================================================================================
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, 1999
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 May 10, 1999, there were outstanding 40,657,192 shares of Class A Limited
Voting Common Stock, par value $0.10 per share, and 16,995,299 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, 1999 and 1998 3
Consolidated Balance Sheets at March 31, 1999,
December 31, 1998 and March 31, 1998 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
EXHIBIT INDEX 21
<PAGE>
<TABLE>
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
Sotheby's Holdings, Inc. and Subsidiaries
(Unaudited)
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------------
1999 1998
----------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share data)
<S> <C> <C>
Revenues:
Auction and related revenue .......................................... $ 51,665 $ 55,266
Other revenue ........................................................ 11,537 13,057
-------- --------
Total revenues ....................................................... 63,202 68,323
Expenses:
Direct costs of services ............................................. 13,004 17,877
Salaries and related costs ........................................... 36,168 33,119
General and administrative ........................................... 25,302 21,863
Depreciation and amortization ........................................ 3,339 3,233
-------- --------
Total expenses ....................................................... 77,813 76,092
-------- --------
Operating loss ....................................................... (14,611) (7,769)
Interest income ...................................................... 1,123 647
Interest expense ..................................................... (1,442) (2,774)
Other expense ........................................................ (191) (76)
-------- --------
Loss before taxes .................................................... (15,121) (9,972)
Income tax benefit ................................................... 5,595 3,689
-------- --------
Net Loss ............................................................. ($ 9,526) ($ 6,283)
======== ========
Basic Loss Per Share ................................................. ($ 0.17) ($ 0.11)
======== ========
Diluted Loss Per Share ............................................... ($ 0.17) ($ 0.11)
======== ========
Basic Weighted Average Shares Outstanding (in millions) .............. 57.3 56.1
======== ========
Diluted Weighted Average Shares Outstanding (in millions) ............ 57.3 56.1
======== ========
Dividends Per Share .................................................. $ 0.10 $ 0.10
======== ========
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
Sotheby's Holdings, Inc. and Subsidiaries
(UNAUDITED)
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
- --------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $32,278 $71,238 $7,788
Accounts and notes receivable, net of allowance
for doubtful accounts of $10,964, $14,585 and $9,775
Accounts receivable 185,181 286,922 168,466
Notes receivable 135,328 135,592 170,381
Other 15,874 18,368 31,588
- --------------------------------------------------------------------------------------------------------------
Total Accounts and Notes Receivable, Net 336,383 440,882 370,435
Inventory, net 20,840 16,915 20,972
Deferred income taxes 16,384 16,251 6,643
Prepaid expenses and other current assets 27,470 23,756 17,998
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 433,355 569,042 423,836
Notes receivable 75,985 17,115 108,232
Properties, less allowance for depreciation
and amortization of $59,806, $60,154 and $73,080 125,533 108,914 80,600
Intangible assets, less allowance for
amortization of $17,779, $17,753 and $17,161 34,270 34,088 32,501
Investments 36,471 36,737 37,289
Other assets 6,794 5,614 5,611
- --------------------------------------------------------------------------------------------------------------
Total Assets $712,408 $771,510 $688,069
- --------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Current Liabilities
Due to consignors $148,198 $289,987 $144,614
Other short-term borrowings 5,016 2,098 26,794
Accounts payable and accrued liabilities 112,565 105,751 70,900
Deferred revenues 7,158 6,921 7,376
Accrued income taxes 22,235 38,944 12,237
- --------------------------------------------------------------------------------------------------------------
Total Current Liabilities 295,172 443,701 261,921
Long-Term Liabilities
Commercial Paper -- -- 155,300
Long-term debt 100,000 -- --
Deferred income taxes 11,046 11,789 11,908
Other liabilities 1,835 1,933 1,102
- --------------------------------------------------------------------------------------------------------------
Total Liabilities 408,053 457,423 430,231
Shareholders' Equity
Common Stock, $0.10 par value: 5,751 5,716 5,653
Authorized shares - 125,000,000 of Class A and 75,000,000 of Class B
Issued and outstanding shares - 40,497,788, 40,164,388 and 39,511,522
of Class A and 16,995,299, 16,995,299 and 17,022,094 of Class B, at
March 31, 1999, December 31, 1998 and March 31, 1998, respectively
Additional paid-in capital 109,829 104,092 83,625
Retained earnings 204,125 219,383 185,127
Accumulated other comprehensive income (15,350) (15,104) (16,567)
- --------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 304,355 314,087 257,838
- --------------------------------------------------------------------------------------------------------------
Total Liabilities And Shareholders' Equity $712,408 $771,510 $688,069
- --------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Sotheby's Holdings, Inc. and Subsidiaries
(UNAUDITED)
