================================================================================
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, 1998
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: (248) 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 November 2, 1998, there were outstanding 39,900,028 shares of Class A
Limited Voting Common Stock, par value $0.10 per share, and 17,002,094 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
-----
PAGE
----
PART I: FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements:
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 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 6. Exhibits and Reports on Form 8-K 18
EXHIBIT INDEX 19
SIGNATURE 20
<PAGE>
<TABLE>
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
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,
--------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Auction and Related ................................... $34,478 $39,903 $219,660 $203,424
Other ................................................. 16,810 11,411 46,766 32,974
--------- --------- --------- ---------
Total Revenues .......................................... 51,288 51,314 266,426 236,398
--------- --------- --------- ---------
Expenses:
Direct Costs of Services .............................. 9,057 9,321 50,428 41,265
Salaries and Related Costs ............................ 32,562 29,376 105,754 92,326
General and Administrative ............................ 21,523 23,151 68,440 65,714
Depreciation and Amortization ......................... 3,313 3,231 9,731 8,415
Non-Recurring Charges ................................. 15,200 3,500 15,200 9,000
-------- -------- --------- ---------
Total Expenses .......................................... 81,655 68,579 249,553 216,720
-------- -------- --------- ---------
Operating (Loss) Income ................................. (30,367) (17,265) 16,873 19,678
Interest Income ......................................... 686 650 2,006 2,058
Interest Expense ........................................ 3,309 1,880 8,394 3,679
Other Expense ........................................... (13) (54) (188) (224)
-------- -------- ---------- ---------
(Loss) Income Before Taxes .............................. (33,003) 18,549 10,297 17,833
Income Tax Benefit (Expense) ............................ 12,211 7,227 (3,810) (6,598)
--------- --------- --------- ---------
Net (Loss) Income ....................................... ($20,792) ($11,322) $6,487 $11,235
========= ========= ========= =========
Basic (Loss) Earnings Per Share ......................... ($0.37) ($0.20) $0.11 0.20
======== ======== ========= =========
Diluted (Loss) Earnings Per Share ....................... ($0.37) ($0.20) $0.11 0.20
======== ======== ========= =========
Basic Weighted Average Shares Outstanding (in millions) . 56.9 55.9 56.6 55.9
======== ======== ========= =========
Diluted Weighted Average Shares Outstanding (in millions) 56.9 55.9 57.0 56.2
======== ======== ========= =========
Dividends Per Share $0.10 $0.10 $0.30 $0.30
======== ======== ========= =========
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
Sotheby's Holdings, Inc. and Subsidiaries
(Thousands of dollars)
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
----------- -----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents ................................................ $16,834 $33,642
Accounts and notes receivable, net of allowance
for doubtful accounts of $8,813 and $10,419
Accounts receivable .................................................. 144,031 315,274
Notes receivable ..................................................... 183,010 160,807
Other ................................................................ 18,851 35,448
--------- ---------
Total Accounts and Notes Receivable, Net 345,892 511,529
--------- ---------
Inventory, net ........................................................... 15,125 23,574
Deferred income taxes .................................................... 9,388 6,401
Prepaid expenses and other current assets ................................ 23,526 18,511
---------- ---------
Total Current Assets ............................................. 410,765 593,657
---------- ---------
Notes receivable ......................................................... 259,603 111,974
Properties, less allowance for depreciation
and amortization of $79,714 and $70,342 79,549 78,542
Intangible assets, less allowance for
amortization of $18,048 and $16,671 32,512 32,618
Investments .............................................................. 36,960 37,466
Other assets ............................................................. 6,344 5,984
---------- ----------
Total Assets ..................................................... $825,733 $860,241
========== ==========
Liabilities And Shareholders' Equity
Current Liabilities
Due to consignors ........................................................ $117,703 $352,437
Other short-term borrowings .............................................. 33,334 2,168
Accounts payable and accrued liabilities ................................. 70,486 87,252
Deferred revenue ......................................................... 12,706 6,510
Accrued income taxes ..................................................... 15,037 23,568
--------- ---------
Total Current Liabilities ........................................ 249,266 471,935
--------- ---------
Long-Term Liabilities
Commercial paper ......................................................... 285,000 117,000
Deferred income taxes .................................................... 9,876 11,908
Other liabilities ........................................................ 15,762 1,130
---------- ----------
Total Liabilities ................................................ $559,904 $601,973
---------- ----------
Shareholders' Equity
Common Stock, $0.10 par value:............................................ 5,690 5,582
Authorized shares - 125,000,000 of Class A and 75,000,000 of Class B
Issued and outstanding shares - 39,897,288 and 38,762,656 of Class A,
and 17,002,094 and 17,058,400 of Class B, at September 30, 1998 and
December 31, 1997, respectively
Additional paid-in capital ............................................... 89,172 71,132
Retained earnings ........................................................ 186,567 197,027
Accumulated other comprehensive income ................................... (15,600) (15,473)
---------- ----------
Total Shareholders' Equity ...................................... 265,829 258,268
---------- ----------
Total Liabilities And Shareholders' Equity ...................... $825,733 $860,241
========== ==========
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>
Nine Months Ended September 30,
- -------------------------------
1998 1997
--------- --------
<S> <C> <C>
Operating Activities:
Net Income $6,487 $11,235
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 12,300 8,415
Write-off of Leasehold Improvements and Furniture and Fixtures 14,100 -
Deferred income taxes (6,566) (2,590)
Tax benefit of stock option exercises 2,275 1,656
Asset provisions 2,401 5,530
Other (379) 250
Changes in assets and liabilities:
Decrease in accounts receivable 183,683 111,588
Decrease (increase) in inventory 7,086 (5,635)
Increase in prepaid expenses and other current assets (5,518) (5,456)
(Increase) decrease in other assets (1,785) 523
Decrease in due to consignors (232,236) (195,024)
Decrease in accrued income taxes (6,810) (15,256)
Increase (decrease) in other liabilities 6,542 (9,903)
--------- ---------
Net cash used by operating activities (18,420) (94,667)
--------- ---------
Investing Activities:
Increase in notes receivable (219,772) (182,179)
Collections of notes receivable 48,844 67,706
Capital expenditures (27,386) (11,430)
Decrease in investments 505 55
Acquisitions - (6,190)
---------- ----------
Net cash used by investing activities (197,809) (132,038)
---------- ----------
Financing Activities:
Increase in commercial paper 168,000 176,000
Increase in short term borrowings 32,285 9,653
Proceeds from exercise of stock options 15,873 7,119
Repurchase of common stock - (10,127)
Dividends (16,947) (16,782)
---------- ----------
Net cash provided by financing activities 199,211 165,863
---------- ----------
Effect of exchange rate changes on cash 210 7,785
Decrease in cash and cash equivalents (16,808) (53,057)
Cash and cash equivalents at beginning of period 33,642 66,886
---------- ----------
Cash and cash equivalents at end of period $16,834 $13,829
========== ==========
Income taxes paid $17,896 $19,240
Interest paid $7,625 $4,189
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
SOTHEBY'S HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
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, 1997 (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 months ended September 30, 1998
and 1997 have been included. Certain prior period amounts have been reclassified
to conform to the current year's presentation. Principal activities and revenues
from Emmerich Galleries have been reclassified to auction and related revenue
from other revenue.
