer agent and
registrar for our common stock.
42
<PAGE> 47
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. An active public market for our common stock may not develop or continue
after this offering and the market price of our common stock may decline below
the initial public offering price. Future sales of substantial amounts of common
stock in the public market could decrease market prices prevailing from time to
time. As described below, no shares currently outstanding will be available for
sale immediately after this offering because of certain contractual restrictions
on resale. Sales of substantial amounts of our common stock in the public market
after the restrictions lapse could decrease the prevailing market price and our
ability to raise equity capital in the future.
Upon the completion of this offering, we will have outstanding 6,252,364
shares of common stock, assuming no exercise of the underwriters' over-allotment
option. Of these shares, all the shares sold in this offering will be freely
tradable without restrictions or further registration under the Securities Act
(except for any shares purchased by an "affiliate" as such term is defined under
Rule 144 of the Securities Act). The remaining 4,752,364 shares of common stock
held by existing stockholders are "restricted shares" as that term is defined in
Rule 144. Restricted shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rule 144. All of the
holders of the restricted shares have entered into lock-up agreements with the
representatives of the underwriters pursuant to which they have agreed not to
sell or otherwise dispose of any of their shares, with certain limited
exceptions, for a period of 180 days after the date of this prospectus without
the prior written consent of First Security Van Kasper. See "Underwriting."
First Security Van Kasper may in its sole discretion, and at any time without
notice, release all or any portion of the securities subject to these lock-up
agreements. All of the restricted shares will become available for sale in the
public market immediately following the expiration of the 180-day lock-up
period, subject to the volume and other resale limitations of Rule 144.
In general, under Rule 144 as currently in effect, any holder of restricted
shares as to which at least one year has elapsed since the later of the date of
the holder's acquisition of such shares from us or from an affiliate, would be
entitled within any three-month period to sell a number of shares that does not
exceed the greater of (1) 1% of the then-outstanding shares of our common stock
(approximately 62,524 shares immediately after the closing of this offering,
assuming no exercise of the underwriters' over-allotment option), or (2) the
average weekly trading volume of the common stock on the Nasdaq National Market
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about our company. However, a person (or persons whose shares
are aggregated) who is not deemed to have been an affiliate at any time during
the 90 days immediately preceding the sale and who beneficially owns restricted
shares is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above, provided that at least two years have elapsed since
the later of the date the shares were acquired. The foregoing is a summary of
Rule 144 and is not intended to be a complete description of that rule.
We intend to file a registration statement on Form S-8 under the Securities
Act covering shares of common stock reserved for issuance under our 1999 Equity
Incentive Plan. That registration statement is expected to be filed and become
effective as soon as practicable after the closing of this offering.
Accordingly, shares registered under that registration statement will, subject
to Rule 144 volume limitations applicable to our affiliates, be available for
sale in the open market, unless those shares are subject to vesting restrictions
or the lock-up agreements described above. See "Management--1999 Equity
Incentive Plan."
43
<PAGE> 48
UNDERWRITING
The underwriters named below, represented by First Security Van Kasper,
have severally agreed, subject to the terms and conditions in the underwriting
agreement, by and between us and the underwriters, to purchase from us the
number of shares of common stock indicated below opposite its name, at the
public offering price less the underwriting discount set forth on the cover page
of this prospectus. The underwriting agreement provides that the obligations of
the underwriters are subject to certain conditions precedent, including the
following:
- effectiveness of the registration statement;
- absence of material changes to our business and finances;
- receipt of opinions from our counsel and counsel for the underwriters;
- receipt of a letter or letters from our auditors, confirming the validity
of certain facts and assumptions about us and this offering;
- receipt of certification from one of our officers regarding the accuracy
of the information, representations and warranties given to the
underwriters; and
- receipt of promises from our existing stockholders not to sell their
stock for 180 days following the date of this offering.
The underwriters are also committed to purchase all of the shares of common
stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
First Security Van Kasper
---------
Total............................................. 1,500,000
=========
</TABLE>
First Security Van Kasper has advised us that the underwriters propose
initially to offer the shares of common stock to the public on the terms set
forth on the cover page of this prospectus. The underwriters may allow selected
dealers a concession of not more than $ per share; and the underwriters may
allow, and such dealers may reallow, a concession of not more than $ per
share to certain other dealers. After the initial public offering, this offering
price and other selling terms may be changed by First Security Van Kasper, but
these terms will not be changed prior to completion of the initial public
offering. The common stock is offered subject to receipt and acceptance by the
underwriters and to certain other conditions, including the right to reject
orders in whole or in part.
We have granted the underwriters an over-allotment option, exercisable 45
days from the date of this prospectus, to purchase up to a maximum of 225,000
additional shares of common stock to cover over-allotments, if any, at the same
price per share as the initial shares to be purchased by the underwriters. To
the extent the underwriters exercise this over-allotment option, each of the
underwriters will be committed, subject to conditions similar to those described
above, to purchase additional shares in approximately the same proportion as set
forth in the above table. The underwriters may exercise this over-allotment
option only to cover over-allotments made in connection with this offering.
The following table summarizes the compensation to be paid by us to the
underwriters.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions............ $ $ $
</TABLE>
44
<PAGE> 49
The underwriting agreement provides that we will indemnify the underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the underwriters may be required to make in
respect thereof.
Our officers and directors and all of our stockholders prior to this
offering have agreed that for a period of 180 days after the date of this
prospectus they will not, subject to certain exceptions described below, offer,
sell, contract to sell, solicit an offer to buy, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or pledge, assign, create a security interest in or lien
upon, encumber or otherwise transfer or dispose of, directly or indirectly, any
common stock or securities exchangeable or exercisable for or convertible into
shares of common stock, without the prior written consent of First Security Van
Kasper. Our stockholders need not obtain consent from the underwriters if they
are making a bona fide gift or are transferring shares of common stock to an
immediate family member or to a trust for the benefit of the stockholder, an
immediate family member or both. We have also agreed not to issue, offer, sell,
grant options to purchase or otherwise dispose of any of our equity securities
for a period of 180 days after the effective date of this offering without the
prior written consent of First Security Van Kasper except for securities that we
issue in connection with acquisitions and for grants and exercises of stock
options, subject in each case to any remaining portion of the 180-day period
applying to shares issued or transferred. In evaluating any request for a waiver
of the 180-day lock-up period, First Security Van Kasper will consider, in
accordance with its customary practice, all relevant facts and circumstances at
the time of the request, including, without limitation, the recent trading
market for our common stock, the size of the request and, with respect to any
request that we may make to issue additional equity securities, the purpose of
an issuance.
In connection with this offering, certain underwriters and selling group
members and their respective affiliates engage in transactions that stabilize,
maintain or otherwise affect the market price of our common stock. These
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M under the Securities and Exchange Act of 1934, pursuant
to which these persons may bid for or purchase our common stock for the purpose
of stabilizing its market price. The underwriters also may create a short
position for the account of the underwriters by selling more common stock in
connection with this offering than they are committed to purchase from us and,
in such case, may purchase common stock in the open market following completion
of this offering to cover all or a portion of a short position. The underwriters
also may cover all or a portion of a short position by exercising the
underwriters' over-allotment option referred to above. In addition, First
Security Van Kasper on behalf of the underwriters may impose "penalty bids"
under contractual arrangements with the underwriters, whereby it may reclaim
from an underwriter (or dealer participating in this offering) for the account
of the other underwriters, the selling concession with respect to common stock
that is distributed in this offering but subsequently purchased for the account
of the underwriters in the open market. Any of the transactions described in
this paragraph may result in the maintenance of the price of our common stock at
a level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
First Security Van Kasper has informed us that the underwriters do not
intend to confirm sales of common stock offered by this prospectus to accounts
over which they exercise discretionary authority in excess of 5% of the number
of shares of common stock offered hereby.
Prior to this offering, there has been no public trading market for our
common stock. The initial public offering price will be determined by
negotiations between us and First Security Van Kasper. The following factors are
among those to be considered in these negotiations:
- our history and prospects and the auction industry;
- an assessment of our management;
- past and present earnings and the trend of our earnings;
- our prospects for future earnings;
45
<PAGE> 50
- the present state of our development;
- the general condition of securities markets at the time of this offering;
and
- the market price of publicly traded stock of comparable companies in
recent periods.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $650,000.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Cooley Godward LLP, San Francisco, California. Certain legal
matters will be passed upon for the underwriters by Perkins Coie LLP, Seattle,
Washington.