<CAPTION>
Three Months Ended March 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
Operating Activities:
Net Loss .................................................................... ($ 9,526) ($ 6,283)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization ............................................ 3,339 3,233
Deferred income taxes .................................................... (876) 242
Tax benefit of stock option exercises .................................... 1,273 1,640
Asset provisions ......................................................... 291 730
Other .................................................................... (85) (105)
Changes in assets and liabilities:
Decrease in accounts receivable .......................................... 106,901 150,267
(Increase) decrease in inventory ......................................... (3,710) 2,097
(Increase) decrease in prepaid expenses and other current assets ......... (3,064) 513
(Increase) decrease in other assets ...................................... (2,466) 374
Decrease in due to consignors ............................................ (144,455) (207,823)
Decrease in accrued income taxes ......................................... (16,709) (11,331)
Increase (decrease) in other liabilities ................................. 4,650 (15,221)
--------- ---------
Net cash used by operating activities .................................... (64,437) (81,667)
Investing Activities:
Increase in notes receivable ................................................ (79,767) (20,986)
Collections of notes receivable ............................................. 22,415 14,978
Capital expenditures ........................................................ (18,142) (4,010)
Decrease in investments ..................................................... 267 177
--------- ---------
Net cash used by investing activities .................................... (75,227) (9,841)
Financing Activities:
Increase in commercial paper ................................................ -- 38,300
Increase in long-term debt .................................................. 100,000 --
Increase in short term borrowings ........................................... 2,614 24,626
Proceeds from exercise of stock options ..................................... 4,498 8,749
Dividends ................................................................... (5,731) (5,617)
--------- ---------
Net cash provided by financing activities ................................ 101,381 66,058
Effect of exchange rate changes on cash ..................................... (677) (404)
--------- ---------
Decrease in cash and cash equivalents .................................. (38,960) (25,854)
Cash and cash equivalents at beginning of period ............................ 71,238 33,642
--------- ---------
Cash and cash equivalents at end of period ............................. $ 32,278 $ 7,788
========= =========
Income taxes paid ........................................................... $ 10,236 $ 4,982
Interest paid ............................................................... $ 1,521 $ 2,462
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, 1998 (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, 1999 and 1998 have been included.
2. NOTES RECEIVABLE
The Company provides collectors, estates 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, estates 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 estates, 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 March 31, 1999, an amount equal to approximately 33% of the
Company's notes receivable (current and non-current) was extended to
two borrowers. No other individual loan or group of related loans
amounted to more than 5% of total assets at March 31, 1999.
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 three months
ended March 31, 1999 and 1998 (in thousands):
1999 1998
------ ------
Allowance for credit losses
at December 31, 1998 and 1997 $2,874 $3,620
Provisions -- 238
Write-offs -- --
Other (19) 27
------- ------
Allowance for credit losses
at March 31, 1999 and 1998 $2,855 $3,885
======= ======
3. CREDIT ARRANGEMENTS
In February, 1999 the Company sold a tranche of long-term debt
securities, pursuant to the Company's $200 million shelf registration
with the Securities and Exchange Commission, for an aggregate offering
price of $100 million. The ten-year notes have an effective interest
rate of 6.98%.
The Company may issue up to $300 million in notes under its U.S.
commercial paper program. At March 31, 1999 there were no outstanding
commercial paper borrowings. At March 31, 1999, the Company had $5.0
million outstanding under domestic and foreign bank lines of credit at
weighted average interest rates of 4.22%.
4. COMPREHENSIVE INCOME
The Company's other comprehensive income consisted of the change in the
foreign currency translation adjustment amount during the period.
Comprehensive loss for the three months ended March 31, 1999 and 1998
amounted to $9.8 million and $7.4 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 $33.8 million at March 31,
1999.
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 May 10, 1999,
the Company had outstanding guarantees totaling approximately $3.7
million which covers auction property having a mid-estimate sales price
of approximately $6.9 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 March 31, 1999, no amounts had been
funded; at May 10, 1999 $2.9 million 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, the Company has financial
commitments of approximately $64 million as of May 3, 1999.
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. SEGMENT REPORTING
During the fourth quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information".
