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 March 31, 1997
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 April 30, 1997, there were outstanding 38,694,817 shares of Class A
Limited Voting Common Stock, par value $0.10 per share, and 17,219,847
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>
INDEX
PART I: FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Statements of Income for the Three
Months Ended March 31, 1997 and 1996 3
Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
PART II: OTHER INFORMATION
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 17
EXHIBIT INDEX 18
SIGNATURE 19
<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
Ended March 31,
1997 1996
<S> <C> <C>
Revenues:
Auction and related $44,783 $33,761
Other 9,299 7,035
Total revenues 54,082 40,796
Expenses:
Direct costs of services (9,988) (8,793)
Salaries and related costs (28,947) (25,395)
General and administrative (21,439) (18,237)
Depreciation and amortization (2,562) (2,281)
Non-recurring charges (2,500) 0
Total expenses (65,436) (54,706)
Operating loss (11,354) (13,910)
Interest income 792 1,087
Interest expense (614) (933)
Other income 56 160
Loss before taxes (11,120) (13,596)
Income taxes 4,337 5,439
Net Loss ($6,783) ($8,157)
Loss Per Share ($0.12) ($0.15)
Weighted Average Shares Outstanding (in millions) 56.0 56.0
Dividends Per Share $0.10 $0.08
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>
March 31, December 31,
1997 1996
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 4,714 $ 66,886
Accounts and notes receivable, net of allowance
for doubtful accounts of $9,458 and $10,156
Accounts receivable 133,186 250,780
Notes receivable 106,556 81,761
Other 13,137 12,810
Total Accounts and Notes Receivable, Net 252,879 345,351
Inventory, net 18,181 14,801
Deferred income taxes 5,409 4,655
Prepaid expenses and other current assets 15,312 14,689
Total Current Assets 296,495 446,382
Notes receivable 52,252 69,418
Properties, less allowance for depreciation
and amortization of $64,752 and $63,983 68,193 70,576
Intangible assets, less allowance for
amortization of $15,609 and $15,607 29,673 27,199
Investment in partnership 35,745 35,834
Other assets 5,843 6,689
Total Assets $488,201 $656,098
Liabilities And Shareholders' Equity
Current Liabilities
Due to consignors $118,690 $277,751
Short-term borrowings 36,381 3,211
Accounts payable and accrued liabilities 56,552 75,023
Deferred revenue 7,189 7,166
Accrued income taxes 16,544 25,765
Total Current Liabilities 235,356 388,916
Long-Term Liabilities
Deferred income taxes 12,661 12,493
Other long-term obligations 1,169 1,217
Total Liabilities 249,186 402,626
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 - 38,857,434 and 38,669,411 of Class A, and
17,219,847 and 17,214,987 of Class B, at March 31,1997 and
December 31, 1996, respectively 5,608 5,589
Additional paid-in capital 80,570 78,382
Retained earnings 166,426 178,805
Foreign currency translation adjustments (13,589) (9,304)
Total Shareholders' Equity 239,015 253,472
Total Liabilities And Shareholders' Equity $488,201 $656,098
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Sotheby's Holdings, Inc. and Subsidiaries
(Thousands of dollars)
(UNAUDITED)
<CAPTION>
Three Months Ended March 31, 1997 1996
<S> <C> <C>
Operating Activities:
Net loss ($ 6,783) ($ 8,157)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 2,562 2,281
Deferred income taxes (586) 455
Tax benefit of stock option exercises 570 1,041
Asset provisions 424 702
Other (881) 5
Changes in assets and liabilities:
Decrease in accounts receivable 111,854 131,068
Decrease (increase) in inventory (3,785) 855
Decrease (increase) in prepaid expenses and other
current assets (623) 974
Decrease in other assets 850 456
Decrease in due to consignors (159,061) (138,333)
Decrease in accrued income taxes (9,221) (7,294)
Decrease in other liabilities (18,844) (17,801)
Net cash used by operating activities (83,524) (33,748)
Investing Activities:
Increase in notes receivable (36,002) (21,724)
Collections of notes receivable 26,617 29,467
Capital expenditures (1,719) (910)
Decrease in investment in partnership 89 367
Net cash provided (used) by investing activities (11,015) 7,200
Financing Activities:
Increase in commercial paper 0 20,000
Increase (decrease) in short term borrowings 31,027 (1,216)
Proceeds from exercise of stock options 1,638 1,354
Dividends (5,595) (4,475)
Net cash provided by financing activities 27,070 15,663
Effect of exchange rate changes on cash 5,297 2,114
Decrease in cash and cash equivalents (62,172) (8,771)
Cash and cash equivalents at beginning of period 66,886 40,713
Cash and cash equivalents at end of period $4,714 $31,942
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, 1996 (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 months
ended March 31, 1997 and 1996 have been included. Certain prior
period amounts have been restated to conform to the current year's
presentation.