EXPERTS
Our consolidated financial statements at December 31, 1996, 1997 and 1998
and for each of the three years in the period ended December 31, 1998 contained
in this prospectus and registration statement have been audited by BDO Seidman,
LLP, independent certified public accountants, as set forth in their report,
which is included in this prospectus and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2, including amendments
thereto, relating to the common stock offered hereby with the Securities and
Exchange Commission, Washington, D.C. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedules thereto. Statements contained in this prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference. For further information with
respect to our company and our common stock offered hereby, reference is made to
the registration statement, exhibits and schedules. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from the Commission upon the payment of certain fees
prescribed by the Commission. Additional information may also be obtained by
calling the Commission at 1-800-SEC-0330 and online at the Commission's Web site
at www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
46
<PAGE> 51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants........ F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Income......................... F-4
Consolidated Statements of Stockholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Summary of Accounting Policies............................ F-7
Notes to Consolidated Financial Statements................ F-10
</TABLE>
F-1
<PAGE> 52
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Butterfield & Butterfield Auctioneers Corporation
San Francisco, California
We have audited the accompanying consolidated balance sheets of Butterfield
& Butterfield Auctioneers Corporation and subsidiary as of December 31, 1997 and
1998, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. 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 presentation of the financial
statements. 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 Butterfield & Butterfield
Auctioneers Corporation and subsidiary at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
San Francisco, California
February 18, 1999, except for the
reorganization and recapitalization
described in Note 1, as to which its
date is March 31, 1999
F-2
<PAGE> 53
BUTTERFIELD & BUTTERFIELD
AUCTIONEERS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
DECEMBER 31, (NOTE 1)
1997 ACTUAL PRO FORMA
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current
Cash and cash equivalents................................. $ 7,232,763 $ 4,243,856 $ 4,243,856
Receivables, less allowances for doubtful accounts of
$456,012 and $509,447 (Note 2).......................... 6,530,927 6,395,479 6,395,479
Receivable from related parties (Note 8).................. 622,790 -- --
Inventories (Note 5)...................................... 1,851,467 1,139,077 1,139,077
Prepaid expenses and other assets......................... 427,302 446,861 446,861
Deferred income tax assets -- current portion (Notes 1 and
6)...................................................... 21,750 26,000 517,000
----------- ----------- -----------
Total Current Assets........................................ 16,686,999 12,251,273 12,742,273
----------- ----------- -----------
Property and Equipment (Notes 5 and 8)
Furniture, fixtures, equipment and vehicles............... 2,041,889 2,739,645 2,739,645
Leasehold improvements.................................... 2,153,941 2,153,941 2,153,941
Construction in progress.................................. 244,598 189,193 189,193
----------- ----------- -----------
4,440,428 5,082,779 5,082,779
Less accumulated depreciation............................... 2,157,382 2,695,184 2,695,184
----------- ----------- -----------
Net Property and Equipment.................................. 2,283,046 2,387,595 2,387,595
----------- ----------- -----------
Other Assets
Asset held for sale (Note 5).............................. 1,359,736 1,159,736 1,159,736
Deferred income tax assets, less current portion (Notes 1
and 6).................................................. 7,250 - 287,000
Deposits.................................................. 15,700 24,000 24,000
Goodwill and covenant not-to-compete, net of accumulated
amortization of $0 and $28,751 (Note 9)................. -- 661,258 661,258
----------- ----------- -----------
1,382,686 1,844,994 2,131,994
----------- ----------- -----------
$20,352,731 $16,483,862 $17,261,862
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable.......................................... $ 484,689 $ 590,230 $ 590,230
Notes payable (Note 4).................................... 100,000 -- --
Payable to consignors..................................... 11,570,850 6,390,449 6,390,449
Accrued expenses (Note 8)................................. 1,329,524 956,184 956,184
Payroll, employee benefits and payroll taxes payable...... 1,294,218 1,067,867 1,067,867
Current maturities of long-term debt (Note 5)............. 48,496 319,756 319,756
Distribution payable (Note 1)............................. -- -- 4,971,000
----------- ----------- -----------
Total Current Liabilities................................... 14,827,777 9,324,486 14,295,486
Long-Term Debt, less current portion (Note 5)............... 614,098 819,072 819,072
----------- ----------- -----------
Total Liabilities........................................... 15,441,875 10,143,558 15,114,558
----------- ----------- -----------
Commitments and Contingency (Notes 3, 7 and 8)
Stockholders' Equity (Note 1)
Common stock -- par value $.01, authorized 15,000,000
shares, issued and outstanding 4,752,364 shares......... 47,523 47,523 47,523
Additional paid-in capital................................ 1,020,957 1,320,957 2,099,781
Retained earnings......................................... 3,842,376 4,971,824 --
----------- ----------- -----------
Total Stockholders' Equity.................................. 4,910,856 6,340,304 2,147,304
----------- ----------- -----------
$20,352,731 $16,483,862 $17,261,862
=========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE> 54
BUTTERFIELD & BUTTERFIELD
AUCTIONEERS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Net auction commissions, inventory sales and
fees........................................... $16,670,374 $19,981,751 $20,540,117
Financial services revenues....................... 398,122 289,277 161,591
----------- ----------- -----------
17,068,496 20,271,028 20,701,708
----------- ----------- -----------
Expenses:
Salaries and related costs (Note 7)............... 8,388,620 9,589,560 10,571,925
General and administrative costs (Note 8)......... 4,160,969 4,391,437 4,750,992
Auction and sale operating expenses............... 1,541,344 1,905,989 2,209,579
Loss on impairment of assets (Note 5)............. -- -- 200,000
Depreciation and amortization..................... 535,658 490,624 619,494
----------- ----------- -----------
14,626,591 16,377,610 18,351,990
----------- ----------- -----------
Income from Operations.............................. 2,441,905 3,893,418 2,349,718
----------- ----------- -----------
Other Income (Expense)
Interest income (Note 8).......................... 161,854 164,094 173,917
Interest expense (Notes 3, 4 and 5)............... (348,054) (57,542) (100,417)
Other, net (Note 8)............................... 377,554 221,682 153,127
----------- ----------- -----------
191,354 328,234 226,627
----------- ----------- -----------
Income before Income Taxes.......................... 2,633,259 4,221,652 2,576,345
Income Tax Expense (Notes 1 and 6).................. 42,644 39,881 46,897
----------- ----------- -----------
Net Income (Note 10)................................ $ 2,590,615 $ 4,181,771 $ 2,529,448
=========== =========== ===========
Pro Forma Information (Unaudited) (Notes 1, 6 and
10)
Historical income before income taxes............. $ 2,633,259 $ 4,221,652 $ 2,576,875
Pro forma income tax expense...................... 1,053,000 1,689,000 1,030,750
----------- ----------- -----------
Pro forma net income (Unaudited).................. $ 1,580,259 $ 2,532,652 $ 1,546,125
=========== =========== ===========
Pro forma basic earnings per share................ $ 0.29
-----------
Weighted average shares outstanding............... 5,264,310
===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE> 55
BUTTERFIELD & BUTTERFIELD
AUCTIONEERS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(SEE NOTE 1)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996.............. 4,752,364 $47,523 $ 870,957 $ 719,990 $ 1,638,470
Net income............................ -- -- -- 2,590,615 2,590,615
--------- ------- ---------- ----------- -----------
Balance, December 31, 1996............ 4,752,364 47,523 870,957 3,310,605 4,229,085
Capital contributions................. -- -- 150,000 -- 150,000
Distributions to stockholders......... -- -- -- (3,650,000) (3,650,000)
Net income............................ -- -- -- 4,181,771 4,181,771
--------- ------- ---------- ----------- -----------
Balance, December 31, 1997............ 4,752,364 47,523 1,020,957 3,842,376 4,910,856
Capital contributions................. -- -- 300,000 -- 300,000
Distributions to stockholders......... -- -- -- (1,400,000) (1,400,000)
Net income............................ -- -- -- 2,529,448 2,529,448
--------- ------- ---------- ----------- -----------
Balance, December 31, 1998............ 4,752,364 $47,523 $1,320,957 $ 4,971,824 $ 6,340,304
========= ======= ========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE> 56
BUTTERFIELD & BUTTERFIELD
AUCTIONEERS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 2,590,615 $ 4,181,771 $ 2,529,448
------------ ------------ -----------
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization........................... 535,658 490,624 619,494
Allowance for doubtful accounts......................... -- 29,872 53,435
Gain on sale of property and equipment.................. (142,781) (25,728) --
Deferred income taxes................................... 3,000 (8,000) 3,000
Interest income added to related party receivable....... (62,781) (30,597) --
Loss on impairment of assets............................ -- -- 200,000
Rent & interest expense paid by reduction of
receivables........................................... 542,196 1,018,536 --
Changes in assets and liabilities:
Receivables........................................... 3,743,041 975,974 574,803
Inventories........................................... 45,575 (1,265,117) 712,390
Prepaid expenses and other assets..................... 107,691 (212,455) (27,859)
Accounts payable...................................... (352,909) 127,811 105,541
Payable to consignors................................. 1,038,325 2,555,258 (5,180,401)
Accrued expenses...................................... (81,358) 221,082 (373,340)
Payroll, employee benefits and payroll taxes
payable............................................ 112,625 615,962 (226,351)
------------ ------------ -----------
Total adjustments........................................... 5,488,282 4,493,222 (3,539,288)
------------ ------------ -----------
Net Cash Provided (Used) by Operating Activities............ 8,078,897 8,674,993 (1,009,840)
------------ ------------ -----------
Cash Flows from Investing Activities:
Purchase of property and equipment........................ (520,335) (478,326) (635,301)
Acquisition of business assets (Note 9)................... -- -- (250,000)
Proceeds from sale of property and equipment.............. 809,427 655,751 --
Advances to or on behalf of related parties............... (1,369,215) (88,139) --
Payments from related parties............................. -- 48,061 130,000
------------ ------------ -----------
Net Cash Provided (Used) by Investing Activities............ (1,080,123) 137,347 (755,301)
------------ ------------ -----------
Cash Flows from Financing Activities
Proceeds from line of credit.............................. 35,564,687 12,766,472 1,412,514
Payments on line of credit................................ (37,939,687) (12,766,472) (1,412,514)
Proceeds from notes payable............................... 800,000 -- --
Payments on notes payable................................. (4,250,000) (405,158) (123,766)
Contributions from stockholders........................... -- 150,000 300,000
Distributions to stockholders............................. -- (3,650,000) (1,400,000)
------------ ------------ -----------
Net Cash Used in Financing Activities....................... (5,825,000) (3,905,158) (1,223,766)
------------ ------------ -----------
Net Increase (Decrease) in Cash and Cash Equivalents........ 1,173,774 4,907,182 (2,988,907)
Cash and Cash Equivalents, beginning of period.............. 1,151,807 2,325,581 7,232,763
------------ ------------ -----------
Cash and Cash Equivalents, end of period.................... $ 2,325,581 $ 7,232,763 $ 4,243,856
============ ============ ===========
Supplemental Disclosures
Cash paid:
Interest paid............................................. $ 338,781 $ 98,226 $ 79,715
Income taxes paid......................................... $ 2,000 $ 70,100 $ 45,545
Non-cash transactions:
Receivable from related party obtained in connection with
sale of building........................................ $ -- $ 178,062 $ --
Unamortized lease commissions written off in connection
with sale of building................................... $ -- $ 34,345 $ --
Building and inventory obtained in connection with
foreclosure............................................. $ -- $ 1,509,737 $ --
Notes and accounts payable assumed in connection with
foreclosure............................................. $ -- $ 694,939 $ --
Receivables canceled in connection with foreclosure....... $ -- $ 814,798 $ --
Acquisition of business assets financed through note
payable................................................. $ -- $ -- $ 500,000
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE> 57
BUTTERFIELD & BUTTERFIELD
AUCTIONEERS CORPORATION AND SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Butterfield & Butterfield Auctioneers Corporation ("B&B"), formerly known
as Butterfield & Butterfield, Auctioneers Corp., and subsidiary (see Note 1)
(collectively, the "Company") conduct auctions and perform appraisal services of
fine art, jewelry, antiques and wine. Auction activities occur primarily in San
Francisco, Los Angeles and the Chicago area. B&B's wholly-owned subsidiary,
Butterfield's Credit Corporation, Inc. ("BCCI"), operates as a financing company
for the Company's clients.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of B&B and BCCI
for the years ended December 31, 1997 and 1998 (previously presented as combined
financial statements, as discussed in Note 1). All material intercompany
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION
Auction commission income, inventory sales, and auction-related fees are
generally recognized at the date of the related sale. Income from financial,
appraisal and other services is recognized as services are rendered.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed by the
straight-line and accelerated methods over the estimated useful lives of the
related assets, ranging from three years for computer equipment to 31.5 years
for buildings. Leasehold improvements are amortized over the shorter of
estimated useful life or term of the related lease, generally nine years or
less.
