SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1994
Commission File Number 1-9750
Sotheby's Holdings, Inc.
(Exact name of registrant as specified in its charter)
Michigan 38-2478409
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 North Woodward Avenue, Suite 100
Bloomfield Hills, Michigan 48304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, include area code: (313) 646-2400
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
As of April 30, 1994, there were outstanding 36,584,716 shares of Class A
Limited Voting Common Stock, par value $0.10 per share, and 19,163,971
shares of Class B Common Stock, par value $0.10 per share, of the
Registrant. Each share of Class B Common Stock is freely convertible into
one share of Class A Limited Voting Common Stock.<PAGE>
<PAGE>
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CONSOLIDATED BALANCE SHEETS
Sotheby's Holdings, Inc. and Subsidiaries
(Thousands of dollars)
<CAPTION>
March 31, December
1994 1993
------------ ---------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $37,644 $91,840
Accounts and notes receivable, net of allowance
for doubtful accounts of $10,729 and $10,596
Auction operations 90,828 166,962
Finance operations 103,558 98,419
Other 11,042 12,670
------------ ---------
Total Accounts and Notes Receivable, Net 205,428 278,051
Inventory, net 82,202 81,369
Deferred income taxes 8,858 8,675
Prepaid expenses 11,467 11,880
------------ ---------
Total Current Assets 345,599 471,815
Properties, less allowance for depreciation
and amortization of $49,285 and $51,100 64,219 65,078
Intangible assets, less allowance for
amortization of $26,175 and $44,464 29,581 29,633
Other assets 11,455 11,345
------------ ---------
Total Assets $450,854 $577,871
============ =========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
Sotheby's Holdings, Inc. and Subsidiaries
(Thousands of dollars)
<CAPTION>
March 31, December
1994 1993
------------ ---------
(Unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Due to consignors $77,687 $205,873
Short-term borrowings 4,505 4,583
Accounts payable and accrued liabilities 81,331 95,043
Deferred revenues 6,162 6,165
Accrued income taxes 36,836 36,187
------------ ---------
Total Current Liabilities 206,521 347,851
Long-term Liabilities:
Commercial paper 53,000 34,000
Other long-term obligations 1,377 1,388
------------ ---------
Total Liabilities 260,898 383,239
Shareholders' Equity
Common Stock, $0.10 par value:
Authorized shares - 125,000,000 of Class A and 75,000,000
of Class B
Issued and outstanding shares - 36,569,650 and 35,399,497
of Class A, and 19,164,305 and 20,096,469 of Class B, at
March 31, 1994 and December 31, 1993, respectively 5,574 5,550
Additional paid-in capital 82,889 80,509
Retained earnings 121,214 129,637
Foreign currency translation adjustments (19,721) (21,064
------------ ---------
Total Shareholders' Equity 189,956 194,632
------------ ---------
Total Liabilities and Shareholders' Equity $450,854 $577,871
============ =========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Sotheby's Holdings, Inc. and Subsidiaries
(Thousands of dollars, except per share data)
<CAPTION>
For The Quarter Ended March 31, 1994 1993
- - ------------------------------- --------- ---------
<S> <C> <C>
Auction:
Revenues $34,659 $31,882
Direct costs of services (7,310) (7,158)
Salaries and related costs (19,560) (17,843)
General and administrative expenses (15,622) (14,980)
Depreciation and amortization (1,836) (1,828)
--------- ---------
Operating loss before inventory and other
auction-related activities (9,669) (9,927)
Income from inventory and other auction-related activities 315 327
--------- ---------
Operating loss - Auction (9,354) (9,600)
Interest income 1,327 1,722
Interest expense (630) (1,329)
Net interest charged to Financial Services 335 587
--------- ---------
Loss before taxes - Auction (8,322) (8,620)
Financial Services:
Revenues 1,676 2,305
General and administrative expenses (599) (798)
Net interest expense from Auction (335) (587)
--------- ---------
Income before taxes - Financial Services 742 920
Real Estate:
Revenues 2,617 2,359
Operating expenses (2,108) (1,873)
--------- ---------
Income before taxes - Real Estate 509 486
Corporate operating expenses (1,505) (1,639)
Other non-operating income 98 345
Consolidated:
Revenues 38,952 36,546
Operating loss (9,608) (9,833)
Net interest income 1,032 980
Other non-operating income 98 345
--------- ---------
Loss before taxes (8,478) (8,508)
Income taxes 3,391 3,318
--------- ---------
Net loss ($5,087) ($5,190)
========= =========
Net Loss Per Share ($0.09) ($0.09)
========= =========
Weighted Average Shares Outstanding 55,596,016 55,116,097
=========== ===========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Sotheby's Holdings, Inc. and Subsidiaries
(Thousands of Dollars)
<CAPTION>
For The Quarter Ended March 31, 1994 1993