For the Three Months Ended March 31, 1999 (in thousands):
Auction Real Estate Finance Other Total
------- ----------- ------- ----- ------
Revenues $ 51,665 $ 5,949 $ 3,627 $1,961 $ 63,202
Profit/(Loss) (16,381) 366 972 (78) (15,121)
Assets 435,587 15,243 229,177 3,373 683,380
For the Three Months Ended March 31, 1998 (in thousands):
Auction Real Estate Finance Other Total
------- ----------- ------- ------ -------
Revenues $ 55,266 $ 5,202 $ 6,170 $1,685 $ 68,323
Profit/(Loss) (11,273) 225 1,218 (142) (9,972)
Assets 372,902 11,323 281,676 2,832 688,733
A reconciliation of the total assets reported for the reportable
operating segments to total assets on the consolidated balance sheets
is as follows:
1999 1998
-------- --------
Total assets for reportable segments $680,007 $665,901
Other assets 3,373 2,832
Goodwill not allocated to segments 10,452 10,725
Other unallocated amounts 18,576 8,611
-------- --------
Consolidated total $712,408 $688,069
======== ========
The other unallocated amounts consist primarily of deferred tax assets
and income tax receivable balances.
7. 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 approximately 80% of the
Company's auction sales are derived from the second and fourth quarters
of the year.
Percentage of Annual
Auction Sales
-------------------
1998 1997 1996
---- ---- ----
January - March 13% 11% 10%
April - June 37% 35% 39%
July - September 8% 8% 9%
October - December 42% 46% 42%
---- ---- ----
100% 100% 100%
==== ==== ====
<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 Company's operating expenses. (See Note 7 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, 1999 and 1998 (in thousands):
For the Three Months
Ended March 31,
1999 1998
---- ----
North America $133,439 $173,804
Europe 101,034 78,132
Asia 1,200 --
-------- --------
Total $235,673 $251,936
======== ========
For the quarter ended March 31, 1999, worldwide auction sales of $235.7
million decreased $16.3 million, or 6%, compared to the first quarter
of 1998. The decrease in first quarter sales was due to a 12% decrease
in the average selling price per lot sold in 1999 as compared to 1998,
offset by a 7% increase in the number of lots sold. The decrease in
North America was primarily due to a decrease in the Old Masters
paintings and drawings sales and Asian Art sales. The decrease was also
due to the 1998 sale of the Collection of H.R.H. the Duke and Duchess
of Windsor, for which there were no comparable sales in the current
year. The sales increase in Europe was principally due to the results
of the sale of Important French and Italian Furniture, Porcelain,
Paintings, Silver and Decorative Arts from the Estate of dott. Giuseppe
Rossi. There was one auction sale in Asia during the first quarter of
1999 while none were held in the same period in 1998. The Company
continues to maintain a presence in the Asian markets but is unable to
predict the effect, if any, of the unstable Asian economies on the
Company's operating results. Historically, Asia has accounted for
approximately five percent of annual sales. Auction sales recorded by
the Company's foreign operations were not materially affected by
translation into U.S. dollars for the first quarter of 1999.
For the first quarter of 1999, worldwide auction and related revenues
decreased $3.6 million, or 7%, compared to 1998. Foreign currency
exchange rate movements did not materially affect revenues for the
first quarter of 1999. This decrease was primarily a result of lower
commission revenue due to the decreased sales discussed above and a
decrease in expense recoveries related to the 1998 sale of the
Collection of H.R.H. the Duke and Duchess of Windsor for which there
were no comparable sales in the current year. These decreases were
offset by an increase in principal activities primarily due to an
increase in net gains on sales of inventory and an increase in the
Company's share of operating results of Acquavella Modern Art. Auction
and related revenues as a percentage of sales for the three months
ended March 31, 1999 was flat in comparison to the three months ended
March 31, 1998.
Other revenue, which includes revenues from the Company's Real Estate
and Finance operating segments decreased $1.5 million, or 12% in the
first quarter of 1999 compared to the same quarter of 1998. This
decrease was due to lower Finance revenues offset slightly by an
increase in Real Estate revenues. The decrease in Finance revenues was
a result of a lower average loan portfolio balance in the first quarter
of 1999 compared to the first quarter of 1998. The increase in Real
Estate revenues was primarily due to revenue earned in the first
quarter of 1999 by new Company owned brokerage offices for which no
revenue was earned in the first quarter of 1998.
Total expenses increased $1.7 million in the first quarter of 1999
compared to 1998. 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) decreased $4.9 million during the first quarter of
1999 compared to the same period of 1998. This decrease was primarily
due to 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 in 1998. This
decrease was slightly offset by an increase in Real Estate direct costs
related to new Company owned brokerage offices.
All other operating expenses (which include salaries and related costs,
general and administrative expenses as well as depreciation and
amortization) totaled $64.8 million for the first quarter of 1999, an
increase of 11% compared to the first quarter of 1998. This increase
was principally due to a $3.0 million, or 9%, increase in salaries and
related costs and a $3.4 million, or 16%, increase in general and
administrative expenses. These increases were primarily the result of
incentive plans, new initiatives and initial Internet related expenses.