2. NOTES RECEIVABLE
The Company provides collectors, museums and dealers with financing
generally secured by works of art that the Company typically controls and other
personal property owned by its clients. The Company generally makes two types of
secured loans: (1) advances secured by consigned property to borrowers who are
contractually committed, in the near term, to sell the property at auction (a
"consignor advance"); and (2) general purpose loans to collectors, museums or
dealers secured by property not presently intended for sale. The consignor
advance allows a consignor to receive funds shortly after consignment for an
auction that will occur several weeks or months in the future, while preserving
for the benefit of the consignor the potential of the auction process. The
general purpose secured loans allow the Company to establish or enhance a
mutually beneficial relationship with dealers and collectors. The loans are
generally made with full recourse to the borrower. In certain instances,
however, loans are made with recourse limited to the works of art pledged as
security for the loan. To the extent that the Company is looking wholly or
partially to the collateral for repayment of its loans, repayment can be
adversely impacted by a decline in the art market in general or in the value of
the particular collateral. In addition, in situations where the borrower becomes
subject to bankruptcy or insolvency laws, the Company's ability to realize on
its collateral may be limited or delayed by the application of such laws.
As of September 30, 1998, an amount equal to approximately 65% of the
Company's notes receivable (current and non-current) was extended to two
borrowers. One of these loans, which represents approximately 54% of the total
outstanding notes receivable as of September 30, 1998, was outstanding from a
group of affiliated corporate borrowers, under a structure in which the
Company's recourse is effectively limited to the works of art pledged as
collateral for the loan. The loan to this group was to mature on December 31,
2001; however, subsequent to the balance sheet date, in late October, it was
repaid in full. The prepayment of this loan will result in the recognition of
$18.7 million of addditional revenue in the fourth quarter of 1998 relating to
the origination fee that would have been amortized through 2001. No other
individual loan or group of related loans amounted to more than 5% of total
assets at September 30, 1998.
The Company regularly reviews its loan portfolio. Each loan is analyzed
based on the current estimated realizable value of collateral securing the loan.
For financial statement purposes, the Company establishes reserves for certain
loans that the Company believes are under-collateralized and with respect to
which the under-collateralized amount may not be collectible from the borrower.
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, 1998 and 1997 (in thousands):
1998 1997
------ -------
Allowance for credit losses
at December 31, 1997 and 1996 $3,620 $2,501
Provisions 238 1,188
Write-offs (855) (3)
Other (365) 98
------ ------
Allowance for credit losses
at September 30, 1998 and 1997 $2,638 $3,784
====== ======
3. CREDIT ARRANGEMENTS
At September 30, 1998, pursuant to the Company's $300 million U.S.
commercial paper program, there were $285 million of outstanding commercial
paper notes at weighted average discount rates of 5.63% with average maturities
of 29 days. These notes have been classified on the consolidated balance sheet
as long-term liabilities based on the Company's ability and intent to maintain
or refinance these obligations on a long-term basis. The U.S. commercial paper
program was increased to $300 million from $200 million in July 1998. At
September 30, 1998, the Company also had $33.3 million outstanding under
domestic and foreign bank lines of credit at weighted average interest rates of
7.08%.
In May 1998, the Company filed a registration statement with the Securities
and Exchange Commission relating to a shelf registration of $200 million of
senior unsecured debt securities that may be offered and sold from time to time.
4. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130 "Reporting Comprehensive Income" which requires
certain transactions to be included as adjustments to net income in order to
report comprehensive income. These transactions referred to as other
comprehensive income represent items that, under previous accounting standards,
bypassed the statement of income and were reported directly as adjustments to
the equity section of the balance sheet. The Company's other comprehensive
income consisted of the change in the foreign currency translation adjustment
amount during the period. The foreign currency translation adjustment amount
previously reported as a separate component of shareholders' equity is now
included in accumulated other comprehensive income in the Consolidated Balance
Sheets. Comprehensive income (loss) for the three months ended September 30,
1998 and 1997 amounted to ($21.4) million and ($13.2) million, respectively and
for the nine months ended September 30, 1998 and 1997 amounted to $6.4 million
and $5.7 million, respectively.
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, 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 $22.8 million at September 30, 1998.
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 the property sells for less
than the minimum price or the property does not sell and therefore, the Company
must pay the difference between the sale price at auction and the amount of the
guarantee. At October 31, 1998, the Company had outstanding guarantees totaling
approximately $9.8 million, which covers auction property having a mid-estimate
sales price of approximately $14.2 million. Under certain 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 guarantees to fund a portion of the guarantee prior to the
auction. At September 30, 1998, no such amounts had been funded.
In conjunction with the Company's building construction, see Management's
Discussion and Analysis under Liquidity and Capital Resources for further
information, as of November 9, 1998 the Company has financial commitments of
approximately $46.0 million.
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.
Percentage of Annual
Auction Sales
--------------------
1997 1996 1995
---- ---- ----
January - March 11% 10% 11%
April - June 35% 39% 39%
July - September 8% 9% 7%
October - December 46% 42% 43%
---- ---- ----
100% 100% 100%
==== ==== ====
7. Non-Recurring Charges
During the third quarter and first nine months of 1998, the Company
recorded a non-recurring charge of $15.2 million relating to the construction of
the York Property, as defined in Management's Discussion and Analysis under
Liquidity and Capital Resources. Approximately $14.1 million of this amount is a
non-cash charge resulting from the impairment of existing leasehold improvements
and related furniture and fixtures. The remaining amount of approximately $1.1
million is a provision resulting from the cost of future rental obligations on
rental space in New York City that will be abandoned as part of the plan.
During the third quarter and first nine months of 1997, the Company
recorded non-recurring charges of $3.5 million and $9.0 million respectively,
which consist largely of legal and other professional fees associated with the
Independent Review Committee. See Form 10-K for the year ended December 31, 1997
for further information.
<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 and nine month periods ended September 30, 1998 and 1997 (in
thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-------------------- ---------------------
North America $32,224 $32,087 $599,848 $463,439
Europe 122,952 98,536 493,590 471,828
Asia 2,515 7,155 31,829 60,380
-------- -------- ---------- --------
Total $157,691 $137,778 $1,125,267 $995,647
======== ======== ========== ========
For the quarter ended September 30, 1998, worldwide auction sales of $157.7
million increased $19.9 million, or 14%, compared to the third quarter of 1997.
For the nine months ended September 30, 1998, worldwide auction sales increased
$129.6 million, or 13% compared to the same period in 1997. Auction sales
recorded by the Company's foreign operations were not materially affected by
translation into U.S. dollars for the three and nine month periods ended
September 30, 1998. The increase in third quarter sales was due to a 25%
increase in Europe partially offset by a 65% decrease in Asia. The increase in
Europe was primarily due to the timing of the Contemporary art Part I and II
sales and Impressionist Part II sale. The series of Contemporary art sales and
Impressionist Part II sale, traditionally held in June, were held in July 1998
and therefore are included in third quarter results. The sales decrease in Asia
was primarily due to the slow down of the economies within Asia. Historically,
Asia has accounted for approximately five percent of annual sales.
Sales for the first nine months of the year increased due to a 29% increase
in North America and a 5% increase in Europe, offset by a 47% decrease in Asia.