GOODWILL
Goodwill, resulting from purchase acquisitions, is amortized over its
estimated useful life, generally five to fifteen years.
INVENTORY
Inventory generally consists of objects obtained as a result of the auction
process (returned or unsold items, etc.) or of goods purchased specifically for
resale. Inventory is valued at the lower of cost (specific identification) or
estimated net realizable value.
TAXES ON INCOME
Taxes on income are calculated using the liability method specified by
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes.
ADVERTISING COSTS
The Company incurs advertising expense primarily relating to the
distribution of catalogues and the broadcasting of radio and television
commercials. Advertising costs are expensed as incurred. Advertising expense was
$925,687 in 1996, $867,563 in 1997 and $1,337,454 in 1998.
F-7
<PAGE> 58
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable or whenever management has committed to a plan to dispose of the
assets. Such assets are carried at the lower of book value or fair value as
estimated by management based on appraisals, current market value, and
comparable sales value, as appropriate. Assets to be held and used affected by
such impairment loss are depreciated or amortized at their new carrying amount
over the remaining estimated life; assets to be sold or otherwise disposed of
are not subject to further depreciation or amortization. In determining whether
impairment exists, the Company compares estimated undiscounted future cash flows
to the carrying value of the asset.
EARNINGS PER SHARE
Basic earnings per share includes no dilution and is calculated by dividing
income available to common stockholders by the average number of shares actually
outstanding during the period (see Note 1). Diluted earnings per share reflect
the potential dilution of securities (such as stock options, warrants and
securities convertible into common stock) that could share in the earnings of an
entity. No dilutive securities were issued prior to 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. The
Company believes that it operates in only one reportable business segment,
dealing and auctioning fine arts and other collectible items, and thus is
subject only to the disclosure requirements applicable to all companies.
SFAS No. 131 does not address issues of recognition or measurement of
segment revenues and expenses and, accordingly, had no impact on the financial
condition or results of operations of the Company upon adoption.
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in an entity's
financial statements. The objective of SFAS No. 130 is to report a measure of
all changes in the equity of an enterprise that result from transactions and
other economic events of the period. Comprehensive income is the total of net
income and all other non-owner changes in equity. SFAS No. 130 does not address
issues of recognition or measurement for comprehensive income and its
components, and therefore, it had no an impact on the financial condition or
results of operation of the Company upon adoption. Currently, there are no
transactions that would give rise to reporting or disclosure differences between
reported income and comprehensive income.
Effective January 1, 1998, the Company also adopted the provision of SFAS
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits. SFAS No. 132 standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures
which are no longer as useful as they were when previous related accounting
standards were issued.
SFAS No. 132 does not address issues of measurement or recognition for
previous and other postretirement benefits and, currently, the Company has no
defined benefit pension plans or other retirement
F-8
<PAGE> 59
benefits. Accordingly, the new standard had no impact on the financial condition
or results of operations of the Company upon adoption.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize
all derivative contracts as wither assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Historically, the Company has not entered into
derivative contracts either to hedge existing risks or for speculative purposes.
OPERATING LEASES
Total contractual rental payments are recognized ratably over the life of
the leases. Any related deferred rent is included in accrued expenses in the
accompanying balance sheets.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable
and debt. The carrying value of cash and accounts receivable approximate fair
value based upon the liquidity and short-term nature of the assets. Based on the
Company's currently available borrowing rates, the fair value of the note
payable on assets held for sale approximated $749,900 at December 31, 1997 and
$689,700 at December 31, 1998, compared to carrying value of $662,594 at
December 31, 1997 and $618,126 at December 31, 1998. Based on the Company's
currently available borrowing rates, the fair value of the note payable to the
former owners of Dunnings (see Note 9) at December 31, 1998 approximated
$544,600, compared to carrying value of $520,702.
Cash and cash equivalents are held principally at three high quality
financial institutions. At times, such balances may be in excess of the FDIC
insurance limit.
F-9
<PAGE> 60
BUTTERFIELD & BUTTERFIELD
AUCTIONEERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, REORGANIZATION AND UNAUDITED PRO FORMA INFORMATION
The Company filed a registration statement for an initial public offering
(IPO) on Form SB-2 with the Securities & Exchange Commission on February 12,
1999. In connection with the IPO, B&B and BCCI have initiated or will initiate
certain events. On March 31, 1999, the stockholders of BCCI contributed their
shares of BCCI stock to B&B and BCCI became a wholly-owned subsidiary of B&B. In
March 1999, B&B reincorporated in Delaware and each share of stock of the
California corporation was exchanged for 1,093 shares of stock of the Delaware
corporation. Accordingly, the historical financial statements for all periods
presented have been prepared to give effect to the combination and
reincorporation, as if they had occurred on January 1, 1996, the first day of
the earliest period presented. Under this presentation, the previously issued
"combined" results are now presented as consolidated results, and the total
number of outstanding shares reflects the reincorporation. There was no change
to results of operations as a result of these capital structure changes.
Components of stockholders' equity prepared on a historical basis of
accounting at December 31, 1998, are as follows:
<TABLE>
<S> <C>
Common Stock:
B&B -- par value $10, authorized 5,000 shares, issued and
outstanding 4,348 shares............................... $ 43,480
BCCI -- par value $25, authorized, issued and outstanding
1,000 shares........................................... 25,000
----------
68,480
Additional Paid-in Capital.................................. 1,300,000
Retained Earnings........................................... 4,971,824
----------
Total............................................. $6,340,304
==========
</TABLE>
Upon completion of the IPO, the Subchapter S corporation status of B&B and
BCCI will terminate automatically and they will become subject to federal and
state income taxes. The accompanying consolidated statements of income reflect a
pro forma provision for income taxes for all periods presented, based upon
pretax income, as if the consolidated group discussed above had been subject to
C corporation federal and state income taxes (see Note 5).
Pro forma earnings per share in the historical columns of the accompanying
statements of income are based on pro forma net income after this estimated
provision for income taxes and the weighted average number of shares of common
stock outstanding adjusted for the effects of the contribution by BCCI
stockholders of their shares to B&B and the reincorporation referred to above.
Also included in weighted average shares is the number of shares (511,946)
required to be sold to fund distributions to existing shareholders in the amount
of $4,971,000 (see below).
The termination of the Company's S corporation status will result in a
one-time credit to income tax expense resulting from the increase in deferred
tax assets at C corporation rates from those deferred tax assets previously
recorded at S corporation rates. The results of this increase are reflected in
the Pro Forma December 31, 1998 column of the accompanying balance sheets as if
the termination of S corporation status had occurred on that date (see Note 6).
Additionally, upon completion of the IPO, the Company will declare and pay
a dividend to the existing stockholders representing a portion of the earned,
but undistributed, Subchapter S earnings through the closing date of the IPO.
The payments to the existing stockholders are currently estimated to total
approximately $6,100,000 based on undistributed accumulated S corporation
earnings through December 31, 1998 plus an estimate of earnings through the date
of the closing of the IPO. Subsequent to December 31, 1998, distributions of
$1,000,000 were paid to existing stockholders out of cash from operations. The
F-10
<PAGE> 61
remaining payments are expected to be made from proceeds of the IPO. The portion
of this distribution which approximates the amount of earnings accumulated for
financial statement purposes through December 31, 1998, or $4,971,000, is
reflected in the pro forma December 31, 1998 column of the accompanying balance
sheets as if it had been declared on that date. The entire amount is presented
as a distribution payable on December 31, 1998, since the existing cash balances
are needed to fund current operations. Any remaining S corporation retained
earnings not distributed will be treated as additional paid-in-capital beginning
on the date of the closing of the IPO.
2. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Auction receivables................................. $5,486,313 $5,203,090
Consignor advance loans............................. 1,358,096 1,342,359
Other............................................... 142,530 359,477
Allowance for doubtful accounts -- consignor
loans............................................. (187,715) (195,511)
Allowance for doubtful accounts -- all other
receivables....................................... (268,297) (313,936)
---------- ----------
Total..................................... $6,530,927 $6,395,479
========== ==========
</TABLE>
Consignor advances include $159,046 at December 31, 1998, due from employees or
entities related to them. Total auction sales in 1998 related to consignments
from these employees and related entities were $1,195,606. Total 1998 auction
sales to an individual who sources consignment goods on contract for the Company
amounted to $291,915.
3. BANK LINE OF CREDIT
B&B and BCCI each have a $3,000,000 bank line of credit which expire on
July 31, 1999 and are each guaranteed by the other party. There were no
outstanding balances at December 31, 1997 and 1998. The lines of credit require
compliance with certain financial covenants and annual profitability. The
Company was in compliance with these covenants at December 31, 1998.
