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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, 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 Indentification No.)
incorporation or organization)
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 9, 1999, there were outstanding 42,202,994 shares of Class A
Limited Voting Common Stock, par value $0.10 per share, and 16,585,983 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.
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<PAGE>
INDEX
PART I: FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Statements of Income for the Three
and Nine Months Ended September 30, 1999 and 1998 3
Consolidated Balance Sheets at September 30, 1999, 4
December 31, 1998 and September 30, 1998
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 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 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
EXHIBIT INDEX 24
<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 For the Nine Months
Ended September 30, Ended September 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------- -----------------------------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Auction and related revenue $32,677 $34,478 $216,036 $219,660
Other revenue 12,598 16,810 38,452 46,766
- --------------------------------------------------------------------------------------------- -----------------------------------
Total revenues 45,275 51,288 254,488 266,426
Expenses:
Direct costs of services 11,503 9,057 49,740 50,428
Salaries and related costs 35,927 32,562 109,491 105,754
General and administrative 31,711 21,523 85,511 68,440
Depreciation and amortization 4,087 3,313 11,312 9,731
Non-recurring charges - 15,200 - 15,200
- --------------------------------------------------------------------------------------------- -----------------------------------
Total expenses 83,228 81,655 256,054 249,553
- --------------------------------------------------------------------------------------------- -----------------------------------
Operating (Loss) Income (37,953) (30,367) (1,566) 16,873
Interest income 844 686 2,791 2,006
Interest expense (490) (3,309) (3,347) (8,394)
Other expense (110) (13) (396) (188)
- --------------------------------------------------------------------------------------------- -----------------------------------
(Loss) Income before taxes (37,709) (33,003) (2,518) 10,297
Income tax benefit (expense) 13,952 12,211 932 (3,810)
- --------------------------------------------------------------------------------------------- -----------------------------------
Net (Loss) Income ($23,757) ($20,792) ($1,586) $6,487
- --------------------------------------------------------------------------------------------- -----------------------------------
Basic (Loss) Earnings Per Share ($0.41) ($0.37) ($0.03) $0.11
- --------------------------------------------------------------------------------------------- -----------------------------------
Diluted (Loss) Earnings Per Share ($0.41) ($0.37) ($0.03) $0.11
- --------------------------------------------------------------------------------------------- -----------------------------------
Basic Weighted Average Shares Outstanding (in millions) 58.5 56.9 57.8 56.6
- --------------------------------------------------------------------------------------------- -----------------------------------
Diluted Weighted Average Shares Outstanding (in millions) 58.5 56.9 57.8 57.0
- --------------------------------------------------------------------------------------------- -----------------------------------
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
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
(UNAUDITED) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $3,817 $71,238 $16,834
Accounts and notes receivable, net of allowance
for doubtful accounts of $10,155, $14,585 and $8,813
Accounts receivable 242,590 305,290 162,882
Notes receivable 121,536 135,592 183,010
- ----------------------------------------------------------------------------------------------------------------------------
Total Accounts and Notes Receivable, Net 364,126 440,882 345,892
Inventory, net 29,347 16,915 15,125
Deferred income taxes 14,595 16,251 9,388
Prepaid expenses and other current assets 29,696 23,756 23,526
- ----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 441,581 569,042 410,765
Notes receivable 31,724 17,115 259,603
Properties, less allowance for depreciation
and amortization of $68,588, $60,154 and $67,542 207,931 108,914 79,549
Intangible assets, less allowance for
amortization of $18,539, $17,753 and $17,548 34,228 34,088 32,512
Investments 36,457 36,737 36,960
Other assets 2,202 5,614 6,344
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $754,123 $771,510 $825,733
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Current Liabilities
Due to consignors $145,216 $289,987 $117,703
Other short-term borrowings 4,763 2,098 33,334