The increase in North America was primarily due to sales of Old Master paintings
and drawings, American paintings, Contemporary art, 19th Century paintings,
single-owner-sales, most notably the sale of Rare Books and Manuscripts,
Magnificent English Silver and French Furniture and Decorations from the
Collection of Jamie Ortiz-Patino, and the sale of the Collection of H.R.H. the
Duke and Duchess of Windsor. The sales increase in Europe was primarily due to
sales of Impressionist and Modern art, English Furniture, the Roger Collection
and the Russian sale held in London. The sales decrease in Asia was primarily
due to the slow down of the economies within Asia. Historically, Asia has
accounted for approximately five percent of annual sales.
For the three months ended September 30, 1998, worldwide auction and
related revenues decreased $5.4 million, or 14%, compared to the same period in
1997. Foreign currency exchange rate movements did not materially affect
revenues for the third quarter of 1998. This decrease was primarily a result of
a significant private treaty sale in the third quarter of 1997. Private Treaty
transactions are not subject to the same seasonality as auction sales. This
decrease was offset by higher commission revenue from increased sales discussed
above. Auction and related revenues as a percentage of sales for the three
months ended September 30, 1998 decreased from 29.0% to 21.9% as compared to the
same period in 1997.
For the nine months ended September 30, 1998, auction and related revenues
increased $16.2 million, or 8%, compared to the nine months ended September 30,
1997. Foreign currency exchange rate movements did not materially affect
revenues for the first nine months of 1998. This increase was primarily the
result of higher commission revenue due to the increased sales discussed above
and expense recoveries associated with the sale of the Collection of H.R.H. the
Duke and Duchess of Windsor in the first quarter. The increase was also due to
an increase in principal activities offset by a decline in private treaty sales.
Auction and related revenues as a percentage of sales for the nine months ended
September 30, 1998 decreased from 20.4% to 19.5% as compared to the same period
in 1997.
Other revenues, which primarily includes revenues from art-related
financing activities and real estate operations, increased $5.4 million, or 47%
in the third quarter of 1998 when compared to the same quarter of 1997. For the
nine months ended September 30, 1998, other revenue increased $13.8 million, or
42%, compared to the same period in 1997. These increases were due to stronger
real estate sales in the U.S. and an increase in the average loan portfolio
balance.
Total expenses, excluding non-recurring charges, increased $1.4 million, or
2%, in the third quarter of 1998 compared to the same quarter in 1997. For the
nine months ended September 30, 1998, total expenses, excluding non-recurring
charges, increased $26.6 million, or 13%, compared to the same period in 1997.
Movements in foreign currency exchange rates did not have a material impact on
expenses for the three and nine months ended September 30, 1998.
Direct costs of services (which consist largely of catalogue production and
distribution costs as well as corporate marketing and sale marketing expenses)
decreased $0.3 million, or 3%, during the third quarter of 1998 compared to the
same period of 1997. This decrease is primarily due to a decrease in corporate
marketing expenses partially offset by an increase associated with higher
auction sales.
Direct costs of services increased $9.2 million, or 22%, during the nine
months ended September 30, 1998 compared to the same period of 1997. This
increase was primarily due to the increase in auction sales, a change in the
sales mix in Europe and the impact of costs associated with the sale of the
Collection of H.R.H. the Duke and Duchess of Windsor which were partially
recovered and reflected in auction and related revenue. The increase was
partially offset by a minimal decrease in corporate marketing costs.
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 $57.4 million for the third quarter of
1998, an increase of 3% compared to the third quarter of 1997. For the nine
months ended September 30, 1998, these expenses (excluding non-recurring
charges) increased $17.5 million, or 10%, compared to 1997. These increases were
due primarily to an increase in salaries and related costs resulting from new
initiatives and expertise, long-term incentive plans, costs incurred relating to
the startup of the Paris office and increased general and administrative costs
related to the construction of the York Property.
As discussed in Note 7 to the consolidated financial statements, during the
third quarter and first nine months of 1998, the Company recorded a
non-recurring charge of $15.2 million relating to the construction of the York
Property. Approximately $14.1 million of this amount is a non-cash charge
resulting from the impairment of existing leasehold improvements and related
furniture and fixtures. The remaining amount of approximately $1.1 million is a
provision resulting from the cost of future rental obligations on rental space
in New York City that will be abandoned as part of the plan.
As discussed in Note 7 to the consolidated financial statements, during the
third quarter and first nine months of 1997, the Company recorded non-recurring
charges of $3.5 million and $9.0 million respectively, which consist largely of
legal and other professional fees associated with the Independent Review
Committee.
Net interest expense increased $1.4 million and $4.8 million for the three
and nine months ended September 30, 1998, respectively, due to additional
commercial paper borrowings to fund the increased loan portfolio.
The consolidated effective tax rate was 37% for the three and nine months
ended September 30, 1998 compared to 39% and 37%, respectively for the
comparable periods in the prior year. The decrease in the tax rate in the third
quarter of 1998, as compared to the same period of 1997, was primarily due to a
result of higher earnings during the third quarter of 1998 in lower tax rate
jurisdictions and lower earnings in higher tax rate jurisdictions.
For the third quarter of 1998, the Company's net loss increased to $20.8
million from a net loss of $11.3 million in the third quarter of 1997. Diluted
loss per share for the third quarter of 1998 increased to $0.37 from $0.20 for
the second quarter of 1997. For the nine months ended September 30, 1998, net
income decreased $4.7 million, to $6.5 million from $11.2 million for the same
period in 1997. Diluted earnings per share for the first nine months of 1998
decreased to $0.11 from $0.20 for the first nine months of 1997.
Excluding non-recurring charges, for the third quarter of 1998 the
Company's net loss increased to $11.2 million from a net loss of $9.2 million in
the third quarter of 1997. The impact of the non-recurring charges on diluted
earnings per share was ($0.17) and ($0.04) for the third quarter of 1998 and
1997, respectively. Excluding non-recurring charges, for the nine months ended
September 30, 1998, net income decreased $0.8 million to $16.1 million from
$16.9 million for the same period in 1997. The impact of the non-recurring
charges on diluted earnings per share was ($0.17) and ($0.10) for the nine
months ended September 30, 1998 and 1997, respectively.
As noted in Note 2 to the consolidated financial statements, in late
October a note receivable, which represented approximately 54% of the Company's
outstanding notes receivable as of September 30, 1998, was repaid by the
borrowers. The loan had an original maturity of December 31, 2001 and the
prepayment of this loan will result in the recognition of the remaining loan
origination fee of $18.7 million as revenue in the fourth quarter of 1998.
As a result of this significant transaction, the Company expects to
accelerate certain business initiatives that will result in additional fourth
quarter expenses. Similarly, the Company is evaluating the impact of recent
global economic uncertainties on its business, which may result in additional
future costs.
<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 $301.5
million at September 30, 1998 compared to a net debt position of $85.5 million
at December 31, 1997, reflecting higher borrowings to fund the increased client
loan portfolio. Working capital (current assets less current liabilities) at
September 30, 1998 was $161.5 million compared to $121.7 million at December 31,
1997.
The Company's client loan portfolio increased to $442.6 million at
September 30, 1998 from $276.4 million at December 31, 1997. These amounts
include $259.6 million and $112.0 million of loans which have a maturity of more
than one year at September 30, 1998 and December 31, 1997, respectively.
Subsequent to September 30, 1998, the Company received payment on the
outstanding balance from one of its outstanding group of loans. See Note 2 to
the consolidated financial statements.