Interest is generally charged at the bank's prime rate (7.75% at December
31, 1998) less .25%. However, the Company has the option to select from
variations of the London Interbank Offered Rate (LIBOR) (5.06 - 6.06% at
December 31, 1998) plus 2% for all or a portion of the outstanding balance for a
predetermined loan term of 30 days to a year.
4. NOTES PAYABLE
Notes payable consist of two demand notes totaling $500,000 at December 31,
1996 and one demand note for $100,000 at December 31, 1997. A $400,000 demand
note to an individual was repaid during 1997 and the remaining $100,000 demand
note payable to an individual was repaid during 1998.
F-11
<PAGE> 62
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
-------- ----------
<S> <C> <C>
10.5% note payable, $9,330 monthly principal and
interest, collateralized by assets held for
sale(a)............................................ $662,594 $ 618,126
8.5% note payable to former owners of Dunnings (see
Note 9), maturing $250,000 June 30, 1999, including
interest, balance plus accrued interest due June
30, 2000........................................... -- 520,702
-------- ----------
662,594 1,138,828
Less current maturities.............................. 48,496 319,756
-------- ----------
$614,098 $ 819,072
======== ==========
</TABLE>
- ---------------
(a) During 1997, the Company foreclosed on secured receivables totaling
$814,798, and assumed a related note payable for $667,753, plus unpaid
property taxes of $27,186. The property received in the foreclosure
consisted of inventory estimated valued at $150,000, and real property
recorded at the $1,359,737 remaining value of consideration given, which
approximated its fair value at time of foreclosure. The real property has
been classified an asset held for sale on the balance sheet, because the
Company does not use the property in its business operations and has
actively listed it for sale since the foreclosure date. During 1998, the
Company determined that the fair value of the real property was less than
its carrying value. Accordingly, the asset was reduced to its estimated fair
value of $1,159,736, resulting in a loss on writedown of $200,000.
As of December 31, 1998, future maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1999............................. $ 319,756
2000............................. 418,443
2001............................. 294,648
2002............................. 32,803
2003............................. 36,365
Thereafter....................... 36,813
----------
$1,138,828
==========
</TABLE>
6. TAXES ON INCOME
The Company has elected to be taxed as an "S" corporation and therefore,
its taxable income is reported on the stockholders' individual income tax
returns. As a result, no federal income tax is imposed on the Company. State
income taxes are calculated at the greatest of the $800 per company minimum tax
or 1.5% of taxable income.
Deferred income taxes arise due to temporary differences resulting
primarily from accumulated depreciation and allowances for doubtful accounts.
The deferred income tax assets consist of the cumulative tax effect of these
temporary differences, and, in the opinion of management, will be realized as an
offset to future taxable income.
As discussed in the Summary of Accounting Policies, in connection with the
IPO (see Note 1), the Company's Subchapter S corporation status will terminate
and it will become subject to federal and state income taxes applicable to C
corporations. The accompanying consolidated statements of income reflect a pro
forma provision for all periods for federal and state taxes (as if the combined
group had been subject to C corporation rates) at a combined effective tax rate
of 40%. The difference between the estimated rate and the 34% statutory federal
rate is primarily attributable to state income and franchise taxes.
F-12
<PAGE> 63
Upon termination of Subchapter S status, and based upon management's
determination that it is more likely than not that deferred tax assets will be
realized, the Company will record an increase in net deferred tax assets and an
accompanying one-time tax benefit to reflect the differences between the
financial statement and income tax basis of the assets and liabilities at C
corporation rates. If the Subchapter S status had been terminated on December
31, 1998, net deferred tax assets for each temporary difference would have been
increased to the following amounts:
<TABLE>
<S> <C>
Accrued vacation......................................... $ 112,000
Deferred rents........................................... 187,000
Accumulated depreciation, amortization and writedown
differences............................................ 111,000
Reserves against receivables............................. 173,000
State income taxes....................................... 167,000
Other.................................................... 54,000
----------
$ 804,000
==========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company has a defined savings contribution plan that covers employees
after one year of service. Under the plan, participants may elect to contribute
up to 15% of their compensation, up to a maximum amount allowable under IRS
regulations on a pre-tax basis. In addition, the Company may contribute to the
plan up to 25% of the first 2% of each participant's compensation in an amount
determined annually by the Board of Directors. The Company's contributions
amounted to $14,080 in 1996, $11,498 in 1997 and $20,146 in 1998. In addition,
the Company pays all plan expenses, amounting to $17,277 in 1997 and $18,410 in
1998.
In February 1999, the Company's Board of Directors approved the 1999 Equity
Incentive Plan, which provides for the grant of incentive stock options to
employees, and for the grant of nonstatutory stock options, restricted stock
purchase awards, and stock bonuses to employees, directors, and consultants of
the Company. The exercise price of an incentive stock option cannot be less than
100% of the fair market value of the common stock on the data of the grant. The
Plan will be administered by the Board of Directors or a Committee of the Board
of Directors, which will have the authority to determine the recipients and
types of awards to be granted. No options, restricted stock purchase awards, or
stock bonuses have been granted under the plan. A total of 914,841 shares of the
Company's common stock are reserved for issuance under the plan.
8. RELATED PARTY TRANSACTIONS
The Company leases certain of its San Francisco and Los Angeles office and
warehouse spaces from partnerships controlled by stockholders. These leases are
non-cancelable operating leases, expiring through June 30, 2005. In addition,
the Company currently leases office and warehouse space in Elgin, Illinois, from
the former owners of Dunnings (see Note 9), at $8,300 monthly, expiring June 30,
1999.
Future minimum annual lease payments for non-cancelable operating leases as
of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, TOTAL
------------------------ -----------
<S> <C>
1999............................ $ 1,989,000
2000............................ 1,997,000
2001............................ 2,057,000
2002............................ 2,119,000
2003............................ 2,183,000
Thereafter...................... 4,563,000
-----------
$14,908,000
===========
</TABLE>
Total rent expense for office and warehouse space was $1,842,600 in 1996,
$2,012,507 in 1997 and $2,070,347 in 1998.
In connection with the Dunnings purchase (see Note 9), the Company entered
into an employment agreement with a former owner of Dunnings. Under the
agreement, the Company shall continue base salary
F-13
<PAGE> 64
payments of $175,000 annually through the November 2001 expiration date in the
event of the employee's death or termination without cause. Payments shall cease
upon resignation or termination with cause.
On January 3, 1997, the Company sold a building with a net book value of
$770,754 to a limited liability company (LLC) controlled by stockholders of the
Company. Proceeds from the sale amounted to $652,000 in cash plus $178,062 in
estimated reimbursements of Company expenditures for clean up of land
contamination, less $11,246 expenses of sale. The LLC's total contractual
liability for such clean-up expenses was limited to $279,000. The net gain of
$24,641 is included in other income and expense in the accompanying statements
of income. Costs reimbursed for clean up were $48,062 in 1997 and $128,500 in
1998; remaining amounts receivable from the LLC at December 31, 1997 of $130,000
for 1997 were satisfied in 1998.
During 1996, the Company advanced a total of $1,369,215 in construction
remodeling costs on behalf of its landlord and accrued related interest income
of $62,781. These amounts, which carried interest at 8.25%, were absorbed in
1996, 1997 and 1998 by offsetting the Company's periodic rental payments due to
111 Potrero Partners, LLC, an entity owned in part by two of the Company's
principal stockholders. In 1997, an additional $88,139 was advanced and $30,597
accrued in interest income. During 1996, $542,196 was offset to rent expense and
during 1997, $1,018,536 was offset to rent expense. The balance due from 111
Potrero Partners, LLC, was $899,800 at December 31, 1996; the entire balance
plus new activity was absorbed during 1997.
Amounts receivable from related parties includes notes and accounts
receivable from employees of $492,790 at December 31, 1997. Of this amount,
$209,436 carried interest at 10% at December 31, 1997; the remaining balances
were non interest-bearing. All such receivables were repaid during 1998.
Subsequent to December 31, 1998, the Company purchased a building located
in Chicago from the LLC for approximately $2,755,000.
9. ACQUISITION
Effective June 30, 1998, the Company purchased the assets of Dunnings
Auction Services, Inc., an auction house located in Elgin, Illinois, for a total
purchase price of $750,000 consisting of $250,000 in cash and $500,000 in debt
(see Note 5). The approximately $590,000 excess of purchase price over a
$100,000 five-and-a-half year covenant-not-to-compete and other identifiable
assets has been charged to goodwill, and is being amortized over the estimated
useful life of 15 years. The transaction has been recorded as a purchase, and,
accordingly, results of operations are included in the consolidated financial
statements from July 1, 1998 forward. Results of operations as if the
acquisition had occurred January 1, 1996, beginning of the earliest period
presented, would have been substantially the same.
10. EARNINGS PER SHARE
During 1998, the Securities and Exchange Commission modified its rules to
require non-public companies to include historical earnings per share when
filing a registration statement for an IPO. The calculation has reflected the
change in the capital structure as discussed in Note 1. The following
information is not deemed reflective of expected future earnings per share due
to the change in legal status from an S corporation to a C corporation.
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share................... $.55 $.88 $.53
Weighted average shares outstanding........ 4,752,364 4,752,364 4,752,364
</TABLE>
11. RESTATEMENT
The Company's previously issued financial statements have been restated to
account for rent expense on a straight-line basis instead of an accrual basis.
The effect of this change in accounting principle was to reduce previously
reported income for 1996 by approximately $231,000 and increase 1997 income by
approximately $231,000. As of December 31, 1996, retained earnings were reduced
by approximately $231,000 and accrued expenses increased by approximately
$231,000 to account for this change.
F-14
<PAGE> 65
[INSIDE BACK COVER]
Butterfield & Butterfield
Around the Corner, Around the World
Since 1865
Background Graphic: Three
identical images of an antique
map of the world
5.