2. Notes Receivable
As of March 31, 1997, an amount equal to approximately 24% of the
Company's notes receivable (current and non-current) was extended
to one borrower. The Company's general policy in relation to
secured loans is to lend an amount which is equal to or less than
50% of the low estimated auction value of the collateral ("loan to
value ratio"). The loan to value ratio for this secured loan was
62% at March 31, 1997. No other individual loan amounted to more
than 5% of total assets at March 31, 1997.
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 three months ended March
31, 1997 and 1996 (in thousands):
<PAGE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Allowance for credit losses
at December 31, 1996 and 1995 $2,501 $3,052
Provisions 63 156
Write-offs (3) -
Other (25) (27)
Allowance for credit losses
at March 31, 1997 and 1996 $2,536 $3,181
</TABLE>
3. Credit Arrangements
At March 31, 1997, the Company had $36.4 million of short term
borrowings outstanding at weighted average interest rates of 6.5%.
4. 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, generally 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 $21.5
million at March 31, 1997.
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 amount of the guarantee. At May 9,
1997, the Company had outstanding guarantees totaling approximately
$9 million which covers auction property having a mid-estimate
sales price of approximately $13 million. Under the auction
guarantees, the Company participates in a share of the proceeds if
the property under guarantee sells above a minimum price. In
addition, the Company is obligated under the terms of certain
auction guarantees to fund a portion of the guarantee prior to the
auction. At March 31, 1997, $7.0 million had been funded.
<PAGE>
In early 1997, a television program aired in the U.K. and a related
book was published, both of which contain certain allegations of
improper or illegal conduct by current and former employees of the
Company. In response to these allegations, the Board of Directors,
in February 1997, established a committee of independent directors
to review the issues raised by the book and related matters. The
Independent Review Committee has retained outside independent
counsel in the U.S. and the U.K. to assist and advise the Committee
in its review. The Company's management is conducting its own
review. Due to the preliminary nature of these investigations, it is
not possible at this time to estimate the full impact of any of the
alleged activities or the expenses associated with these
investigations on the Company's financial condition and results of
operations. However, the non-recurring expenses to be incurred in
connection with this matter may be material to the Company's
operating results for the year ended December 31, 1997. During the
first quarter of 1997, the Company recorded $2.5 million in non-
recurring charges which consist largely of legal and other
professional fees associated with the Independent Review Committee.
Except for the matters referred to in the preceding paragraph, 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.
5. Earnings Per Share
The Financial Accounting Standards Board recently issued Accounting
Standards No. 128 "Earnings Per Share," which is effective for
financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of this statement is not
permitted. The Company has applied this statement to the 1996 first
quarter and annual results and to the 1997 first quarter results and
determined that the adoption of this standard would not have a
material impact on the earnings per share calculations for these
periods.