The Company relies on internally generated funds and borrowings to meet its
financing requirements. The Company may issue up to $300 million of short-term
notes pursuant to its U.S. commercial paper program. The U.S. commercial paper
program was increased to $300 million from $200 million in July 1998. The
Company supports any short-term notes issued under its U.S. commercial paper
program with a committed credit facility. The Company maintains $300 million of
committed and available financing to July 11, 2001 pursuant to a Bank Credit
Agreement. Additionally, the Company has a $200 million shelf registration with
the Securities and Exchange Commission for issuing senior unsecured debt
securities, which may be offered and sold from time to time.
For the nine months ended September 30, 1998, the Company's primary sources
of liquidity were derived from commercial paper and short term borrowings
supplemented by available cash balances and operations. The most significant
cash uses during the first nine months of 1998 were the net funding of the
client loan portfolio, capital expenditures and payment of shareholder
dividends.
Capital expenditures, consisting primarily of office and auction facility
refurbishment, acquisition of computer equipment and software, and costs
associated with the construction of the York Property, as defined below totaled
$27.4 million and $11.4 million for the first nine months of 1998 and 1997,
respectively.
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 evaluated the adequacy of its principal auction premises for
the requirements of the present and future conduct of its business. In September
1998, the Company received final approval from the City of New York to proceed
with its plan to construct a six story addition and to renovate its current
facility on York Avenue ("the York Property").
This construction will expand auction, warehouse and office space in New
York City and will enable the Company to consolidate its operations in New York
into one facility. The capital expenditures relating to the new building
construction is currently estimated to be in the range of $125-130 million. As
of November 9, 1998, the Company has financial commitments in relation to this
project of approximately $46 million. The Company believes that it has
sufficient capital resources to carry out planned capital spending relating to
this project.
The Company believes that operating cash flows will be adequate to meet
normal working capital requirements and that the commercial paper program,
credit facilities and the shelf registration will continue to be adequate to
fund the client loan program, peak working capital requirements, short-term
commitments to consignors and the project on the York Property.
YEAR 2000 UPDATE
- ----------------
The Year 2000 issue is a result of date sensitive devices, systems and
computer programs that were deployed using two digits rather than four to define
the applicable year. Any such technologies may recognize a year containing "00"
as the year 1900 rather than the year 2000.
The Company has completed its assessment of its worldwide financial and
information systems and is in the process of modifying or replacing such
systems, as required. The Company's modification or replacement of worldwide
financial and information systems is proceeding on schedule and should be
completed by the end of 1999. Based on the progress to date, the Company
believes that no significant contingency plans will be needed. However, the
Company has developed a contingency plan should the modification or replacement
fall behind schedule.
The Company has assessed and determined its material non-information
technology systems to be Year 2000 compliant.
The Company is currently assessing the status of its material suppliers and
other third party vendors. The Company intends to distribute information
requests and evaluate responses during the first quarter of 1999. The Company
intends to develop a contingency plan in the event that it is not satisfied with
the response of its key suppliers and vendors.
In connection with assessing its information systems, the Company
determined to replace its existing financial and accounting systems, which the
Company believes will not only address many of its year 2000 issues, but will
also increase its operational efficiencies. The Company currently believes that
the cost of replacing such systems, retaining consultants in connection with the
integration and implementation of such systems, testing and rolling-out the new
systems on a world-wide basis, training its personnel to operate its new
systems, continuing its assessment of existing information technology and
non-information technology systems to determine the need for remediation or
replacement, and implementing additional modifications or remediation as may be
necessary, will be in the range of $10 million to $15 million. To date, the
Company's expenditures for this project have been approximately $6.8 million,
with the balance of such expenses expected to be incurred during 1999 and 2000.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party vendors, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The modification or replacement of worldwide financial and
information systems is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and therefore the possibility of
significant interruptions of normal operations should be reduced.
EUROPEAN MONETARY UNION
- -----------------------
The euro is scheduled to be introduced on January 1, 1999 as a wholesale
currency, at which time the eleven participating EMU member countries will
establish fixed conversion rates between their existing currencies and the euro.
The existing currencies will continue to be used as legal tender through January
1, 2002; thereafter, the existing currencies will be cancelled and euro bills
and coins will be used for cash transactions in the participating countries.
The Company's European operations affected by the euro conversion have
established plans to address the systems issues raised by the euro currency
conversion and are cognizant of the potential business implications of
converting to a common currency. The Company is unable to determine the ultimate
financial impact of the conversion on its operations, if any, given that the
impact will be dependent upon the competitive situations which exist in the
various regional markets in which the Company participates.
RECENTLY ISSUED ACCOUNTING STANDARDS
- -------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which is required
to be adopted for fiscal quarters of fiscal years beginning after June 15, 1999.
The Statement permits early adoption. The Company expects to adopt SFAS No. 133
effective January 1, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company is
currently evaluating the impact that the adoption of this statement will have on
its financial position and results of operations.
FORWARD-LOOKING STATEMENTS
- --------------------------
This form 10-Q contains certain forward-looking statements, as such term is
defined in Section 21E of the Securities Exchange 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 the planned expansion of the Company's New York
auction facility. 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 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.
(5) The expansion of the New York auction facility and global headquarters.
(6) The Year 2000 issue.
See Note 5 in the Notes to the Consolidated Financial Statements for additional
information.
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10-A. U.S. Commercial Paper Dealer Agreement, dated July 29, 1998,
between Sotheby's Inc., Sotheby's Holdings Inc. and Chase
Securities Inc. relating to the issuance of the U.S. Notes.
10-B. Amendment, dated July 13, 1998, to U.S. Commercial Paper
Dealer Agreement, dated July 29, 1998, between Sotheby's
Inc., and Merrill Lynch Money Markets Inc. relating to the
issuance of the U.S. Notes.
27. Financial Data Schedule
(b) Reports on Form 8-K
(i) On September 23, 1998, the Company reported on Form 8-K that
the Company received final approval from the City of New York to
proceed with its plan to construct a new auction facility. The
implementation of this plan resulted in a non-recurring charge.
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
---------- ------------
10-A. U.S. Commercial Paper Dealer Agreement
10-B. Amendment to U.S. Commercial Paper Dealer
Agreement
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 9th day of November, 1998, on
its behalf by the undersigned, thereunto duly authorized and in the capacity
indicated.
SOTHEBY'S HOLDINGS, INC.
By: /s/ JOSEPH A. DOMONKOS
----------------------------
Joseph A. Domonkos
Vice President, Controller
and Chief Accounting Officer
COMMERCIAL PAPER DEALER AGREEMENT, dated as of July 29, 1998, among
SOTHEBY'S, INC., a New York corporation (the "Issuer"), SOTHEBY'S HOLDINGS,
INC., a corporation organized under the laws of the Michigan (the "Guarantor"),
and CHASE SECURITIES INC., a Delaware corporation ("CSI").
The Issuer intends to issue short-term notes pursuant to Section 3(a)(3) of
the Securities Act of 1933 (the "1933 Act").
The Guarantor has agreed to unconditionally and irrevocably guarantee
payment in full of the principal and interest (if any) on all such notes of the
Issuer, pursuant to the guarantee, dated November 27, 1996, in the form of
Exhibit A hereto (the "Guarantee").
The Issuer and the Guarantor desire to enter into this Agreement with
CSI in order to provide for the offer and sale of such notes in the manner
described herein, and to provide certain assurances in connection therewith.