Total Internet related expenses amounted to approximately $2.3 million
for the three months ended March 31, 1999. These costs include
primarily marketing, salary and related and professional fees. The
Company continues to evaluate its planned expenditures in the initial
development phase of SOTHEBYS.COM.
Interest income increased $0.5 million due to higher average cash
balances in the first quarter of 1999 compared to 1998. The higher cash
balances were principally the result of the Company's $100 million debt
offering, as discussed more fully in Liquidity and Capital Resources,
before such funds were utilized. Interest expense decreased $1.3
million in the first quarter of 1999 as compared to the same period in
1998 as a result of lower average borrowings due to the decreased
average loan portfolio and capitalized interest on the Company's
building construction and other projects.
The consolidated effective tax rate was 37% for the quarters ended
March 31, 1999 and 1998.
For the first quarter of 1999, the Company's net loss increased to a
net loss of $9.5 million from a net loss of $6.3 million in the first
quarter of 1998. The diluted loss per share for the first quarter of
1999 increased to $0.17 from $0.11 in the first quarter of 1998.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's net debt position (total debt, which includes short-term
borrowings, commercial paper and long-term debt, less cash and cash
equivalents) totaled $72.7 million at March 31, 1999 compared to a net
debt position of $174.3 million at March 31, 1998. The Company had a
net cash position of $69.1 million at December 31, 1998. Working
capital (current assets less current liabilities) at March 31, 1999 was
$138.2 million compared to $161.9 million and $125.3 million at March
31, 1998 and December 31, 1998, respectively.
The Company's client loan portfolio increased to $214.2 million at
March 31, 1999 from $155.6 million at December 31, 1998. These amounts
include $76.0 million and $17.1 million of loans which have a maturity
of more than one year at March 31, 1999 and December 31, 1998,
respectively.
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
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, of which $100
million is available as of March 31, 1999. In February 1999, the
Company sold a tranche of these debt securities for an aggregate
offering price of $100 million.
For the three months ended March 31, 1999, the Company's primary
sources of liquidity were derived from the issuance of the long-term
debt securities. The most significant cash uses during the first three
months of 1999 were operations, capital expenditures, the net funding
of the client loan portfolio and payment of shareholder dividends.
Capital expenditures, consisting primarily of office and facility
refurbishment, acquisition of computer equipment and software, and
costs associated with the construction of the York Property, as defined
below, totaled $18.1 and $4.0 million for the first three months of
1999 and 1998, respectively. The increase in expenditures in 1999 as
compared to 1998 is due to the York Property construction and increased
computer and software costs.
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.
As a result of such evaluation, 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"). The capital expenditures relating to
the new building construction are currently estimated to be in the
range of $130 million. As of May 3, 1999 the Company has financial
commitments in relation to this project of approximately $64 million.
York Avenue Development, Inc. ("York"), a wholly owned subsidiary of
Sotheby's Inc. (itself a wholly owned subsidiary of the Company), under
its operating lease, holds a purchase option on the York Property that
can be exercised on defined dates in 1999, 2004 and 2009 for ten times
the annual rent at the date the option is exercised, subject to
limitations. York expects to exercise the option in August 1999. 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, senior unsecured debt and the shelf
registration will continue to be adequate to fund the client loan
program, peak working capital requirements, other short-term
commitments to consignors, the project on the York Property and the
Company's Internet initiative.
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 has developed contingency plans
for those locations where the replacing or modification of systems will
not be completed by the end of 1999. These contingency plans consist of
fixing or upgrading software that will soon be replaced, to address the
year 2000 issue. The Company's modification, replacement and execution
of contingency plans of its worldwide financial and information systems
is proceeding on schedule and should be completed by the end of 1999.
The Company has assessed its material non-information technology
systems. The Company does not anticipate any material disruption to its
operations due to Year 2000 issues with its non-information technology
systems.
The Company is currently assessing the status of its material suppliers
and other third party vendors. The Company intends to distribute
information requests during the second quarter of 1999 and evaluate
responses shortly thereafter. 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 a significant majority of 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 and employees 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 modification or replacement, and implementing
additional modifications or remediation as may be necessary, will be in
the range of $15 million. To date, the Company's expenditures for this
project have been approximately $13.0 million, with the balance of such
expenses expected to be incurred during the rest of 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.
With respect to all statements made herein regarding Year 2000, see
statement on Forward Looking Statements.