<PAGE> 66
- ------------------------------------------------------
- ------------------------------------------------------
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF THE COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Prior S Corporation Status............ 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Dilution.............................. 16
Capitalization........................ 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 26
Management............................ 34
Certain Transactions.................. 39
Principal Stockholders................ 40
Description of Capital Stock.......... 41
Shares Eligible for Future Sale....... 43
Underwriting.......................... 44
Legal Matters......................... 46
Experts............................... 46
Additional Information................ 46
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
Until , 1999 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,500,000 SHARES
BUTTERFIELD & BUTTERFIELD LOGO
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
FIRST SECURITY VAN KASPER
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 67
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
that may incur in such capacities, including liabilities under the Securities
Act of 1933. The Registrant's Bylaws also provide that the Registrant will
indemnify its directors and executive officers and may indemnify its other
officers, employees and other agents to the fullest extent not prohibited by
Delaware law.
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty of
care to the Registrant and its stockholders. These provisions do not eliminate
the directors' duty of care and, in appropriate circumstances, equitable
remedies such an injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Registrant or any of its affiliated enterprises, provided such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
The underwriting agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the common stock being registered. All the amounts shown are estimates except
for the registration fee, the NASD filing fee and the Nasdaq application fee.
<TABLE>
<S> <C>
Registration fee............................................ $ 5,755
NASD filing fee............................................. 2,570
Nasdaq application fee...................................... 38,750
Blue sky qualification fees and expenses.................... 5,000
Printing expenses........................................... 125,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 135,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 27,925
--------
Total............................................. $650,000
========
</TABLE>
II-1
<PAGE> 68
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2 Bylaws.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2* Specimen stock certificate.
5.1 Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement between Butterfields and each of
its directors and executive officers.
10.2+ 1999 Equity Incentive Plan (the "Incentive Plan").
10.3+ Form of Grant Notice and Stock Option Agreement under the
Incentive Plan.
10.4+ Form of Grant Notice and Stock Option Agreement to be
effective upon the closing of this offering.
10.5+ Standard Industrial Lease dated April 10, 1996 between
Butterfields and HBJ Partners, LLC.
10.6+ Standard Industrial Lease dated January 1, 1996 between
Butterfields and HBJ Partners, LLC.
10.7+ Standard Industrial Lease dated January 1, 1996 between
Butterfields and 111 Potrero Partners, LLC.
10.8+ Standard Industrial Lease dated January 1, 1996 between
Butterfields and 111 Potrero Partners, LLC.
10.9+ Revolving Line of Credit Note dated September 30, 1998
between Butterfields and Wells Fargo Bank, National
Association.
10.10+ Revolving Line of Credit Note dated September 30, 1998
between BCCI and Wells Fargo Bank, National Association.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of Attorney. Reference is made to page II-4.
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------------
* To be filed by amendment.
+ Previously filed.
(b) No financial statement schedules are required to be filed.
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-2
<PAGE> 69
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefor, 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 Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act of 1933, the information omitted from the
form of prospectus as filed as part of the registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 70
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and has caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Francisco, County of San Francisco, State of
California, on the 2nd day of April, 1999.
BUTTERFIELD & BUTTERFIELD
AUCTIONEERS CORPORATION
By /s/ JOHN D. GALLO
------------------------------------
John D. Gallo
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints John
Gallo and Kenneth Stupi his true and lawful attorney-in-fact and agent, each
acting alone, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to the Registration Statement
on Form SB-2 and to sign any registration statement filed under Rule 462 under
the Securities Act of 1933 including post-effective amendments thereto, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, each acting alone, or his or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN D. GALLO President, Chief Executive April 2, 1999
- -------------------------------------------------------- Officer and Director
John D. Gallo (Principal Executive Officer)
/s/ KENNETH G. STUPI Chief Financial Officer April 2, 1999
- -------------------------------------------------------- (Principal Financial and
Kenneth G. Stupi Accounting Officer)
/s/ BERNARD A. OSHER Chairman of the Board April 2, 1999
- --------------------------------------------------------
Bernard A. Osher
Director April , 1999
- --------------------------------------------------------
John R. DiMatteo
Director April , 1999
- --------------------------------------------------------
Irving Rabin
/s/ WILL K. WEINSTEIN Director April 2, 1999
- --------------------------------------------------------
Will K. Weinstein
</TABLE>
II-4
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2 Bylaws.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2* Specimen stock certificate.
5.1 Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement between Butterfields and each of
its directors and executive officers.
10.2+ 1999 Equity Incentive Plan (the "Incentive Plan").
10.3+ Form of Grant Notice and Stock Option Agreement under the
Incentive Plan.
10.4+ Form of Grant Notice and Stock Option Agreement to be
effective upon the closing of this offering.
10.5+ Standard Industrial Lease dated April 10, 1996 between
Butterfields and HBJ Partners, LLC.
10.6+ Standard Industrial Lease dated January 1, 1996 between
Butterfields and HBJ Partners, LLC.
10.7+ Standard Industrial Lease dated January 1, 1996 between
Butterfields and 111 Potrero Partners, LLC.
10.8+ Standard Industrial Lease dated January 1, 1996 between
Butterfields and 111 Potrero Partners, LLC.
10.9+ Revolving Line of Credit Note dated September 30, 1998
between Butterfields and Wells Fargo Bank, National
Association.
10.10+ Revolving Line of Credit Note dated September 30, 1998
between BCCI and Wells Fargo Bank, National Association.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of Attorney. Reference is made to page II-4.
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
BUTTERFIELD & BUTTERFIELD DELAWARE CORPORATION
The undersigned, a natural person (the "Sole Incorporator"), for the purpose of
organizing a corporation to conduct the business and promote the purposes
hereinafter stated, under the provisions and subject to the requirements of the
laws of the State of Delaware hereby certifies that:
I.
The name of this corporation is Butterfield & Butterfield Delaware Corporation.
II.
The address of the registered office of the corporation in the State of Delaware
is 15 East North Street, Dover, DE 19901, City of Dover, County of Kent, and the
name of the registered agent of the corporation in the State of Delaware at such
address is Amerisearch Corporate Services, Inc.
III.
The purpose of this corporation is to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of the
State of Delaware.
IV.
A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is Twenty Million
(20,000,000) shares. FIFTEEN MILLION (15,000,000) shares shall be Common Stock,
each having a par value of one-tenth of one cent ($.001). FIVE MILLION
(5,000,000) shares shall be Preferred Stock, each having a par value of
one-tenth of one cent ($.001).
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and
1.
<PAGE> 2
to increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be
decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
V.
A. For the management of the business and for the conduct of the affairs
of the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
1. The management of the business and the conduct of the affairs of
the corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
2. BOARD OF DIRECTORS
a. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances, and
to any restrictions or limitations of applicable law, following the closing of
the initial public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "Act"), covering the offer and
sale of Common Stock to the public (the "Initial Public Offering") and during
such time or times that the corporation is not subject to Section 2115(b) of the
California General Corporation Law (the "CGCL"), the directors shall be divided
into three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors. At the first annual meeting of
stockholders following the closing of the Initial Public Offering (assuming the
corporation is not subject to Section 2115(b) of the CGCL), the term of office
of the Class I directors shall expire and Class I directors shall be elected for
a full term of three years. At the second annual meeting of stockholders
following the Initial Public Offering (assuming the corporation is not subject
to Section 2115(b) of the CGCL), the term of office of the Class II directors
shall expire and Class II directors shall be elected for a full term of three
years. At the third annual meeting of stockholders following the Initial Public
Offering (assuming the corporation is not subject to Section 2115(b) of the
CGCL), the term of office of the Class III directors shall expire and Class III
directors shall be elected for a full term of three years. At each succeeding
annual meeting of stockholders (assuming the corporation is not subject to
Section 2115(b) of the CGCL), directors shall be elected for a full term of
three years to succeed the directors of the class whose terms expire at such
annual meeting.
b. In the event that the corporation is subject to Section
2115(b) of the CGCL at any time, or from time to time, Section A. 2. a. of this
Article V shall not apply and
2.
<PAGE> 3
all directors shall be shall be elected at each annual meeting of stockholders
to hold office until the next annual meeting.
c. No person entitled to vote at an election for directors may
cumulate votes to which such person is entitled, unless, at the time of such
election, the corporation is subject to Section 2115(b) of the CGCL. During such
time or times that the corporation is subject to Section 2115(b) of the CGCL,
every stockholder entitled to vote at an election for directors may cumulate
such stockholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which
such stockholder's shares are otherwise entitled, or distribute the
stockholder's votes on the same principle among as many candidates as such
stockholder thinks fit. No stockholder, however, shall be entitled to so
cumulate such stockholder's votes unless (i) the names of such candidate or
candidates have been placed in nomination prior to the voting and (ii) the
stockholder has given notice at the meeting, prior to the voting, of such
stockholder's intention to cumulate such stockholder's votes. If any stockholder
has given proper notice to cumulate votes, all stockholders may cumulate their
votes for any candidates who have been properly placed in nomination. Under
cumulative voting, the candidates receiving the highest number of votes, up to
the number of directors to be elected, are elected.
Notwithstanding the foregoing provisions of this section, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
3. REMOVAL OF DIRECTORS
a. During such time or times that the corporation is subject to
Section 2115(b) of the CGCL, the Board of Directors or any individual director
may be removed from office at any time without cause by the affirmative vote of
the holders of at least a majority of the outstanding shares entitled to vote on
such removal; provided, however, that unless the entire Board is removed, no
individual director may be removed when the votes cast against such director's
removal, or not consenting in writing to such removal, would be sufficient to
elect that director if voted cumulatively at an election which the same total
number of votes were cast (or, if such action is taken by written consent, all
shares entitled to vote were voted) and the entire number of directors
authorized at the time of such director's most recent election were then being
elected.
b. At any time or times that the corporation is not subject to
Section 2115(b) of the CGCL and subject to any limitations imposed by law,
Section A. 3. a. above shall no longer apply and removal shall be as provided in
Section 141(k) of the Delaware General Corporation Law.
4. VACANCIES
a. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification,
3.