The parties hereto, in consideration of the premises and mutual
covenants herein contained, agree as follows:
1. Definitions.
-----------
"Business Day" shall mean any day other than a Saturday or Sunday or a
day when banks are authorized or required by law to close in New York
City.
"Company Information" shall mean the Offering Memorandum (defined
below), together with, to the extent applicable, information provided
by the Issuer or the Guarantor pursuant to Section 6(b) hereof.
"DTC" shall mean the Depository Trust Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Issuing and Paying Agent" shall mean The Chase Manhattan Bank, N.A.,
the issuing and paying agent under the Issuing and Paying Agency
Agreement, or any successor thereto.
"Issuing and Paying Agency Agreement" shall mean the amended and
restated issuing and paying agency agreement, dated as of September 14,
1992, among the Issuer and the Issuing and Paying Agent, as the same
may from time to time be amended.
"Notes" shall mean short-term promissory notes of the Issuer,
substantially in the form of Annex A to the Issuing and Paying Agency
Agreement in the case of certificated Notes, and represented by master
notes substantially in the form of Annex B to the Issuing and Paying
Agency Agreement in the case of book-entry Notes, issued by the Issuer
from time to time pursuant to the Issuing and Paying Agency Agreement.
"Offering Materials" shall mean the Offering Memorandum (defined
below), any company information and any other offering materials
concerning the Issuer and the Guarantor contemplated by Section 6
hereof, as such offering materials may be amended or supplemented from
time to time with the prior written consent of the Issuer or the
Guarantor.
"Offering Memorandum" shall mean the offering memorandum with respect
in the offer and sale of the Notes (including materials referred to
therein or incorporated by reference therein), prepared in accordance
with Section 6 hereof and provided to purchasers or prospective
purchasers of the Notes, and including all amendments and supplements
thereto which may be prepared from time to time in accordance with this
Agreement.
"Person" shall mean an individual, a corporation, a partnership, a
trust, an association or any other entity.
"SEC" shall mean the U.S. Securities and Exchange Commission, or any
successor thereto.
2. Issuance and Placement of Notes.
-------------------------------
(a) The Issuer hereby appoints CSI to act as the Issuer's placement agent
in connection with the sale of the Notes in accordance with the terms hereof,
and CSI hereby accepts such appointment. While (i) the Issuer has and shall have
no obligation to permit CSI to purchase any Notes for its own account or to
arrange for the sale of the Notes and (ii) CSI has and shall have no obligation
to purchase any Notes for CSI's own account or to arrange for the sale of Notes,
the parties agree that, as to any and all Notes which CSI may purchase or the
sale of which CSI may arrange, such Notes will be purchased or sold by CSI in
reliance on, the agreements, representations, warranties and covenants of the
Issuer and the Guarantor contained herein and on the terms and conditions and in
the manner provided for herein.
(b) If the Issuer and CSI shall agree on the terms of the purchase of any
Note by CSI or the sale of any Note arranged by CSI (including, but not limited
to, agreement with respect to the date of issue, purchase price, principal
amount, maturity and interest rate (in the case of interest-bearing Notes) or
discount rate thereof (in the case of Notes issued on a discount basis), and
appropriate compensation for CSI's services hereunder) pursuant to this
Agreement, CSI shall confirm the terms of each such agreement promptly to the
Issuer in CSI's customary form, which includes written confirmation of each
purchase, setting forth the principal amounts, maturity and denominations of the
Notes purchased and the applicable interest rate or discount, the Issuer shall
cause such Note to be issued and delivered in accordance with the terms of the
Issuing and Paying Agency Agreement, and payment for such Note shall be made in
accordance with such Issuing and Paying Agency Agreement. The authentication and
delivery of such Note by the Issuing and Paying Agent shall constitute the
issuance of such Note by the Issuer. The Issuer shall deliver Notes signed by
the Issuer and the Guarantor to the Issuing and Paying Agent, and instructions
shall be delivered to the Issuing and Paying Agent to complete, authenticate and
deliver such Notes in the manner prescribed in the Issuing and Paying Agency
Agreement. CSI shall be entitled to compensation at such rates and paid in such
manner as the Issuer and CSI shall from time to time agree upon and to
reimbursement for CSI's reasonable out-of-pocket costs and expenses, including,
but not limited to, reasonable fees and disbursements of counsel, in connection
with the preparation of this Agreement and the transactions contemplated hereby.
(c) The Notes may be issued either in physical bearer form or in book-entry
form. Notes in book-entry form shall be represented by master notes registered
in the name of a nominee of DTC and recorded in the book-entry system maintained
by DTC. The Guarantee shall be, in the case of physical bearer Notes, evidenced
on the face of the Notes and, in the case of book-entry Notes, evidenced on the
related master notes. References to "Notes" in this Agreement shall refer to
both physical and book-entry Notes unless the context otherwise requires. The
Notes may be issued either at a discount or as interest-bearing obligations with
interest payable at maturity in a stated amount.
(d) Each Note purchased by, or the sale of which is arranged through, CSI
hereunder shall (i) have a face amount of $100,000, or an integral multiple of
$1,000 in excess thereof, (ii) have a maturity which is a Business Day not later
than the 270th day next succeeding such Note's date of issuance and (iii) not
contain any provision for extension, renewal or automatic "rollover".
3. Representations and Warranties of the Issuer and the Guarantor.
--------------------------------------------------------------
(a) The Issuer represents and warrants as follows:
(i) The Issuer is a duly organized and validly existing corporation in good
standing under the laws of the state of its incorporation and has the corporate
power and authority to own its property, to carry on its business as presently
being conducted, to execute and deliver this Agreement, the Issuing and Paying
Agency Agreement, and the Notes, and to perform and observe the conditions
hereof and thereof.
(ii) Each of this Agreement and the Issuing and Paying Agency Agreement has
been duly and validly authorized, executed and delivered by the Issuer and
constitutes the legal, valid and binding agreement of the Issuer. The issuance
and sale of Notes by the Issuer hereunder have been duly and validly authorized
by the Issuer and, when delivered by the Issuing and Paying Agent as provided in
the Issuing and Paying Agency Agreement, each Note will be the legal, valid and
binding obligation of the Issuer.
(iii) The Notes are exempt from the registration requirements of the 1933
Act by reason of Section 3(a)(3) thereof, and, accordingly, registration of the
Notes under the 1933 Act will not be required. Qualification of an indenture
with respect to the Notes under the Trust Indenture Act of 1939, as amended,
will not be required in connection with the offer, issuance, sale or delivery of
the Notes.
(iv) The Issuer is not an "investment company" nor a "company controlled by
and investment company" within the meaning of the Investment Company Act of
1940, as amended.
(v) No consent or action of, or filing or registration with, any
governmental or public regulatory body or authority is required to authorize, or
is otherwise required in connection with, the execution, delivery or performance
of this Agreement, the Issuing and Paying Agency Agreement or the Notes.
(vi) Neither the execution and delivery by the Issuer of any of this
Agreement, the Issuing and Paying Agency Agreement and the Notes, nor the
fulfillment of or compliance with the terms and provisions hereof or thereof by
the Issuer, will (x) result in the creation or imposition of any mortgage, lien,
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Issuer or (y) violate any of the terms of the Issuer's charter documents or
by-laws, any contract or instrument to which the Issuer is a party or by which
it or its property is bound, or any law or regulation, or any order, writ,
injunction or decree of any court or governmental instrumentality, to which the
Issuer is subject or by which it or its property is bound.