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
1996 1995 1994
<S> <C> <C> <C>
January - March 10% 11% 12%
April - June 39% 39% 40%
July - September 9% 7% 8%
October - December 42% 43% 40%
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 three months ended March 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1997 1996
<S> <C> <C>
North America $137,170 $90,493
Europe 64,942 63,663
Asia 5,150 879
Total $207,262 $155,035
</TABLE>
For the quarter ended March 31, 1997, worldwide auction sales of
$207.3 million increased $52.2 million, or 34%, compared to the
first quarter of 1996. Auction sales recorded by the Company's
foreign operations were not materially impacted by translation into
U.S. dollars for the first quarter of 1997. The increase in first
quarter sales occurred largely in North America due to record Old
Masters sales, Asia Week sales and a 19th Century Paintings sale
for which there was no comparable sale in the prior year. Sales in
Asia increased due to a Stamps sale in Hong Kong for which there
was also no comparable sale in the prior year.
For the first quarter of 1997, worldwide auction and related
revenues increased $11.0 million, or 33%, compared to 1996. Foreign
currency exchange rate movements did not materially impact revenues
for the first quarter of 1997. This increase was primarily a
result of higher commission revenue due to the increased sales
discussed above and an increase in non-auction revenue categories.
Auction and related revenues as a percentage of sales for the three
months ended March 31, 1997 was flat in comparison to the three
months ended March 31, 1996.
<PAGE>
Other revenue, which primarily includes revenues from art-related
financing activities and real estate operations, increased $2.3
million in the first quarter of 1997 when compared to the same
quarter of 1996. This increase was due largely to stronger real
estate sales in the U.S. and an increase in the average loan
portfolio balance.
Total expenses increased $10.7 million in the first quarter of 1997
compared to 1996. Movements in foreign currency exchange rates did
not have a material impact on first quarter expenses.
Direct costs of services (which consist largely of catalogue
production and distribution costs as well as corporate marketing
and sale marketing expenses) increased $1.2 million, or 14%, during
the first quarter of 1997 compared to the same period of 1996.
Direct costs as a percentage of auction sales declined to 4.8% in
the first quarter of 1997 compared to 5.7% in the prior year. This
decline can be attributed to the much higher level of sales during
the first quarter of 1997 with no related incremental increases in
the expenses associated with these sales.
Excluding non-recurring charges, all other operating expenses
(which include salaries and related costs, general and
administrative expenses as well as depreciation and amortization)
totaled $52.9 million for the first quarter of 1997, an increase of
15% compared to the first quarter of 1996. This increase was
principally due to an increase in salaries and related costs as
well as higher levels of provisions for reserves.
During the first quarter of 1997, the Company recorded non-
recurring charges of $2.5 million which consist largely of legal
and other professional fees associated with the Independent Review
Committee (See Note 4 in the Notes to the Consolidated Financial
Statements for additional information).
Interest income decreased $0.3 million for the three months ended
March 31, 1997 due largely to lower cash balances in Europe.
Interest expense decreased $0.3 million for the three months ended
March 31, 1997 due to a decline in the average amount of commercial
paper borrowings outstanding.
<PAGE>
The consolidated effective tax rate was 39% for the quarter ended
March 31, 1997 compared to 40% in the prior year.
For the first quarter of 1997, the net loss improved 17%, to a net
loss of $6.8 million from a net loss of $8.2 million in the first
quarter of 1996. The loss per share for the first quarter of 1997
improved 20% to $0.12 from $0.15 in the first quarter of 1996.
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 $31.7 million at March 31, 1997 compared to a
net cash position of $63.7 million at December 31, 1996, reflecting
the seasonal nature of the Company's auction business. Working
capital (current assets less current liabilities) at March 31, 1997
was $61.1 million compared to $57.5 million at December 31, 1996.
The Company's client loan portfolio increased to $161.3 million at
March 31, 1997 from $153.7 million at December 31, 1996. These
amounts include $52.3 million and $69.4 million of loans which have
a maturity of more than one year at March 31, 1997 and December 31,
1996, 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. 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 to July 11, 2001 pursuant to a bank credit agreement.
