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 Quarterly Period Ended September 30, 1996
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, including area code: (810) 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 October 31, 1996, there were outstanding 38,345,903 shares of Class
A Limited Voting Common Stock, par value $0.10 per share, and 17,250,534
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>
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Consolidated Statements of Income
Sotheby's Holdings, Inc. and Subsidiaries
(Thousands of dollars, except per share data)
(UNAUDITED)
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Auction $ 30,335 $ 27,849 $ 179,881 $ 164,340
Other 7,884 7,640 23,732 22,156
Total revenues 38,219 35,489 203,613 186,496
Expenses:
Direct costs of services (7,201) (7,669) (40,149) (35,769)
Salaries and related costs (25,605) (24,082) (80,547) (75,237)
General and administrative (18,938) (20,190) (58,020) (58,298)
Depreciation and amortization (2,389) (2,286) (6,916) (6,829)
Total expenses (54,133) (54,227) (185,632) (176,133)
Operating income (loss) (15,914) (18,738) 17,981 10,363
Interest income 1,163 903 3,127 2,297
Interest expense (1,121) (1,567) (2,707) (4,261)
Other income (expense) (54) (33) (305) 24
Income (loss) before taxes (15,926) (19,435) 18,096 8,423
Income tax benefit (expense) 6,371 7,773 (7,238) (3,370)
Net Income (Loss) ($ 9,555) ($11,662) $ 10,858 $ 5,053
Earnings (Loss) Per Share ( $0.17) ( $0.21) $ 0.19 $ 0.09
Weighted Average Shares Outstanding (in millions) 55.4 55.9 56.1 56.2
Dividends Per Share $ 0.08 $ 0.06 $ 0.24 $ 0.18
Prior period amounts have been restated to conform to current year presentation
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
Sotheby's Holdings, Inc. and Subsidiaries
(UNAUDITED)
(Thousands of dollars)
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 37,865 $ 40,713
Accounts and notes receivable, net of allowance
for doubtful accounts of $10,711 and $12,578
Accounts receivable 85,368 215,221
Notes receivable 94,879 98,711
Other 14,363 21,200
Total Accounts and Notes Receivable, Net 194,610 335,132
Inventory, net 17,619 22,798
Deferred income taxes 7,249 8,434
Prepaid expenses and other current assets 13,770 11,936
Total Current Assets 271,113 419,013
Notes receivable 79,916 42,670
Properties, less allowance for depreciation
and amortization of $60,256 and $63,898 64,318 65,320
Intangible assets, less allowance for
amortization of $14,834 and $13,986 27,146 28,123
Investment in partnership 35,945 38,801
Other assets 7,889 6,177
Total Assets $ 486,327 $ 600,104
Liabilities And Shareholders' Equity
Current Liabilities
Due to consignors $ 76,790 $ 224,223
Short-term borrowings 3,712 5,816
Accounts payable and accrued liabilities 54,981 67,579
Deferred revenue 7,856 5,709
Accrued income taxes 15,536 14,292
Total Current Liabilities 158,875 317,619
Long-Term Liabilities
Commercial paper 94,000 38,000
Deferred income taxes 14,542 15,801
Other long-term obligations 1,218 1,202
Total Liabilities 268,635 372,622
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 - 38,258,902 and 38,466,478 of Class A, and
17,250,534 and 17,278,667 of Class B, at September 30,1996 and
December 31, 1995, respectively 5,551 5,575
Additional paid-in capital 74,338 81,051
Retained earnings 153,181 155,688
Foreign currency translation adjustments (15,378) (14,832)
Total Shareholders' Equity 217,692 227,482
Total Liabilities And Shareholders' Equity $ 486,327 $ 600,104
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Sotheby's Holdings, Inc. and Subsidiaries
(UNAUDITED)
(Thousands of dollars)
<CAPTION>
Nine Months Ended September 30, 1996 1995
<S> <C> <C>
Operating Activities:
Net income $ 10,858 $ 5,053
Adjustments to reconcile net income to net cash
provided (used) in operating activities:
Depreciation and amortization 6,916 6,829
Deferred income taxes (74) 1,904
Tax benefit of stock option exercises 1,533 165
Asset provisions 3,139 7,247
Other 232 133
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets (1,834) (2,854)
Decrease in accounts receivable 130,634 62,521
Decrease (increase) in inventory 7,049 (14,246)