EUROPEAN MONETARY UNION
The European Monetary Unit ("the euro") was introduced on January 1,
1999 as a wholesale currency. The eleven participating European
Monetary Union member countries established 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, on July 1, 2002, 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 financial and cash management operations
affected by the euro conversion have adequately prepared for its
introduction. For the transition period and the period after January 1,
2002, the Company has established an internal group of employees to
analyze the potential business implications of converting to a common
currency. The Company is unable to determine the ultimate financial
impact of the euro 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.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("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 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.
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company continuously evaluates its market risk associated with its
financial instruments and forward exchange contracts during the course
of its business. The Company's financial instruments include cash and
cash equivalents, notes receivable, short-term borrowings and long-term
debt. The market risk of the Company's financial instruments has not
changed significantly as of March 31, 1999 from that set forth in the
Annual Report.
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
rank order:
(1) The Company's business is seasonal, with peak revenues and
operating income occurring in the second and fourth quarters of each
year as a result of the traditional spring and fall art auction season.
(2) The overall strength of the international economy and financial
markets and, in particular, the economies of the United States, the
United Kingdom, and the major countries of continental Europe and Asia
(principally Japan and Hong Kong).
(3) Competition with other auctioneers and art dealers.
(4) The volume of consigned property and the marketability at auction
of such property.
(5) The expansion of the New York auction facility and global
headquarters.
(6) The effects of Year 2000 issues.
(7) The effects of the Euro conversion.
(8) Competition in the Internet auction business and the Company's
success in developing and implementing its Internet auction
strategy.
(9) The demand for art-related financing.
(10) The effects of Market Risk.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 29, 1999, 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 seven directors by the holders of Class B Common Stock; (iii) the approval
of an amendment to the Sotheby's Holdings, Inc. 1997 Stock Option Plan; and
(iv) the ratification of the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the year ended December 31, 1999. All
nominees were elected, and all proposals passed. The results of the voting are
shown below:
ELECTION OF CLASS A DIRECTORS
NOMINEES FOR AGAINST WITHHELD
Walter J.P. Curley 36,988,179 0 98,708
Max M. Fisher 36,986,850 0 100,037
A. Alfred Taubman 36,987,067 0 99,820
ELECTION OF CLASS B DIRECTORS
NOMINEES FOR AGAINST WITHHELD
Conrad Black 169,354,490 0 0
Viscount Blakenham 169,354,490 0 0
Diana D. Brooks 169,354,490 0 0
The Marquess of
Hartington 169,354,490 0 0
Henry R. Kravis 169,354,490 0 0
Jeffrey H. Miro 169,354,490 0 0
Sharon Percy Rockefeller 169,354,490 0 0
APPROVAL OF AMENDMENT TO 1997 STOCK OPTION PLAN
199,816,026 Votes were cast;
195,513,692 Votes were cast for the Resolution;
4,302,334 Votes were cast against the Resolution; and
59,248 Votes abstained
RATIFICATION OF INDEPENDENT AUDITORS
206,401,891 Votes were cast;
206,383,282 Votes were cast for the Resolution;
18,609 Votes were cast against the Resolution; and
39,486 Votes abstained
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
(i) On February 10, 1999, the Company reported
on Form 8-K the following:
(1) Underwriting Agreement, dated
as of February 2, 1999, among
Sotheby's Holdings Inc., Morgan
Stanley & Co. Incorporated,
Chase Securities Inc., and
Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
(2) Indenture, dated as of February
5, 1999, between Sotheby's
Holdings Inc. and the Chase
Manhattan Bank as trustee.
(3) Fixed Rate Note, dated as of
February 5, 1999, made by
Sotheby's Holdings, Inc. in
favor of Cede & Co.
<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 13th day of May, 1999,
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
<PAGE>
Exhibit Index
Exhibit No. Description
----------- ------------
27. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 32,278
<SECURITIES> 0
<RECEIVABLES> 336,383
<ALLOWANCES> 10,964
<INVENTORY> 20,840
<CURRENT-ASSETS> 433,355
<PP&E> 125,533
<DEPRECIATION> 59,806
<TOTAL-ASSETS> 712,408
<CURRENT-LIABILITIES> 295,172
<BONDS> 0
0
0
<COMMON> 5,751
<OTHER-SE> 298,604
<TOTAL-LIABILITY-AND-EQUITY> 304,355
<SALES> 0
<TOTAL-REVENUES> 63,202
<CGS> 0
<TOTAL-COSTS> 13,004
<OTHER-EXPENSES> 64,809
<LOSS-PROVISION> 133
<INTEREST-EXPENSE> 1,442
<INCOME-PRETAX> (15,121)
<INCOME-TAX> (5,595)
<INCOME-CONTINUING> (9,526)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,526)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