For the three months ended March 31, 1997, the Company's primary
sources of liquidity were derived from available cash balances
supplemented by short term borrowings. The most significant cash
uses during the three months of 1997 were operations, the 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 $1.7 and $0.9 million for the first three months of 1997
and 1996, 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 March 31, 1997, no such advances were
outstanding. In addition, on certain occasions the Company will
lend amounts to consignors at loan to value ratios higher than 50%
where the Company participates in a share of the proceeds higher
than the standard selling commission if the property consigned
sells for more than an agreed target amount. 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
4 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 21E of the Securities Act of 1934, 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:
<PAGE>
(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.
See Note 4 in the Notes to the Consolidated Financial Statements for
additional information.
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On April 29, 1997, the Company held its annual meeting of
shareholders. The matters on which the shareholders voted were: (i) the
election of three directors by holders of Class A Limited Voting Common
Stock; (ii) the election of nine directors by the holders of Class B
Common Stock; (iii) the approval of the Amended and Restated Sotheby's
Holdings, Inc. Director Stock Ownership Plan; and (vi) the ratification
of the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the year ended December 31, 1997. All nominees
were elected, and all proposals passed. The results of the voting are
shown below:
<TABLE>
<CAPTION>
ELECTION OF CLASS A DIRECTORS
NOMINEES FOR AGAINST WITHHELD
<S> <C> <C> <C>
Walter J.P. Curley 30,509,666 0 479,409
Max M. Fisher 30,512,055 0 477,020
A. Alfred Taubman 30,511,966 0 477,109
</TABLE>
<TABLE>
<CAPTION>
ELECTION OF CLASS B DIRECTORS
NOMINEES FOR AGAINST WITHHELD
<S> <C> <C> <C>
Conrad Black 166,696,020 0 0
Viscount Blakenham 166,696,020 0 0
Kevin A. Bousquette 166,696,020 0 0
Diana D. Brooks 166,696,020 0 0
Lord Camoys 166,696,020 0 0
The Rt. Hon. The Earl
of Gowrie 166,696,020 0 0
The Marquess of
Hartington 166,696,020 0 0
Henry R. Kravis 166,696,020 0 0
Simon de Pury 166,696,020 0 0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
APPROVAL OF THE SOTHEBY'S HOLDINGS, INC. AMENDED AND RESTATED DIRECTOR
STOCK OWNERSHIP PLAN
<C> <S>
197,564,723 Votes were cast;
196,422,372 Votes were cast for the Resolution;
1,025,818 Votes were cast against the Resolution; and
116,533 Votes were abstained
</TABLE>
<TABLE>
<CAPTION>
RATIFICATION OF INDEPENDENT AUDITORS
<C> <S>
197,685,095 Votes were cast;
197,652,844 Votes were cast for the Resolution;
20,086 Votes were cast against the Resolution; and
12,165 Votes were abstained
</TABLE>
<PAGE>
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
Exhibit No. Description
27. Financial Data Schedule
<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 15th day of May, 1997, 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
<CAPTION>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
March 31, 1997
(in thousands of dollars, except per share amounts)
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,714
<SECURITIES> 0
<RECEIVABLES> 252,879
<ALLOWANCES> 9,458
<INVENTORY> 18,181
<CURRENT-ASSETS> 296,495
<PP&E> 68,193
<DEPRECIATION> 64,752
<TOTAL-ASSETS> 488,201
<CURRENT-LIABILITIES> 235,356
<BONDS> 0
<COMMON> 5,608
0
0
<OTHER-SE> 233,407
<TOTAL-LIABILITY-AND-EQUITY> 488,201
<SALES> 0
<TOTAL-REVENUES> 54,082
<CGS> 0
<TOTAL-COSTS> 9,988
<OTHER-EXPENSES> 30,281
<LOSS-PROVISION> 165
<INTEREST-EXPENSE> 614
<INCOME-PRETAX> (11,120)
<INCOME-TAX> (4,337)
<INCOME-CONTINUING> (6,783)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,783)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