Decrease (increase) in other assets (1,798) 1,071
Decrease in due to consignors (147,433) (103,659)
Increase (decrease) in accrued income taxes 1,244 (11,115)
Decrease in other liabilities (9,690) (4,633)
Net cash provided (used) by operating activities 776 (51,584)
Investing Activities:
Increase in notes receivable (88,500) (92,813)
Collections of notes receivable 54,201 62,019
Capital expenditures (5,077) (5,605)
Distributions from investment in partnership 2,856 914
Net cash used by investing activities (36,520) (35,485)
Financing Activities:
Increase in commercial paper 56,000 70,500
Increase (decrease) in short term borrowings (2,104) 6,869
Proceeds from exercise of stock options 3,547 848
Repurchase of common stock (12,024) 0
Dividends (13,365) (10,054)
Net cash provided by financing activities 32,054 68,163
Effect of exchange rate changes on cash 842 1,288
Decrease in cash and cash equivalents (2,848) (17,618)
Cash and cash equivalents at beginning of period 40,713 34,987
Cash and cash equivalents at end of period $ 37,865 $ 17,369
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
SOTHEBY'S HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO THE 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, 1995 (the "Annual Report").
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 three and nine
month periods ended September 30, 1996 and 1995 have been included.
Certain prior period amounts have been restated to conform to the
current year's presentation.
In January of 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The
adoption of this standard did not have a material impact on the
Company's financial statements.
2. Notes Receivable
As of September 30, 1996, an amount equal to approximately 34% of
the Company's notes receivable (current and non-current) was
extended to one borrower. At November 14, 1996, the loan value was
62% of the low auction estimate of the collateral securing the
loan. No other individual loan amounted to more than 5% of total
assets.
Interest income on impaired loans is recognized to the extent cash
is received. Where there is doubt regarding the ultimate
collectibility of principal for impaired loans, cash receipts,
whether designated as principal or interest, are thereafter applied
to reduce the recorded investment in the loan. Following are the
changes in the allowance for credit losses relating to both current
and non-current notes receivable for the nine months ended
September 30, 1996 and 1995 (in thousands):
<PAGE>
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Allowance for credit losses
at December 31, 1995 and 1994 $ 2,848 $ 2,292
Provisions 299 453
Write-offs (786) (134)
Other (3) 16
Allowance for credit losses
at September 30, 1996 and 1995 $ 2,358 $ 2,627
</TABLE>
3. Credit Arrangements
At September 30, 1996, pursuant to the Company's $200 million U.S.
commercial paper program, there were $94.0 million of outstanding
commercial paper notes sold to dealers at weighted average interest
rates of 5.5% with average maturities of 20.1 days. These notes
have been classified on the consolidated balance sheet as long-term
liabilities based on the Company's ability to maintain or refinance
these obligations on a long-term basis. At September 30, 1996, the
Company also had $3.7 million outstanding under domestic and
foreign bank lines of credit at weighted average interest rates of
7.7%.
On July 11, 1996, the Company entered into an amended and restated
$300 million Bank Credit Agreement (the "Credit Agreement").
Borrowings under the Credit Agreement are permitted to July 11,
2001 in either U.S. dollars or U.K. pounds sterling. The interest
rate applicable to borrowings under the facility is based on the
London Interbank Offer Rate ("LIBOR"). The facility fee for the
$300 million committed amount is 0.10% per annum. The Credit
Agreement contains certain financial covenants. Under these
covenants, the Company is permitted to pay dividends, however, the
Company is required to maintain consolidated tangible net worth, as
defined, of at least $150 million. At September 30, 1996
consolidated tangible net worth, as defined, was $205.9 million.