- - ------------------------------- --------- ---------
<S> <C> <C>
Operating Activities:
Net loss ($5,087) ($5,190)
Adjustments to reconcile net loss to net cash
used by operating activities before
working capital items:
Depreciation and amortization 1,948 1,941
Deferred income taxes (183) 0
Tax benefit of stock option exercises 768 78
Asset provisions 1,430 1,367
Other 158 34
--------- ---------
Net cash used by operating activities
before working capital items (966) (1,770)
Working capital items:
Decrease in prepaid expenses 413 391
Decrease in accounts receivable 76,972 50,552
Decrease (increase) in inventory (1,397) 641
Decrease in due to consignors (128,186) (106,867)
Increase (decrease) in income taxes payable 649 (2,578)
Decrease in other current liabilities (13,715) (6,277)
--------- ---------
Net cash used by operating activities (66,230) (65,908)
Investing Activities:
Finance operation loans (35,908) (6,941)
Collections on finance operation loans 31,199 26,783
Capital expenditures (891) (482)
--------- ---------
Net cash provided (used) by investing activities (5,600) 19,360
Financing Activities:
Increase in commercial paper 19,000 30,900
Increase (decrease) in short-term borrowings (78) 3,828
Proceeds from exercise of stock options 1,636 526
Dividends paid (3,336) (8,253)
--------- ---------
Net cash provided by financing activities 17,222 27,001
Effect of exchange rate changes on cash 412 (103)
--------- ---------
Decrease in Cash and Cash Equivalents (54,196) (19,650)
Cash and Cash Equivalents at Beginning of Period 91,840 85,703
--------- ---------
Cash and Cash Equivalents at End of Period $37,644 $66,053
========= =========
</TABLE>
<PAGE>
SOTHEBY'S HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have been
prepared by Sotheby's Holdings, Inc. (together with its subsidiaries,
the "Company") pursuant to the rules and regulations of the Securities
and Exchange Commission. These consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the notes thereto incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 (the "Annual Report"). Reference should be made to the Annual
Report for industry segment information required to be included under
Financial Accounting Standards Board Statement No. 14.
In the opinion of the management of the Company, all adjustments,
consisting of normal recurring adjustments, necessary for a fair
presentation of the results of operations for the quarter ended March
31, 1994 and 1993 have been included. Certain amounts for the quarter
ended March 31, 1993 have been reclassified to conform to the 1994
presentation.
2. Credit Arrangements
-------------------
At March 31, 1994, there were $53.0 million of outstanding commercial
paper notes sold to dealers at weighted average discount rates of
3.7%. These notes have been classified on the consolidated balance
sheets as long-term liabilities based on the Company's intent and
ability to maintain or refinance these obligations on a long-term
basis. Short-term borrowings totaled $4.5 million at March 31, 1994
and consisted primarily of a demand note payable which bears interest
at prime + 1%.
3. Commitments and Contingencies
-----------------------------
In conjunction with the client loan program, the Company enters into
legally binding arrangements to lend, on a collateralized basis, to
potential consignors and other individuals who have collections of
fine art or other objects. Unfunded commitments to extend additional
credit were approximately $24.2 million at March 31, 1994 and $5.8
million at May 3, 1994.
In certain instances, consignor advances are made with recourse
limited only to the works of art consigned for sale and pledged as
security for the loan, or with recourse limited to the consigned works
and to other works of art owned by the consignor but not pledged as
security. As of March 31, 1994 and May 3, 1994, $18.5 million and
<PAGE>
$34.6 million, respectively, of these consignor advances were
outstanding.
The Company has a mortgage guarantee program whereby the employee
borrows from a bank on a demand basis and pays an annual interest rate
equal to the prime rate. All of the repayment obligations of the
employee are guaranteed by the Company. These obligations totaled
$2.0 million at March 31, 1994.
In addition, the Company, in the normal course of business, is a
defendant in various legal actions.
In the opinion of management, the commitments and contingencies
described above currently are not expected to have a material adverse
effect on the Company's financial statements.
4. Seasonality of Business
-----------------------
The worldwide art auction market has two principal selling seasons,
spring and fall. During the summer and winter, sales are considerably
lower. The table below demonstrates that at least 80% of the
Company's auction sales have been derived from the second and fourth
quarters of the year for each of the last three years.