(vii) There are no actions, suits, proceedings, claims or governmental
investigations pending or threatened against the Issuer or any persons who
control the Issuer (within the meaning of Section 15 of the 1933 Act or Section
20 of the Exchange Act) or to which any property of the Issuer is subject, which
are reasonably likely to result in a material adverse change in the condition
(financial or otherwise) of the Issuer, or materially prevent or interfere with,
or materially and adversely affect the Issuer's execution, delivery or
performance of, any of this Agreement, the Issuing and Paying Agency Agreement
and the Notes.
(viii) The Offering Materials do not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made therein, in light of the circumstances under which
they are made, not misleading.
(b) The Guarantor represents and warrants as follows:
(i) The Guarantor is a duly organized and validly existing corporation in
good standing under the laws of the Michigan and has the corporate power and
authority to own its property, to carry on its business as presently being
conducted, to execute and deliver this Agreement and the Guarantee, and to
perform and observe the conditions hereof and thereof.
(ii) Each of this Agreement and the Guarantee has been duly and validly
authorized, executed and delivered by the Guarantor and constitutes the legal,
valid and binding agreement of the Guarantor.
(iii) The Notes are exempt from the registration requirements of the 1933
Act by reason of Section 3(a)(3) thereof, and, accordingly, registration of the
Guarantee under the 1933 Act and qualification of an indenture under the Trust
Indenture Act of 1939, as amended, will not be required with respect to the
Guarantee in connection with the offer, issuance, sale or delivery of the Notes.
(iv) The Guarantor is not an "investment company" or a "company controlled
by an investment company" within the meaning of the Investment Company Act of
1940, as amended.
(v) No consent or action of, or filing or registration with, any
governmental or public regulatory body or authority is required to authorize, or
is otherwise required in connection with, the execution, delivery or performance
of this Agreement or the Guarantee.
(vi) Neither the execution and delivery by the Guarantor of any of this
Agreement and the Guarantee, nor the fulfillment of or compliance with the terms
and provisions hereof or thereof by the Guarantor, will (x) result in the
creation or imposition of any mortgage, lien, or encumbrance of any nature
whatsoever upon any of the properties or assets of the Guarantor or (y) violate
any of the terms of the Guarantor's charter documents or by-laws, any contract
or instrument to which the Guarantor is a party or by which it or its property
is bound, or any law or regulation, or any order, writ, injunction or decree of
any court or governmental instrumentality, to which the Guarantor is subject or
by which it or its property is bound.
(vii) There are no actions, suits, proceedings, claims or governmental
investigations pending or threatened against the Guarantor or any persons who
control the Guarantor (within the meaning of Section 15 of the 1933 Act or
Section 20 of the Exchange Act) or to which any property of the Guarantor is
subject, which are reasonably likely to result in a material adverse change in
the condition (financial or otherwise) of the Guarantor, or materially prevent
or interfere with, or materially and adversely affect the Guarantor's execution,
delivery or performance of, any of this Agreement, the Issuing and Paying Agency
Agreement and the Guarantee.
(viii) The Offering Materials do not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made therein, in light of the circumstances under which
they are made, not misleading.
(c) Each issuance of Notes by the Issuer shall be deemed a representation
and warranty by each of the Issuer and the Guarantor (as to itself) to CSI, as
of the date thereof, that, both before and after giving effect to such issuance,
(i) the respective representations and warranties of the Issuer and the
Guarantor set forth in Sections 3(a) and 3(b) hereof remain true and correct on
and as of such date as if made on and as of such date (except to the extent such
representations and warranties expressly relate solely to an earlier date); (ii)
the corporate resolutions and certificates of incumbency referred to in Section
5 hereof remain accurate and in full force and effect; (iii) since the date of
the most recent Offering Materials, there has been no material adverse change in
the financial condition or operations of the Issuer or of the Guarantor which
has not been disclosed to CSI in writing; and (iii) neither the Issuer nor the
Guarantor is in default of any of its obligations hereunder, under the
Guarantee, the Issuing and Paying Agency Agreement or under any Note.
4. Covenants and Agreements of the Issuer and the Guarantor.
--------------------------------------------------------
(a) Each of the Issuer and the Guarantor agrees that, without the prior
written consent of CSI, it shall not permit to become effective any amendment,
supplement, waiver or consent to or under the Issuing and Paying Agency
Agreement or the Guarantee. The Issuer shall give to CSI, at least 25 Business
Days prior to the proposed effective date thereof, notice of any proposed
amendment, supplement, waiver or consent under the Issuing and Paying Agency
Agreement. The Issuer shall provide to CSI, promptly after the same is executed,
a copy of any amendment, supplement or written waiver or consent covered by the
notice requirements of this Section 4(a). The Issuer further agrees to furnish
prior written notice to CSI, as soon as possible (and where practicable at least
30 Business Days) prior to the effective date thereof, of any proposed
resignation, termination or replacement of the Issuing and Paying Agent.
(b) Each of the Issuer and the Guarantor shall, whenever there shall
occur any change in its financial condition or any development or occurrence in
relation to it that would be material to the holders of Notes or potential
holders of Notes, promptly, and in any event prior to any subsequent issuance of
Notes, notify CSI (by telephone, confirmed in writing) of such change,
development or occurrence.
(c) Each of the Issuer and the Guarantor covenants and agrees with CSI
that it will promptly furnish to CSI a copy of any notice, report or other
information, relating to the rating of the Notes delivered to or from rating
agencies then rating the Notes.
(d) The proceeds of the Notes will be used by the Issuer for "current
transactions" within the meaning of Section 3(a)(3) of the 1933 Act.
(e) The Issuer agrees promptly from time to time to take such action as
CSI may reasonably request to qualify the Notes for offering and sale under the
laws of such jurisdictions as CSI may request and to comply with such laws so as
to permit the continuance of sales and resales therein for as long as may be
necessary to complete the transactions contemplated hereby, provided that in
connection therewith the Issuer shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction other than consent to service of process under such state
securities laws. The Issuer also agrees to reimburse CSI for any reasonable
costs incurred in so qualifying such Notes.
5. Conditions Precedent.
--------------------
At or promptly after the execution of this Agreement, and as conditions
precedent to any obligations of CSI hereunder, there shall have been furnished
to CSI, in form and substance satisfactory to CSI:
(i) a copy of the executed Issuing and Paying Agency Agreement;
(ii) a copy of the Guarantee;
(iii) a certified copy of resolutions duly adopted by the Board of
Directors of the Issuer authorizing and approving the transactions contemplated
hereby, and a certified copy of resolutions duly adopted by the Board of
Directors of the Guarantor authorizing and approving the Guarantee;
(iv) a certificate of incumbency showing the officers and other
representatives of the Issuer authorized to execute Notes and to give
instructions concerning the issuance of Notes, and a certificate of incumbency
showing the officers of the Guarantor authorized to execute the Guarantee;
(v) an opinion of counsel to the Issuer addressed to CSI as to the
matters set forth in subsections (i)-(vii) of Section 3(a) above an opinion of
counsel to the Guarantor addressed to CSI as to the matters set forth in
subsections (i)-(vii) of Section 3(b) above and, in each case, as to such other
matters as CSI may reasonably request;
(vi) a copy of the Offering Materials, including the Offering
Memorandum, approved in writing by the Issuer and the Guarantor;
(vii) true and correct copies of any documents relating to the Notes
executed by the Issuer, the Guarantor and DTC; and
(viii) in connection with issuance of Notes in book-entry form, a copy
of the master note(s) evidencing such Notes.