The Credit Agreement represents an amendment and restatement of the
Company's former $300 million credit agreement which was executed
in August 1994.
4. Stockholders' Equity
In June of 1996, the Board of Directors authorized an increase in
the number of shares of its Class A Common Stock to be acquired
under the previously approved November 1995 stock repurchase
program to 4.0 million shares.
5. Commitments and Contingencies
The Company, in the normal course of business, is a defendant in
various legal actions.
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 and other objects. Unfunded commitments to
extend additional credit were approximately $23.0 million at
September 30, 1996.
On certain occasions, the Company will guarantee to the consignor a
minimum price in connection with the sale of property at auction.
The Company must perform under its guarantee only in the event that
(a) the property fails to sell and the consignor prefers to be paid
the minimum price rather than retain ownership of the unsold
property, resulting in the Company's purchase of the property at
the minimum price or (b) the property sells for less than the
minimum price and the Company must pay the difference between the
sale price at auction and the minimum price. Under the auction
guarantees, the Company participates in a share of the proceeds if
the property under guarantee sells above a minimum price.
<PAGE>
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 consolidated financial statements.
6. 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 are derived from the second and
fourth quarters of the year.
<TABLE>
<CAPTION>
Percentage of Annual
Auction Sales
1995 1994 1993
<S> <C> <C> <C>
January - March 11% 12% 10%
April - June 39% 40% 38%
July - September 7% 8% 6%
October - December 43% 40% 46%
100% 100% 100%
</TABLE>
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The worldwide auction business is highly seasonal in nature, with
two principal selling seasons, spring and fall. Accordingly, first
and third quarter results reflect lower auction sales and lower
operating margins than the second and fourth quarters due to the
fixed nature of many of the operating expenses. (See Note 6 in
the Notes to the Consolidated Financial Statements for additional
information.)
Following is a geographical breakdown of the Company's auction
sales for the third quarter and nine month periods ended September
30, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
For the Third Quarter For the Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
North America $ 31,376 $ 31,224 $436,806 $490,267
Europe 103,242 82,117 455,467 436,033
Asia 13,988 10,233 42,349 28,754
Total $148,606 $123,574 $934,622 $955,054
</TABLE>
For the quarter ended September 30, 1996, worldwide auction sales
of $148.6 million increased $25.0 million, or 20%, compared to the
third quarter of 1995. Auction sales recorded by the Company's
foreign operations were not materially impacted by translation into
U.S. dollars for the third quarter of 1996. The increase in third
quarter sales was largely due to sales in the United Kingdom,
notably the sale of European Works of Art from the collection
formed by the British Rail Pension Fund and sales of Old Master
paintings. For the nine months ended September 30, 1996, worldwide
auction sales decreased $20.4 million, or 2%, compared to 1995.
Excluding foreign currency exchange rate movements, auction sales
were relatively unchanged from the prior year despite the lower
level of single-owner sales during 1996, particularly the lack of a
replacement for the sale of the Stralem Collection held in the
spring of 1995, which totaled $65.2 million.
For the third quarter of 1996, worldwide auction revenues increased
$2.5 million, or 9%, to $30.3 million. Foreign currency exchange
rate movements did not materially impact auction revenues for the
third quarter of 1996. Auction revenue as a percentage of sales
for the three months ended September 30, 1996 was 20.4% compared to
22.5% for the three months ended September 30, 1995. This decrease
largely reflects a change in sales mix to property with higher
average values which yield lower average rates. For the nine
months ended September 30, 1996, auction revenues increased $15.5
million, or 9%, compared to 1995. Movements in foreign currency
exchange rates did not materially impact auction revenues for the
first nine months of 1996. Auction revenue as a percentage of
sales for the first nine months of 1996 was 19.2% compared to 17.2%
for 1995. This increase was largely attributable to the positive
impact of our new sellers' commission structure, the revenue
contribution from the sale of property from the Estate of
Jacqueline Kennedy Onassis, an increase in expense recoveries and a
shift in the mix of auction sales toward property with lower
average lot values.