<TABLE>
<CAPTION>
Percentage of Annual
Auction Sales
----------------------
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
January - March 10% 12% 11%
April - June 38% 38% 37%
July - September 6% 8% 7%
October - December 46% 42% 45%
------ ------ ------
100% 100% 100%
====== ====== ======
</TABLE>
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
- - ---------------------
Auction
- - -------
The worldwide auction business is highly seasonal in nature, with two
principal selling seasons, spring and fall. Accordingly, first
quarter results reflect a period of low auction sales resulting in
lower operating margins due to the fixed nature of many of the
operating expenses. (See Note 4 in the Notes to the Consolidated
Financial Statements for additional information.)
Following is a geographical breakdown of the Company's auction sales
for the three months ended March 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
North America $101,940 $ 70,843
Europe 59,341 58,468
Asia - 274
-------- --------
Total $161,281 $129,585
======== ========
</TABLE>
For the quarter ended March 31, 1994, auction sales increased to
$161.3 million from $129.6 million in the first quarter of 1993, an
increase of $31.7 million, or 24%. This increase was primarily
attributable to North American sales, with growth of $31.1 million, or
44%, over 1993 levels. Two single owner sales held in New York, the
Peter Jay Sharp Collection and the Bertram K. and Nina Fletcher Little
Collection, were principally responsible for this growth with total
sales of $20.6 million and $7.4 million, respectively. In addition,
several fine art categories, including Old Master Paintings and 19th
Century Paintings, exceeded the sale totals achieved during the same
period last year. European sales increased $0.9 million, or 1.5%,
during the first quarter of 1994. There were no sales in Asia during
the first three months of 1994 as the single-owner sale that occurred
in Australia in the first quarter of 1993 did not recur this year.
The impact of translating sales outside North America into U.S.
dollars was not material to first quarter sales.
Revenues from auction operations ("Auction") increased $2.8 million,
or 9%, to $34.7 million in the first quarter of 1994. The increase in
revenues was primarily attributable to increased commissions (which
are principally buyer's premium, vendor's commission and expense
recoveries). The growth in commissions of $3.9 million, or 17%,
resulted from the greater volume of auction sales discussed above.
The increase in commissions was offset, in part, by reductions in the
realized rate of vendor's commission, as well as a decline in other
<PAGE>
revenue areas. Auction revenues as a percent of auction sales
decreased approximately 3% in the first quarter of 1994 largely due to
the fact that a majority of the increase in auction sales came from
the two single owner sales held in New York, which typically generate
lower than average commissions.
Auction's operating expenses (which include Auction's direct costs of
services, salaries, general and administrative expenses as well as
depreciation and amortization) totaled $44.3 million in the first
quarter of 1994, an increase of $2.5 million, or 6%, when compared to
the same period last year. The increase in operating expenses is
largely due to an increase in salaries and related costs of $1.7
million as well as an increase in general and administrative expenses
of $0.6 million. The increase in salaries and related costs is
principally due to salary increases at the beginning of 1994, as well
as salary adjustments put into effect during the course of 1993
(following several years of very restrained compensation growth).
Direct costs of services, which consist largely of catalogue production,
distribution and mailing costs, were up slightly when compared to 1993.
Direct costs of services as a percentage of sales was 4.5% in the
first quarter of 1994 compared to 5.5% in the first quarter of 1993.
For the quarter ended March 31, 1994, income from inventory and other
auction-related activities contributed $0.3 million to pre-tax income,
which was flat when compared to the same period of the prior year.
Income from inventory and other auction-related activities includes
net gains on sales of inventory (including gains on sales of inventory
obtained as a result of the auction process and the Company's share of
earnings from the sale of inventory through the Acquavella Modern Art
Partnership) and provisions for writedowns of inventory to estimated
realizable value.
Traditionally, the first quarter generates a loss due to the seasonal
nature of the art auction business. Auction's operating loss totalled
$9.4 million for the quarter ended March 31, 1994, which represents a
3% improvement over the first quarter of 1993.
Auction's interest income, which is earned on short-term investments
of excess cash, decreased in the first quarter of 1994 compared to the
first quarter of 1993 due to a lower level of invested funds in Europe
when compared to the prior year. Interest expense decreased due to a
lower average level of commercial paper borrowings.
Auction funds a portion of the loan portfolio of the finance operation
("Financial Services"). Net interest charged to Financial Services
during the first quarter of 1994 represents interest income of $0.5
million on borrowings by Financial Services from Auction net of
interest expense on special financing programs of $0.2 million charged
by Financial Services to Auction.