<PAGE> 4
removal or other causes and any newly created directorships resulting from any
increase in the number of directors, shall, unless the Board of Directors
determines by resolution that any such vacancies or newly created directorships
shall be filled by the stockholders, except as otherwise provided by law, be
filled only by the affirmative vote of a majority of the directors then in
office, even though less than a quorum of the Board of Directors, and not by the
stockholders. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the director for which
the vacancy was created or occurred and until such director's successor shall
have been elected and qualified.
b. If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
Delaware General Corporation Law.
c. At any time or times that the corporation is subject to
Section 2115(b) of the CGCL, if, after the filling of any vacancy by the
directors then in office who have been elected by stockholders shall constitute
less than a majority of the directors then in office, then
(i) Any holder or holders of an aggregate of five percent
(5%) or more of the total number of shares at the time outstanding having the
right to vote for those directors may call a special meeting of stockholders; or
(ii) The Superior Court of the proper county shall, upon
application of such stockholder or stockholders, summarily order a special
meeting of stockholders, to be held to elect the entire board, all in accordance
with Section 305(c) of the CGCL. The term of office of any director shall
terminate upon that election of a successor.
B. BYLAW AMENDMENTS
1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the voting stock of the corporation entitled to
vote. The Board of Directors shall also have the power to adopt, amend or repeal
Bylaws.
2. The directors of the corporation need not be elected by written
ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws or by written consent of stockholders in accordance with the Bylaws
prior to the closing of the Initial Public
4.
<PAGE> 5
Offering and following the closing of the Initial Public Offering no action
shall be taken by the stockholders by written consent.
4. At any time or times that the corporation is subject to Section
2115(b) of the CGCL, stockholders holding more than five percent (5%) of the
outstanding shares of the corporation shall have the right to call a special
meeting of stockholders as set forth in Article V, Section A. 4. c. herein.
5. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
VI.
A. A director of the Corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective and
shall not affect the rights under this Article VI in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the voting stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI
and VII.
5.
<PAGE> 6
The name and the mailing address of the Sole Incorporator is as follows:
NAME MAILING ADDRESS
Alexis Rondell Rhorer Cooley Godward LLP
One Maritime Plaza, 20th Fl.
San Francisco, CA 94111
IN WITNESS WHEREOF, this Certificate has been subscribed this 8th day of
February, 1999 by the undersigned who affirms that the statements made herein
are true and correct.
/s/ ALEXIS RONDELL RHORER
-----------------------------------------
ALEXIS RONDELL RHORER
Sole Incorporator
6.
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
BUTTERFIELD & BUTTERFIELD DELAWARE CORPORATION
(A DELAWARE CORPORATION)
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TABLE OF CONTENTS
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ARTICLE I Offices................................................................................1
Section 1. Registered Office......................................................................1
Section 2. Other Offices..........................................................................1
ARTICLE II CORPORATE SEAL.........................................................................1
Section 3. Corporate Seal.........................................................................1
ARTICLE III STOCKHOLDERS' MEETINGS.................................................................1
Section 4. Place Of Meetings......................................................................1
Section 5. Annual Meetings........................................................................1
Section 6. Special Meetings.......................................................................4
Section 7. Notice Of Meetings.....................................................................5
Section 8. Quorum.................................................................................5
Section 9. Adjournment And Notice Of Adjourned Meetings...........................................5
Section 10. Voting Rights..........................................................................6
Section 11. Joint Owners Of Stock..................................................................6
Section 12. List Of Stockholders...................................................................6
Section 13. Action Without Meeting.................................................................6
Section 14. Organization...........................................................................7
ARTICLE IV DIRECTORS..............................................................................8
Section 15. Number And Term Of Office..............................................................8
Section 16. Powers.................................................................................8
Section 17. Classes of Directors...................................................................8
Section 18. Vacancies..............................................................................9
Section 19. Resignation...........................................................................10
Section 20. Removal...............................................................................10
Section 21. Meetings..............................................................................10
Section 22. Quorum And Voting.....................................................................11
Section 23. Action Without Meeting................................................................12
Section 24. Fees And Compensation.................................................................12
Section 25. Committees............................................................................12
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Section 26 Organization..........................................................................13
ARTICLE V OFFICERS..............................................................................14
Section 27. Officers Designated...................................................................14
Section 28. Tenure And Duties Of Officers.........................................................14
Section 29. Delegation Of Authority...............................................................15
Section 30. Resignations..........................................................................15
Section 31. Removal...............................................................................15
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE
CORPORATION...........................................................................16
Section 32. Execution Of Corporate Instruments....................................................16
Section 33. Voting Of Securities Owned By The Corporation.........................................16
ARTICLE VII SHARES OF STOCK.......................................................................16
Section 34. Form And Execution Of Certificates....................................................16
Section 35. Lost Certificates.....................................................................17
Section 36. Transfers.............................................................................17
Section 37. Fixing Record Dates...................................................................17
Section 38. Registered Stockholders...............................................................18
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION...................................................19
Section 39. Execution Of Other Securities.........................................................19
ARTICLE IX DIVIDENDS.............................................................................19
Section 40. Declaration Of Dividends..............................................................19
Section 41. Dividend Reserve......................................................................19
ARTICLE X FISCAL YEAR...........................................................................20
Section 42. Fiscal Year...........................................................................20
ARTICLE XI INDEMNIFICATION.......................................................................20
Section 43. Indemnification Of Directors, Executive Officers, Other Officers, Employees
And Other Agents......................................................................20
ARTICLE XII NOTICES...............................................................................23
Section 44. Notices...............................................................................23
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ARTICLE XIII Amendments............................................................................24
Section 45. Amendments............................................................................24
ARTICLE XIV LOANS TO OFFICERS.....................................................................25
Section 46. Loans To Officers.....................................................................25
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BYLAWS
OF
BUTTERFIELD & BUTTERFIELD DELAWARE CORPORATION
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation in
the State of Delaware shall be in the City of Dover, County of Kent.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the Board
of Directors, and may also have offices at such other places, both within and
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETINGS.
(a) The annual meeting of the stockholders of the corporation, for
the purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors. Nominations of persons for election
to the Board of Directors of the corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting of stockholders:
(i) pursuant to the corporation's notice of meeting of stockholders; (ii) by or
at the
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direction of the Board of Directors; or (iii) by any stockholder of the
corporation who was a stockholder of record at the time of giving of notice
provided for in the following paragraph, who is entitled to vote at the meeting
and who complied with the notice procedures set forth in Section 5.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. For
nominations or other business to be properly brought before an annual meeting by
a stockholder pursuant to clause (c) of Section 5(a) of these Bylaws, (i) the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation, (ii) such other business must be a proper matter for
stockholder action under the General Corporation Law of Delaware, (iii) if the
stockholder, or the beneficial owner on whose behalf any such proposal or
nomination is made, has provided the corporation with a Solicitation Notice (as
defined in this Section 5(b)), such stockholder or beneficial owner must, in the
case of a proposal, have delivered a proxy statement and form of proxy to
holders of at least the percentage of the corporation's voting shares required
under applicable law to carry any such proposal, or, in the case of a nomination
or nominations, have delivered a proxy statement and form of proxy to holders of
a percentage of the corporation's voting shares reasonably believed by such
stockholder or beneficial owner to be sufficient to elect the nominee or
nominees proposed to be nominated by such stockholder, and must, in either case,
have included in such materials the Solicitation Notice, and (iv) if no
Solicitation Notice relating thereto has been timely provided pursuant to this
section, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under this Section 5. To be
timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the ninetieth (90th) day nor earlier than the close of business on
the one hundred twentieth (120th) day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced more than thirty (30) days prior to or
delayed by more than thirty (30) days after the anniversary of the preceding
year's annual meeting, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the one hundred twentieth
(120th) day prior to such annual meeting and not later than the close of
business on the later of the ninetieth (90th) day prior to such annual meeting
or the tenth (10th) day following the day on which public announcement of the
date of such meeting is first made. In no event shall the public announcement of
an adjournment of an annual meeting commence a new time period for the giving of
a stockholder's notice as described above. Such stockholder's notice shall set
forth: (A) as to each person whom the stockholder proposed to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "1934 Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (B) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (C) as to
the stockholder giving the notice and the
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beneficial owner, if any, on whose behalf the nomination or proposal is made (i)
the name and address of such stockholder, as they appear on the corporation's
books, and of such beneficial owner, (ii) the class and number of shares of the
corporation which are owned beneficially and of record by such stockholder and
such beneficial owner, and (iii) whether either such stockholder or beneficial
owner intends to deliver a proxy statement and form of proxy to holders of, in
the case of the proposal, at least the percentage of the corporation's voting
shares required under applicable law to carry the proposal or, in the case of a
nomination or nominations, a sufficient number of holders of the corporation's
voting shares to elect such nominee or nominees (an affirmative statement of
such intent, a "Solicitation Notice").
(c) Notwithstanding anything in the second sentence of Section 5(b)
of these Bylaws to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the corporation at least one
hundred (100) days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Section 5 shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the corporation.
(d) Only such persons who are nominated in accordance with the
procedures set forth in this Section 5 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 5. Except as otherwise provided by law, the Chairman of the
meeting shall have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made, or proposed, as the
case may be, in accordance with the procedures set forth in these Bylaws and, if
any proposed nomination or business is not in compliance with these Bylaws, to
declare that such defective proposal or nomination shall not be presented for
stockholder action at the meeting and shall be disregarded.
(e) Notwithstanding the foregoing provisions of this Section 5, in
order to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Nothing in these Bylaws shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the corporation proxy statement pursuant to
Rule 14a-8 under the 1934 Act.
(f) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the 1934 Act.
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SECTION 6. Special Meetings.
(a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption) or (iv) for so long as Section 2115(a) of the California
General Corporations Code (the "CGCL") is applicable to the corporation, by the
holders of shares entitled to cast not less than fifty percent (50%) of the
votes at the meeting, and shall be held at such place, on such date, and at such
time as the Board of Directors, shall fix. At any time or times that the
corporation is subject to Section 2115(b) of the CGCL, stockholders holding five
percent (5%) or more of the outstanding shares shall also have the right to call
a special meeting of stockholders as set forth in Section 18(c) herein.