<PAGE>
Other revenues, which include revenues from art-related financing
activities, real estate operations, other auction-related services
and principal activities, increased $0.2 million in the third
quarter of 1996 when compared to the same quarter of 1995. This
increase is due largely to other auction-related services as well
as art-related financing activities offset, in part, by lower net
revenue from principal activities. For the nine months ended
September 30, 1996, other revenue increased $1.6 million compared
to 1995. This increase resulted principally from real estate
operations due to stronger sales in the U.S. partly offset by a
decrease in net revenue from principal activities, reflecting an
increase in writedowns on inventory to net realizable value.
Total expenses remained flat in the third quarter of 1996 compared
to 1995. For the nine months ended September 30, 1996, total
expenses, excluding costs associated with the sale of property from
the Estate of Jacqueline Kennedy Onassis which were fully
recovered, increased 2%. Movements in foreign currency exchange
rates did not have a material impact on third quarter or nine month
expenses.
Direct costs of services (which consist largely of catalogue
production and distribution costs as well as corporate marketing
and sale marketing expenses) decreased $0.5 million, or 6%, during
the third quarter of 1996 compared to the same period of 1995. For
the nine months ended September 30, 1996, direct costs of services
increased $4.4 million, or 12%, compared to 1995. The increase was
primarily due to an increase in catalogue expenses relating to the
sale of the property from the Estate of Jacqueline Kennedy Onassis
which were fully recovered and were reflected in auction revenue.
Excluding these costs, direct costs in the first nine months of
1996 decreased slightly and totaled 3.7% of auction sales,
unchanged compared to the prior year.
All other operating expenses (which include salaries and related
costs, general and administrative expenses as well as depreciation
and amortization) totaled $46.9 million for the third quarter of
1996, an increase of less than 1% compared to the third quarter of
1995. The change in third quarter expenses was principally due to
an increase in salaries and related costs offset, in large part, by
reductions in general and administrative expenses. For the nine
months ended September 30, 1996, these expenses increased 4%
compared to the prior year. The increase in all other operating
expenses for the nine months ended September 30, 1996 is largely
due to salaries and related costs which increased 7% when compared
to the prior year.
Interest income increased $0.3 million and $0.8 million for the
three and nine month periods ended September 30, 1996,
respectively, due largely to higher cash balances in Europe.
Interest expense decreased $0.4 million and $1.6 million for the
three and nine months ended September 30, 1996, respectively,
partially due to a decline in the average amount of borrowings
outstanding and, to a lesser extent, a reduction in the average
interest rate paid on those borrowings.
The consolidated effective tax rate was 40% for the third quarter
and nine month periods ended September 30, 1996 and 1995.
For the third quarter of 1996, the net loss improved 18%, to a net
loss of $9.6 million from a net loss of $11.7 million in the third
quarter of 1995. The loss per share for the third quarter of 1996
decreased 19% to $0.17 from $0.21 in the third quarter of 1995.
For the nine months ended September 30, 1996, net income increased
$5.8 million, to $10.9 million from $5.1 million in 1995. Earnings
per share for the first nine months increased to $0.19 from $0.09
in 1995.
<PAGE>
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 $59.8 million at September 30, 1996 compared
to $3.1 million at December 31, 1995, reflecting the seasonal
nature of the Company's auction business. Working capital (current
assets less current liabilities) at September 30, 1996 was $112.2
million compared to $101.4 million at December 31, 1995.
The Company's client loan portfolio increased to $177.2 million at
September 30, 1996 from $144.2 million at December 31, 1995. These
amounts include $79.9 million and $42.7 million of loans which have
a maturity of more than one year at September 30, 1996 and December
31, 1995, respectively.
The Company relies on internally generated funds and borrowings to
meet its financing requirements. The Company may issue up to $200
million of short-term notes pursuant to its U.S. commercial paper
program, of which $94.0 million was issued and outstanding at
September 30, 1996. The Company supports any short-term notes
issued under its U.S. commercial paper program with committed
credit facilities. The Company maintains $300 million of committed
and available financing pursuant to a Bank Credit Agreement which
was amended and restated on July 11, 1996 (See Note 3 in the Notes
to the Consolidated Financial Statements for additional
information). The Credit Agreement provides the Company $300
million of committed financing to July 11, 2001.