6. Disclosure.
----------
(a) The Issuer and the Guarantor understand that, in connection with
the offer and sale of the Notes, from time to time Offering Materials and any
other Company Information approved by the Company or the Guarantor for
dissemination to purchasers or potential purchasers of the Notes will be
prepared relating to the Issuer and the Guarantor, which may be distributed to
the CSI's sales personnel and to purchasers and prospective purchasers of the
Notes. To provide a basis for the preparation of such Offering Materials and to
assist in CSI's ongoing credit review procedures and sale of the Notes, each of
the Issuer and the Guarantor agrees to furnish to CSI, as these items become
available, (i) its most recent report on Forms 10-Q and 10-K filed with the SEC
and each report filed on Form 8-K filed by the Guarantor with the SEC since the
most recent Form 10-K, (ii) its most recent annual audited financial statements
and annual and interim financial statements prepared subsequent thereto, if not
included in item (i) above, to the extent made publicly available, and (iii) its
affiliates' other publicly available recent reports, including, but not limited
to, any publicly available filings or reports provided to their respective
shareholders, any national securities exchange or any rating agency, and any
information generally supplied in writing to securities analysts, (iv) research
reports prepared by any brokerage house or rating agency with respect to the
Issuer or the Guarantor, (v) any other information or disclosure prepared
pursuant to Section 6(f) hereof, and (vi) any other information or document
prepared or approved by the Issuer or the Guarantor for dissemination to
purchasers or potential purchasers of the Notes. In addition, each of the Issuer
and the Guarantor shall provide CSI with such other information as CSI may
reasonably request (under an appropriate confidentiality agreement) for the
purpose of its ongoing credit review of the Issuer and the Guarantor.
(b) Each of the Issuer and the Guarantor recognizes that the accuracy
and completeness of the Offering Materials are dependent upon the accuracy and
completeness of the information obtained by CSI and, subject to Section 6(d) and
Section 7 hereof, CSI shall not be responsible for any inaccuracy in any
Offering Materials. CSI agrees that prior to the distribution of any Offering
Materials, CSI will provide the Issuer or the Guarantor with a copy thereof for
their respective approval. Each of the Issuer and the Guarantor agrees to notify
CSI in writing, within fourteen (14) business days of receipt of any Offering
Materials submitted for review, of its approval or disapproval of any Offering
Materials. Any such approval by the Issuer or the Guarantor shall be deemed to
be a representation by it that the Offering Materials so approved do not contain
an untrue statement of a material fact nor omit to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading.
(c) Each of the Issuer and the Guarantor represents and warrants to CSI
that its financial statements delivered or to be delivered to CSI in accordance
with this Section 6 are or will be in accordance with generally accepted
accounting principles and practices in effect in the United States, on the date
such statements were or will be prepared and fairly do or will present its
financial condition and operations at such date and the results of its
operations for the period then ended.
(d) Each of the Issuer and the Guarantor further agrees to notify CSI
promptly upon the occurrence of (i) any event that would render any material
fact contained in its most recent financial reports, as submitted to CSI, untrue
or misleading, or (ii) any event relating to or affecting it that would cause
the Offering Materials then in use to include an untrue statement of a material
fact or to omit to state a material fact necessary in order to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading. In such event, each of the Issuer and the Guarantor
agrees to supply CSI promptly with such information as will correct such untrue
or misleading statement or such omission.
7. Indemnification.
---------------
(a) The Issuer and the Guarantor, jointly and severally, hereby agree
to indemnify CSI and its affiliates, their respective directors, officers,
employees, and agents, and each person who controls CSI or its affiliates within
the meaning of the 1933 Act or the Exchange Act and any successor thereto (CSI
and each such person being an "Indemnified Person") from and against any and all
losses, claims, damages and liabilities, joint or several, to which such
Indemnified Person may become subject under any applicable federal or state law,
or otherwise, related to or arising out of (i) any untrue statement or alleged
untrue statement of a material fact contained in the Offering Materials or in
any information (whether oral or written) or documents furnished or made
available by the Issuer or the Guarantor to offerees of the Notes or any of
their representatives or the omission or the alleged omission to state therein a
material fact necessary to make the statements therein not misleading in light
of the circumstances under which they were made, or (ii) any matter or
transaction contemplated by this Agreement or by the engagement of CSI pursuant
to, and the performance by CSI of the services contemplated by, this Agreement
and shall promptly reimburse any Indemnified Person for all out-of-pocket
expenses (including, but not limited to, reasonable fees and disbursements of
counsel), as they are incurred, in connection with the investigation of,
preparation for or defense of any pending or threatened claim or any action or
proceeding arising therefrom, whether or not such Indemnified Person is a party,
provided, however, that, with respect to (ii) herein, neither the Issuer nor the
Guarantor shall be liable in any such case to the extent such loss, claim,
damage or liability is finally judicially determined to have resulted from an
Indemnified Person's gross negligence or willful misconduct or, with respect to
(i) the Issuer shall not be liable for information furnished by the Placement
Agent expressly for inclusion in the Offering Memorandum, as set forth in the
sections thereof entitled "Chase Securities Inc. and Affiliates" and "Additional
Information."
(b) Promptly after receipt by an Indemnified Person under this Section
7 of notice of any claim or the commencement of any action, the Indemnified
Person shall, if a claim in respect thereof is to be made under this Section 7,
notify the Issuer and the Guarantor in writing of the claim or the commencement
of that action; provided, however, that the failure to notify either or both of
the Issuer and the Guarantor shall not relieve either of them from any liability
that it may have under this Section 7 except up to the extent of any actual
prejudice suffered by it as a result of such failure; and, provided, further,
that in no event shall the failure to notify either or both of the Issuer and
the Guarantor relieve either of them from any liability that it may have to an
Indemnified Person otherwise than under this Section 7. If any such claim or
action shall be brought against an Indemnified Person, and it shall notify the
Issuer and the Guarantor thereof, the Issuer and the Guarantor shall be entitled
to participate therein and, to the extent that either of them wishes, to assume
the defense thereof with counsel reasonably satisfactory to the Indemnified
Person. After notice from the Issuer or the Guarantor to the Indemnified Person
of the election of the Issuer or the Guarantor to assume the defense of such
claim or action, neither of them shall be liable to the Indemnified Person under
this Section 7 for any legal or other expenses subsequently incurred by the
Indemnified Person in connection with the defense thereof other than reasonable
costs of investigation. Neither the Issuer nor the Guarantor shall be liable for
any settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld).