(b) If a special meeting is properly called by any person or persons
other than the Board of Directors, the request shall be in writing, specifying
the general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the Chairman of the Board of Directors, the Chief
Executive Officer or the Secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
Board of Directors shall determine the time and place of such special meeting,
which shall be held not less than thirty-five (35) nor more than one hundred
twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within sixty (60) days after the receipt of the request, the person or
persons properly requesting the meeting may set the time and place of the
meeting and give the notice. Nothing contained in this paragraph (b) shall be
construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
(c) Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders at which directors are to be
elected pursuant to the corporation's notice of meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
corporation who is a stockholder of record at the time of giving notice provided
for in these Bylaws who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 6(c). In the event
the corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be), for election to such
position(s) as specified in the corporation's notice of meeting, if the
stockholder's notice required by Section 5(b) of these Bylaws shall be delivered
to the Secretary at the principal executive offices of the corporation not
earlier than the close of business on the one hundred twentieth (120th) day
prior to such special meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such meeting or the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting
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and of the nominees proposed by the Board of Directors to be elected at such
meeting. In no event shall the public announcement of an adjournment of a
special meeting commence a new time period for the giving of a stockholder's
notice as described above.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise
provided by statute or by the Certificate of Incorporation, or by these Bylaws,
the presence, in person or by proxy duly authorized, of the holders of a
majority of the outstanding shares of stock entitled to vote shall constitute a
quorum for the transaction of business. In the absence of a quorum, any meeting
of stockholders may be adjourned, from time to time, either by the chairman of
the meeting or by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by statute, the Certificate of Incorporation or these Bylaws,
in all matters other than the election of directors, the affirmative vote of the
majority of shares present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders.
Except as otherwise provided by statute, the Certificate of Incorporation or
these Bylaws, directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Where a separate vote by a class or classes
or series is required, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of such class or classes or series, present in person or represented by
proxy, shall constitute a quorum entitled to take action with respect to that
vote on that matter and, except where otherwise provided by the statute or by
the Certificate of Incorporation or these Bylaws, the affirmative vote of the
majority (plurality, in the case of the election of directors) of the votes cast
by the holders of shares of such class or classes or series shall be the act of
such class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the
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time and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the Delaware General Corporation Law, Section 217(b). If
the instrument filed with the Secretary shows that any such tenancy is held in
unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at said meeting, arranged in alphabetical order,
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not specified, at the place where
the meeting is to be held. The list shall be produced and kept at the time and
place of meeting during the whole time thereof and may be inspected by any
stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING.
(a) Unless otherwise provided in the Certificate of Incorporation,
any action required by statute to be taken at any annual or special meeting of
the stockholders, or any action which may be taken at any annual or special
meeting of the stockholders, may be taken without a
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meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered to the corporation in the manner herein
required, written consents signed by a sufficient number of stockholders to take
action are delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is consented
to is such as would have required the filing of a certificate under any section
of the Delaware General Corporation Law if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written consent has been given in accordance with
Section 228 of the Delaware General Corporation Law.
(d) Notwithstanding the foregoing, no such action by written consent
may be taken following the closing of the initial public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "1933 Act"), covering the offer and sale of Common Stock of the corporation
(the "Initial Public Offering").
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the President,
or, if the President is absent, a chairman of the meeting chosen by a majority
in interest of the stockholders entitled to vote, present in person or by proxy,
shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary
directed to do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and
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constituted proxies and such other persons as the chairman shall permit,
restrictions on entry to the meeting after the time fixed for the commencement
thereof, limitations on the time allotted to questions or comments by
participants and regulation of the opening and closing of the polls for
balloting on matters which are to be voted on by ballot. Unless and to the
extent determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with
rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors
of the corporation shall be fixed in accordance with the Certificate of
Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
SECTION 17. CLASSES OF DIRECTORS.
(a) Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
closing of the Initial Public Offering and during such time or times that the
corporation is not subject to Section 2115(b) of the CGCL, the directors shall
be divided into three classes designated as Class I, Class II and Class III,
respectively. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At the first annual
meeting of stockholders following the closing of the Initial Public Offering
(assuming the corporation is not subject to Section 2115(b) of the CGCL), the
term of office of the Class I directors shall expire and Class I directors shall
be elected for a full term of three years. At the second annual meeting of
stockholders following the Initial Public Offering (assuming the corporation is
not subject to Section 2115(b) of the CGCL), the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three years. At the third annual meeting of stockholders following the
Initial Public Offering (assuming the corporation is not subject to Section
2115(b) of the CGCL), the term of office of the Class III directors shall expire
and Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders (assuming the corporation is not
subject to Section 2115(b) of the CGCL), directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
(b) In the event that the corporation is subject to Section 2115(b)
of the CGCL at any time, or from time to time, Section 17(a) of these Bylaws
shall not apply and all directors
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shall be elected at each annual meeting of stockholders to hold office until the
next annual meeting.
(c) No person entitled to vote at an election for directors may
cumulate votes to which such person is entitled, unless, at the time of such
election, the corporation is subject to Section 2115(b) of the CGCL. During such
time or times that the corporation is subject to Section 2115(b) of the CGCL,
every stockholder entitled to vote at an election for directors may cumulate
such stockholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which
such stockholder's shares are otherwise entitled, or distribute the
stockholder's votes on the same principle among as many candidates as such
stockholder thinks fit. No stockholder, however, shall be entitled to so
cumulate such stockholder's votes unless (i) the names of such candidate or
candidates have been placed in nomination prior to the voting and (ii) the
stockholder has given notice at the meeting, prior to the voting, of such
stockholder's intention to cumulate such stockholder's votes. If any stockholder
has given proper notice to cumulate votes, all stockholders may cumulate their
votes for any candidates who have been properly placed in nomination. Under
cumulative voting, the candidates receiving the highest number of votes, up to
the number of directors to be elected, are elected.
Notwithstanding the foregoing provisions of this section, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
SECTION 18. VACANCIES.
(a) Unless otherwise provided in the Certificate of Incorporation,
any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes and any newly created directorships
resulting from any increase in the number of directors shall, unless the Board
of Directors determines by resolution that any such vacancies or newly created
directorships shall be filled by stockholders, be filled only by the affirmative
vote of a majority of the directors then in office, even though less than a
quorum of the Board of Directors. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
director for which the vacancy was created or occurred and until such director's
successor shall have been elected and qualified. A vacancy in the Board of
Directors shall be deemed to exist under this Bylaw in the case of the death,
removal or resignation of any director.
(b) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
Delaware General Corporation Law.
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(c) At any time or times that the corporation is subject to Section
2115(b) of the CGCL, if, after the filling of any vacancy, the directors then in
office who have been elected by stockholders shall constitute less than a
majority of the directors then in office, then
(1) Any holder or holders of an aggregate of five percent (5%)
or more of the total number of shares at the time outstanding having the right
to vote for those directors may call a special meeting of stockholders; or
(2) The Superior Court of the proper county shall, upon
application of such stockholder or stockholders, summarily order a special
meeting of stockholders, to be held to elect the entire board, all in accordance
with Section 305(c) of the CGCL. The term of office of any director shall
terminate upon that election of a successor.
SECTION 19. RESIGNATION. Any director may resign at any time by delivering
his written resignation to the Secretary, such resignation to specify whether it
will be effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made, it shall
be deemed effective at the pleasure of the Board of Directors. When one or more
directors shall resign from the Board of Directors, effective at a future date,
a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote thereon
to take effect when such resignation or resignations shall become effective, and
each Director so chosen shall hold office for the unexpired portion of the term
of the Director whose place shall be vacated and until his successor shall have
been duly elected and qualified.
SECTION 20. REMOVAL.
(a) During such time or times that the corporation is subject to
Section 2115(b) of the CGCL, the Board of Directors or any individual director
may be removed from office at any time without cause by the affirmative vote of
the holders of at least a majority of the outstanding shares entitled to vote on
such removal; provided, however, that unless the entire Board is removed, no
individual director may be removed when the votes cast against such director's
removal, or not consenting in writing to such removal, would be sufficient to
elect that director if voted cumulatively at an election which the same total
number of votes were cast (or, if such action is taken by written consent, all
shares entitled to vote were voted) and the entire number of directors
authorized at the time of such director's most recent election were then being
elected.
(b) Following any date on which the corporation is no longer subject
to Section 2115(b) of the CGCL and subject to any limitations imposed by law,
Section 20(a) above shall no longer apply and removal shall be as provided in
Section 141(k) of the Delaware General Corporation Law.
SECTION 21. Meetings.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
at the place where such
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meeting is held. No notice of an annual meeting of the Board of Directors shall
be necessary and such meeting shall be held for the purpose of electing officers
and transacting such other business as may lawfully come before it.
(b) REGULAR MEETINGS. Unless otherwise restricted by the Certificate
of Incorporation, regular meetings of the Board of Directors may be held at any
time or date and at any place within or without the State of Delaware which has
been designated by the Board of Directors and publicized among all directors. No
formal notice shall be required for regular meetings of the Board of Directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate
of Incorporation, special meetings of the Board of Directors may be held at any
time and place within or without the State of Delaware whenever called by the
Chairman of the Board, the President or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of
any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all special
meetings of the Board of Directors shall be orally or in writing, by telephone,
including a voice messaging system or other system or technology designed to
record and communicate messages, facsimile, telegraph or telex, or by electronic
mail or other electronic means, during normal business hours, at least
twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) WAIVER OF NOTICE. The transaction of all business at any meeting
of the Board of Directors, or any committee thereof, however called or noticed,
or wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
the meeting, each of the directors not present shall sign a written waiver of
notice. All such waivers shall be filed with the corporate records or made a
part of the minutes of the meeting.
SECTION 22. Quorum And Voting.
(a) Unless the Certificate of Incorporation requires a greater number
and except with respect to indemnification questions arising under Section 43
hereof, for which a quorum shall be one-third of the exact number of directors
fixed from time to time in accordance with the Certificate of Incorporation, a
quorum of the Board of Directors shall consist of a majority of the exact number
of directors fixed from time to time by the Board of Directors in
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accordance with the Certificate of Incorporation; provided, however, at any
meeting whether a quorum be present or otherwise, a majority of the directors
present may adjourn from time to time until the time fixed for the next regular
meeting of the Board of Directors, without notice other than by announcement at
the meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by the affirmative vote
of a majority of the directors present, unless a different vote be required by
law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and provided
in the resolution of the Board of Directors shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
Delaware General Corporation Law to be submitted to stockholders for approval,
or (ii) adopting, amending or repealing any bylaw of the corporation.