For the nine months ended September 30, 1996, the Company's primary
sources of liquidity were derived from available cash balances
supplemented by commercial paper borrowings. The most significant
cash uses during the first nine months of 1996 were the net funding
of the client loan portfolio, payment of shareholder dividends and
repurchases of common stock. For the nine months ended September
30, 1995, the Company's primary sources of liquidity were derived
from available cash balances supplemented by commercial paper
borrowings. The most significant cash uses during the first nine
months of 1995 were operations, net funding of the client loan
portfolio and payment of shareholder dividends.
Capital expenditures, consisting primarily of office and auction
facility refurbishment and the acquisition of computer equipment,
totaled $5.1 and $5.6 million for the first nine months of 1996 and
1995, respectively.
<PAGE>
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. As of September 30, 1996, no such advances
were outstanding. From time to time, the Company has off-balance
sheet commitments to consignors that property will sell at a
minimum price and legally binding lending commitments in
conjunction with the client loan program. See Note 5 in the Notes
to the Consolidated Financial Statements for additional
information. The Company does not believe that material liquidity
risk exists relating to these commitments.
The Company believes that operating cash flows will be adequate to
meet normal working capital requirements and that the commercial
paper program and credit facilities will continue to be adequate to
fund the client loan program, peak working capital requirements and
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 which
the Company believes is adequately available.
FORWARD-LOOKING STATEMENTS
This form 10-Q contains certain forward-looking statements, as such
term is defined in Section 27A of the Securities Act of 1933, as
amended, relating to future events and the financial performance of
the Company, particularly with respect to the adequacy of working
capital as well as additional capital necessary for relocation of
all or a portion of the Company. Such statements are only
predictions and involve risks and uncertainties, resulting in the
possibility that the actual events or performance will differ
materially from such predictions. Major factors which the Company
believes could cause the actual results to differ materially from
the predicted results in the forward-looking statements include, but
are not limited to, the following, which are not listed in any
particular rank order:
(1) The Company's business is seasonal, with peak revenues and
operating income occurring in the second and fourth quarters of each
year as a result of the traditional spring and fall art auction
season.
(2) The overall strength of the international economy and financial
markets and, in particular, the economies of the United States, the
United Kingdom, and the major countries of Continental Europe and
Asia (principally Japan and Hong Kong).
(3) Competition with other auctioneers and art dealers.
(4) The volume of consigned property and the marketability at
auction of such property.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b)Reports on Form 8-K
None.
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
<C> <S>
27. Financial Data Schedule
</TABLE>
<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
the 14th day of November, 1996, on its behalf by the undersigned,
thereunto duly authorized and in the capacity indicated.
SOTHEBY'S HOLDINGS, INC.
By: PATRICIA A. CARBERRY
Patricia A. Carberry
Vice President, Controller
and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE>5
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 37,865
<SECURITIES> 0
<RECEIVABLES> 194,610
<ALLOWANCES> 10,711
<INVENTORY> 17,619
<CURRENT-ASSETS> 271,113
<PP&E> 64,318
<DEPRECIATION> 60,256
<TOTAL-ASSETS> 486,327
<CURRENT-LIABILITIES> 158,875
<BONDS> 94,000
<COMMON> 5,551
0
0
<OTHER-SE> 212,141
<TOTAL-LIABILITY-AND-EQUITY> 486,327
<SALES> 0
<TOTAL-REVENUES> 203,613
<CGS> 0
<TOTAL-COSTS> 40,149
<OTHER-EXPENSES> 83,909
<LOSS-PROVISION> 808
<INTEREST-EXPENSE> 2,707
<INCOME-PRETAX> 18,096
<INCOME-TAX> 7,238
<INCOME-CONTINUING> 10,858
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,858
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