(c) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7 is for
any reason unavailable or insufficient to hold harmless an Indemnified Person,
other than as expressly provided above, the Issuer and the Guarantor, on the one
hand, and CSI on the other, shall contribute to the aggregate costs of
satisfying such liability (i) in such proportion as is appropriate to reflect
the relative benefits received by the Issuer and the Guarantor, on the one hand,
and CSI, on the other hand. The relative benefits received by the Issuer and the
Guarantor on the one hand and CSI on the other with respect to such offering
shall be deemed to be in the same proportion as the aggregate proceeds to the
Issuer of the Notes sold pursuant hereto (before deducting expenses) bear to the
aggregate commissions and fees earned by CSI hereunder. The Issuer, the
Guarantor and CSI agree that it would not be just and equitable if contributions
pursuant to this Section 7 were to be determined by pro rata allocation or by
any other method of allocation that does not take into account the equitable
considerations referred to herein. The amount paid or payable by an Indemnified
Person as a result of the loss, claim, damage or liability, or action in respect
thereof, referred to above in this Section 7 shall be deemed to include, for
purposes of this Section 7(c), but not be limited to, any fees and disbursements
of counsel, reasonably incurred by an Indemnified Person in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7(c), to the extent permitted by law, the aggregate
of all amounts paid by CSI pursuant to the foregoing shall not exceed the
aggregate of the commissions and fees earned by CSI hereunder.
(d) The obligations of the Issuer and the Guarantor in this Section 7
are in addition to any other liability that either or both of them may otherwise
have.
(e) The provisions of this Section 7 shall survive the termination of
this Agreement.
8. Choice of Forum.
---------------
Each of the Issuer and the Guarantor agrees that any suit, action or
proceeding brought by either or both of them against CSI, in connection with or
arising out of this Agreement, , instrument or document entered into in
connection with this Agreement, or the offer and sale of the Notes shall be
brought solely in the Federal courts located in the Borough of Manhattan or the
courts of the State of New York located in the Borough of Manhattan.
9. Notices.
-------
All notices required under the terms and provisions hereof shall be in
writing, delivered by hand, by mail (postage prepaid), or by telex, telecopier
or telegram, and any such notice shall be effective when received at the address
specified below.
If to the Issuer:
Sotheby's, Inc.
1334 York Avenue
New York, New York 10021
Attention: John S. Brittain, Jr.
Fax No.: 212-508-8079
If to the Guarantor:
Sotheby's, Inc.
1334 York Avenue
New York, New York 10021
Attention: John S. Brittain, Jr.
Fax No.: 212-508-8079
If to CSI:
Chase Securities Inc.
270 Park Avenue, 9th Floor
New York, New York 10017
Attention: Commercial Paper Department
Fax No.: 212-834-6560
or, if to any of the foregoing parties or their successors, at such other
address as such party or successor may designate from time to time by notice
duly given in accordance with the terms of this Section 9 to the other party
hereto.
10. Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties
hereto with respect to the matters covered hereby and supersedes all prior
agreements and understandings between the parties including the amended and
restated letter agreement dated October 10, 1989.
11. Amendment and Termination; Successors; Counterparts.
---------------------------------------------------
(a) The terms of this Agreement shall not be waived, altered, modified,
amended or supplemented in any manner whatsoever except by written instrument
signed by both parties hereto. The Issuer or CSI may terminate this Agreement
upon at least 30 days' written notice to the other, provided that such
termination shall not affect the obligations of the parties hereunder with
respect to Notes unpaid at the time of such termination or with respect to
actions or events occurring prior to such termination.
(b) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that neither the Issuer nor the Guarantor may assign, either in whole
or in part, any of its rights or obligations under this Agreement without the
prior written consent of CSI, and any such assignment without such consent shall
be null and void. CSI may assign or transfer, either in whole or in part, any of
its rights or obligations under this Agreement to any affiliate of CSI, upon at
least 30 days' prior written notice to the Issuer and the Guarantor.
(c) This Agreement may be executed in several counterparts, each of
which shall be deemed an original hereof.
12. Captions.
--------
The captions in this Agreement are for convenience of reference only
and shall not define or limit any of the terms or provisions hereof.
13. Severability of Provisions.
--------------------------
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity of such provisions in any other
jurisdiction.
14. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without regard to its conflict of laws
provisions.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first above written.
SOTHEBY'S INC.
By: /s/ John S. Brittain, Jr.
Name: John S. Brittain, Jr.
Title: SVP & Treasurer
SOTHEBY'S HOLDINGS, INC.
By: /s/ John S. Brittain, Jr.
Name: John S. Brittain, Jr.
Title: SVP & Treasurer
CHASE SECURITIES INC.
By: /s/ Eugen Pickens
Name: Eugene Pickens
Title: Vice President
AMENDMENT TO AGREEMENT
July 13, 1998
Merrill Lynch Money Markets Inc.
Merrill Lynch World Headquarters
World Financial Center - North Tower
250 Vesey Street - 10th Floor
New York, New York 10281-1310
Ladies and Gentlemen:
This is to amend that certain 3(a)(3) Dealer Agreement between Sotheby's,
Inc. (the "Company") and Merrill Lynch Money Markets Inc. (the "Dealer") dated
February 15, 1989 (the "Agreement")
Unless otherwise defined herein, all terms used in this Amendment to
Agreement will have the same meaning as ascribed thereto in the Agreement.
1. Amendment. The Agreement is hereby amended as follows:
(a) Paragraph 2 of the Agreement is hereby amended by deleting
the first sentence thereof.
(b) Paragraph 3 of the Agreement is hereby deleted in its
entirety and the following is inserted in lieu thereof:
"3. On the date of purchase of any notes, MLMMI shall
confer with the Company as to the principal amounts,
maturities and denominations thereof, the interest
rate thereon, if any, or the discount, if any, from
the principal amount at which the notes are to be
purchased from the Company. The authentication,
delivery and payment of the notes shall be effected
in accordance with the Issuing and Paying Agency
Agreement and the notes shall be either individual
bearer physical certificates or represented by
book-entry notes registered in the name of DTC or its
nominee in the form or forms annexed to the Issuing
and Paying Agency Agreement."
(c) Paragraph 4 is hereby deleted in its entirety.
2. Conditions to Effectiveness. This Amendment to Agreement shall become
effective as of the date first above written when the Dealer shall have
received an incumbency certificate of an authorized officer of the Company
as to the name and true signatures of the officers authorized to sign this
Amendment to Agreement.
3. Governing Law. THIS AMENDMENT TO AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.
If the foregoing is in accordance with your understanding of the
Amendment to Agreement, please sign and return to us a counterpart hereof,
whereupon, this Amendment to Agreement along with all counterparts will become a
binding agreement between us in accordance with its terms.
Very truly yours,
SOTHEBY'S, INC.
By: /s/ John S. Brittain, Jr.
Name: John S. Brittain, Jr.
Title: SVP & Treasurer
Accepted and agreed to as of the date first above written.
MERRILL LYNCH MONEY MARKETS INC.
By: /s/ Richard N. Doyle
Authorized Signatory
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,834
<SECURITIES> 0
<RECEIVABLES> 345,892
<ALLOWANCES> 8,813
<INVENTORY> 15,125
<CURRENT-ASSETS> 410,765
<PP&E> 159,263
<DEPRECIATION> 79,714
<TOTAL-ASSETS> 825,733
<CURRENT-LIABILITIES> 249,266
<BONDS> 0
0
0
<COMMON> 5,690
<OTHER-SE> 260,139
<TOTAL-LIABILITY-AND-EQUITY> 825,733
<SALES> 0
<TOTAL-REVENUES> 266,426
<CGS> 0
<TOTAL-COSTS> 50,428
<OTHER-EXPENSES> 199,125
<LOSS-PROVISION> 1,183
<INTEREST-EXPENSE> 8,394
<INCOME-PRETAX> 10,297
<INCOME-TAX> 3,810
<INCOME-CONTINUING> 6,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,487
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