(b) Other Committees. The Board of Directors may, from time to time,
appoint such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall any such committee have the powers denied to the Executive
Committee in these Bylaws.
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(c) TERM. Each member of a committee of the Board of Directors shall
serve a term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to any requirements of any
outstanding series of preferred Stock and the provisions of subsections (a) or
(b) of this Bylaw, may at any time increase or decrease the number of members of
a committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any reason remove any individual committee member
and the Board of Directors may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(d) MEETINGS. Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 25 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such
committee may be held at any place which has been determined from time to time
by such committee, and may be called by any director who is a member of such
committee, upon written notice to the members of such committee of the time and
place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the Chairman
of the Board of Directors, or, if a Chairman has not been appointed or is
absent, the President (if a director), or if the President is absent, the most
senior Vice President (if a director), or, in the absence of any such person, a
chairman of the meeting chosen by a majority of the directors present, shall
preside over the meeting. The Secretary, or in his absence, any Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.
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ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the officers
of the corporation shall be fixed by or in the manner designated by the Board of
Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of the
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers, as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
(c) DUTIES OF PRESIDENT. The President shall preside at all meetings
of the stockholders and at all meetings of the Board of Directors, unless the
Chairman of the Board of Directors has been appointed and is present. Unless
some other officer has been elected Chief Executive Officer of the corporation,
the President shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the corporation. The
President shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers, as the Board of
Directors shall designate from time to time.
(d) Duties of Vice Presidents. The Vice Presidents may assume and
perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
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(e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of
the stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers, as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall keep or cause to be kept the books of account of the corporation in a
thorough and proper manner and shall render statements of the financial affairs
of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the order of
the Board of Directors, shall have the custody of all funds and securities of
the corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time. The President may direct the Treasurer or any Assistant Treasurer,
or the Controller or any Assistant Controller to assume and perform the duties
of the Chief Financial Officer in the absence or disability of the Chief
Financial Officer, and each Treasurer and Assistant Treasurer and each
Controller and Assistant Controller shall perform other duties commonly incident
to his office and shall also perform such other duties and have such other
powers as the Board of Directors or the President shall designate from time to
time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officer or
agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. Removal. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
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ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND
VOTING OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may,
in its discretion, determine the method and designate the signatory officer or
officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares
of stock of the corporation shall be in such form as is consistent with the
Certificate of Incorporation and applicable law. Every holder of stock in the
corporation shall be entitled to have a certificate signed by or in the name of
the corporation by the Chairman of the Board of Directors, or the President or
any Vice President and by the Treasurer or Assistant Treasurer or the Secretary
or Assistant Secretary, certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may be facsimiles.
In case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent,
or registrar at the date of issue. Each certificate shall state upon the face or
back thereof, in full or in summary, all of the powers, designations,
preferences, and rights, and the limitations or restrictions of the shares
authorized to be issued or shall, except as otherwise required by law, set forth
on the face or back a statement that the corporation will furnish without charge
to each stockholder who so requests
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the powers, designations, preferences and relative, participating, optional, or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Within a reasonable time after the issuance or transfer of uncertificated stock,
the corporation shall send to the registered owner thereof a written notice
containing the information required to be set forth or stated on certificates
pursuant to this section or otherwise required by law or with respect to this
section a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights. Except as otherwise expressly provided by law, the rights and
obligations of the holders of certificates representing stock of the same class
and series shall be identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to agree to indemnify the corporation in such manner as it shall
require or to give the corporation a surety bond in such form and amount as it
may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation shall
be made only upon its books by the holders thereof, in person or by attorney
duly authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the Delaware General Corporation Law.
SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall, subject to applicable law, not be more than sixty (60) nor less than ten
(10) days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of or to
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vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) Prior to the Initial Public Offering, in order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors. Any stockholder of
record seeking to have the stockholders authorize or take corporate action by
written consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. The Board of Directors shall promptly, but in
all events within ten (10) days after the date on which such a request is
received, adopt a resolution fixing the record date. If no record date has been
fixed by the Board of Directors within ten (10) days of the date on which such a
request is received, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is required by applicable law, shall be the first date
on which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
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ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other
corporate securities of the corporation, other than stock certificates (covered
in Section 34), may be signed by the Chairman of the Board of Directors, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or
other corporate security shall be authenticated by the manual signature, or
where permissible facsimile signature, of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of Incorporation
and applicable law, if any, may be declared by the Board of Directors pursuant
to law at any regular or special meeting. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
Certificate of Incorporation and applicable law.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may be
set aside out of any funds of the corporation available for dividends such sum
or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
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ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify
its directors and executive officers (for the purposes of this Article XI,
"executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law or any other applicable law; provided, however, that the
corporation may modify the extent of such indemnification by individual
contracts with its directors and executive officers; and, provided, further,
that the corporation shall not be required to indemnify any director or
executive officer in connection with any proceeding (or part thereof) initiated
by such person unless (i) such indemnification is expressly required to be made
by law, (ii) the proceeding was authorized by the Board of Directors of the
corporation, (iii) such indemnification is provided by the corporation, in its
sole discretion, pursuant to the powers vested in the corporation under the
Delaware General Corporation Law or any other applicable law or (iv) such
indemnification is required to be made under subsection (d).
(b) OTHER OFFICERS. The corporation shall have power to indemnify its
other officers, employees and other agents as set forth in the Delaware General
Corporation Law or any other applicable law.
(c) EXPENSES. The corporation shall advance to any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer, of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding,
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whether civil, criminal, administrative or investigative, if a determination is
reasonably and promptly made (i) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to the proceeding, or (ii)
if such quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, that the facts known to the decision-making party at the time such
determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the corporation.
(d) ENFORCEMENT. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law or any other applicable law for the corporation
to indemnify the claimant for the amount claimed. In connection with any claim
by an executive officer of the corporation (except in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such executive officer is or was a director of the corporation)
for advances, the corporation shall be entitled to raise a defense as to any
such action clear and convincing evidence that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation, or with respect to any criminal action or
proceeding that such person acted without reasonable cause to believe that his
conduct was lawful. Neither the failure of the corporation (including its Board
of Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he has met the applicable
standard of conduct set forth in the Delaware General Corporation Law or any
other applicable law, nor an actual determination by the corporation (including
its Board of Directors, independent legal counsel or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that claimant has not met the applicable
standard of conduct. In any suit brought by a director or executive officer to
enforce a right to indemnification or to an advancement of expenses hereunder,
the burden of proving that the director or executive officer is not entitled to
be indemnified, or to such advancement of expenses, under this Article XI or
otherwise shall be on the corporation.
(e) Non-Exclusivity of Rights. The rights conferred on any person by
this Bylaw shall not be exclusive of any other right which such person may have
or hereafter acquire under any applicable statute, provision of the Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
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authorized to enter into individual contracts with any or all of its directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law, or by any
other applicable law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by this
Bylaw shall continue as to a person who has ceased to be a director, officer,
employee or other agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law or any other applicable law, the corporation, upon
approval by the Board of Directors, may purchase insurance on behalf of any
person required or permitted to be indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw shall only
be prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
(1) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(2) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(3) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Bylaw with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
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(4) References to a "director," "executive officer," "officer,"
"employee," or "agent" of the corporation shall include, without limitation,
situations where such person is serving at the request of the corporation as,
respectively, a director, executive officer, officer, employee, trustee or agent
of another corporation, partnership, joint venture, trust or other enterprise.
(5) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to his last known post office address as shown by the stock record
of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by overnight
delivery service, facsimile, telex or telegram, except that such notice other
than one which is delivered personally shall be sent to such address as such
director shall have filed in writing with the Secretary, or, in the absence of
such filing, to the last known post office address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly
authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) Time Notices Deemed Given. All notices given by mail or by
overnight delivery service, as above provided, shall be deemed to have been
given as at the time of mailing, and all notices given by facsimile, telex or
telegram shall be deemed to have been given as of the sending time recorded at
time of transmission.
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(e) METHODS OF NOTICE. It shall not be necessary that the same method
of giving notice be employed in respect of all directors, but one permissible
method may be employed in respect of any one or more, and any other permissible
method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever
notice is required to be given, under any provision of law or of the Certificate
of Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action or
meeting which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given. In the event that the action taken by the corporation is
such as to require the filing of a certificate under any provision of the
Delaware General Corporation Law, the certificate shall state, if such is the
fact and if notice is required, that notice was given to all persons entitled to
receive notice except such persons with whom communication is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least
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sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the voting stock of the corporation entitled to vote.
The Board of Directors shall also have the power to adopt, amend, or repeal
Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing in these Bylaws shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
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EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
April 2, 1999
Butterfield & Butterfield Auctioneers Corporation
220 San Bruno Avenue
San Francisco, CA 94103
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Butterfield & Butterfield Auctioneers Corporation (the
"Company") of a registration statement on Form SB-2 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission")
covering the underwritten public offering of up to 1,725,000 shares of Common
Stock (the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws and the originals or copies certified to our
satisfaction of such records, documents, certificates, memoranda and other
instruments as in our judgment are necessary or appropriate to enable us to
render the opinion expressed below, and (ii) assumed that the shares of the
Common Stock will be sold by the Underwriters at a price established by the
Pricing Committee of the Company's Board of Directors.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid and
nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Karyn R. Smith
------------------------
KARYN R. SMITH
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Butterfield & Butterfield Auctioneers Corporation
San Francisco, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated February 18, 1999,
except for Note 1 which is as of March 31, 1999, relating to the consolidated
financial statements of Butterfield & Butterfield Auctioneers Corporation and
subsidiary which are contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
San Francisco, California
April 2, 1999