<PAGE>
Financial Services
- - ------------------
Revenues from Financial Services decreased to $1.7 million for the
first quarter of 1994 from $2.3 million in last year's first quarter
due primarily to a decrease in the average outstanding loan portfolio
and, to a lesser extent, to lower rates of interest earned on
outstanding loans. Average month-end portfolio balances for the three
months ended March 31, 1994 and 1993 were approximately $96.2 million
and $114.9 million, respectively. The average interest rate charged
to borrowers decreased in the first quarter of 1994 compared to the
same period last year consistent with the general decline in interest
rates in the countries where the Company does business. The smaller
Financial Services' portfolio reflects the Company's policy, since
1990, of reducing the portfolio in response to general economic as
well as market conditions. The Company is experiencing increased
demand for loans, particularly from consignors, which has resulted in
portfolio growth during the latter part of the first quarter and which
has continued into the second quarter.
For the first three months of 1994, income before taxes decreased $0.2
million compared to the prior year. The decrease is principally the
result of the smaller client loan portfolio.
Real Estate
- - -----------
Revenues from Sotheby's International Realty, Inc. ("Real Estate")
increased $0.3 million in the first quarter of 1994. This increase
reflects a higher level of property sales partially offset by lower
commission rates. Operating expenses increased $0.2 million compared
to 1993, largely reflecting an increase in marketing and other costs
associated with the higher level of property sales. Income before
taxes of $0.5 million was unchanged compared to the prior year.
Provision for Income Taxes
- - --------------------------
The consolidated effective tax rate was 40% for the first three months
of 1994 and 39% for the first three months of 1993. The increased tax
rate reflects the net impact on the Company of the Omnibus Budget
Reconciliation Act of 1993 which was enacted during the third quarter
of 1993.
Net Loss and Loss per Share
- - ---------------------------
For the first quarter of 1994 and 1993, the Company recorded a net
loss of $5.1 million and $5.2 million, respectively. Net loss per
share for the first quarter of 1994 and 1993 was $0.09 per share.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company's net debt position (total debt, which includes short-term
borrowings and commercial paper, less cash and cash equivalents)
totaled $19.9 million at March 31, 1994 compared to a net cash
position (cash and cash equivalents less total debt) of $53.3 million
at December 31, 1993. Working capital at March 31, 1994 was $139.1
<PAGE>
million compared to $124.0 million at December 31, 1993.
The Company relies on internally generated funds and borrowings to
meet its financing requirements. The Company may issue up to $200
million of notes pursuant to its U.S. commercial paper program, of
which $53 million was issued and outstanding at March 31, 1994. The
Company supports any notes issued under this program with lines of
credit. The Company has $175 million available under committed
Revolving Credit Facilities and has $30 million available under short-
term lines of credit.
For the three months ended March 31, 1994 and 1993, the Company's
primary sources of liquidity were derived from short-term borrowings.
The most significant cash requirements were from operating activities
and payment of shareholder dividends. For the quarter ended March 31,
1994, cash used by operating activities totalled $66.2 million
compared to $65.9 million for the corresponding period of 1993.
The Company paid dividends to shareholders of $3.3 million during the
first three months of 1994 in respect of 1993 and $8.3 million during
the first three months of 1993 in respect of 1992. During the third
quarter of 1993, the Company announced a reduction in the quarterly
dividend on common shares to $0.06 per share.
Capital expenditures, consisting primarily of office and auction
facility refurbishment and the acquisition of computer equipment,
totalled $0.9 million for the first quarter of 1994 and $0.5 million
for the first quarter of 1993.
The Company believes that operating cash flows will be adequate to
meet normal working capital requirements and that the commercial paper
programs and credit facilities will continue to be adequate to fund
the client loan program, peak working capital requirements and other
short-term commitments to consignors.
The Company evaluates, on an ongoing basis, the adequacy of its
principal auction premises for the requirements of the present and
future conduct of its business. Any significant alteration to these
premises may require utilization of additional capital resources.
<PAGE>
PART II, OTHER INFORMATION
SOTHEBY'S HOLDINGS, INC.
AND SUBSIDIARIES
ITEM 6. Exhibits and Reports on Form 8-K
(a)Exhibits
None
(b)Reports on Form 8-K
No report on Form 8-K has been filed for the quarter ended
March 31, 1994.
<PAGE>
SOTHEBY'S HOLDINGS, INC.
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed this 16 day of May, 1994,
on its behalf by the undersigned, thereunto duly authorized and in the
capacity indicated.
SOTHEBY'S HOLDINGS, INC.
By: THOMAS F. GANNALO
-----------------
Thomas F. Gannalo
Vice President &
Chief Accounting Officer
<PAGE>