Accounts payable and accrued liabilities 114,065 105,751 70,486
Deferred revenues 14,051 6,921 12,706
Accrued income taxes 19,243 38,944 15,037
- ----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 297,338 443,701 249,266
Long-Term Liabilities
Long-term debt 100,000 - -
Commercial Paper - - 285,000
Deferred income taxes 11,283 11,789 9,876
Other liabilities 1,218 1,933 15,762
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 409,839 457,423 559,904
Shareholders' Equity
Common Stock, $0.10 par value: 5,880 5,716 5,690
Authorized shares - 125,000,000 of Class A and 75,000,000 of Class B
Issued and outstanding shares - 41,804,368, 40,164,388 and 39,897,288
of Class A and 16,979,299, 16,995,299 and 17,002,094 of Class B, at
September 30, 1999, December 31, 1998 and September 30, 1998, respectively
Additional paid-in capital 157,470 104,092 89,172
Retained earnings 199,695 219,383 186,567
Accumulated other comprehensive income (18,761) (15,104) (15,600)
- ------------------------------------------------------------------------------- --------------------------------------------
Total Shareholders' Equity 344,284 314,087 265,829
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities And Shareholders' Equity $754,123 $771,510 $825,733
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Sotheby's Holdings, Inc. and Subsidiaries
(UNAUDITED)
<CAPTION>
Nine Months Ended September 30, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
Operating Activities:
Net (Loss) Income ($1,586) $6,487
Adjustments to reconcile net (loss) income to net cash
used by operating activities:
Depreciation and amortization 11,312 12,300
Write-off of Leashold Improvements and Furniture and Fixtures - 14,100
Deferred income taxes 1,590 (6,566)
Tax benefit of stock option exercises 4,716 2,275
Asset provisions 2,642 2,401
Other - (379)
Changes in assets and liabilities:
Decrease in accounts receivable 62,765 183,683
(Increase) decrease in inventory (14,305) 7,086
Increase in prepaid expenses and other current assets (5,694) (5,518)
Increase in other assets (2,634) (1,785)
Decrease in due to consignors (145,440) (232,236)
Decrease in accrued income taxes (19,977) (6,810)
(Decrease) increase in accounts payable and accrued liabilities and other liabilities (3,915) 6,542
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (110,526) (18,420)
Investing Activities:
Increase in notes receivable (129,223) (219,772)
Collections of notes receivable 125,985 48,844
Capital expenditures (86,711) (27,386)
Decrease in investments 281 505
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (89,668) (197,809)
Financing Activities:
Increase in commercial paper - 168,000
Increase in long-term debt 100,000 -
Increase in short term borrowings 2,515 32,285
Proceeds from exercise of stock options 3,385 15,873
Proceeds from issuance of common stock 35,440 -
Proceeds from issuance of warrant to purchase common stock 10,000 -
Dividends (18,102) (16,947)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 133,238 199,211
Effect of exchange rate changes on cash (465) 210
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (67,421) (16,808)
Cash and cash equivalents at beginning of period 71,238 33,642
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $3,817 $16,834
- ---------------------------------------------------------------------------------------------------------------------------
Income taxes paid $6,557 $17,896
- ---------------------------------------------------------------------------------------------------------------------------
Interest paid (net of capitalized interest) $1,023 $7,625
- ---------------------------------------------------------------------------------------------------------------------------
Non cash investing activities:
Capital asset and lease obligation additions $12,635 -
- ---------------------------------------------------------------------------------------------------------------------------
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 and nine months
ended September 30, 1999 and 1998 have been included. Included in the
three and nine months ended September 30, 1998 is a non-recurring
charge. See Note 10 for further information.
2. Accounts and 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 September 30, 1999, an amount equal to approximately 13% of the
Company's notes receivable (current and non-current) was extended to
one borrower. No other individual loan or group of related loans
amounted to more than 10% of the Company's notes receivable (current
and non-current).
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, 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 - (855)
Other (6) (365)
------- -------
Allowance for credit losses
at September 30, 1999 and 1998 $2,868 $2,638
======= =======
As of September 30, 1999, an amount equal to approximately 27% of the
Company's accounts receivable balance was due from one purchaser.
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 September 30, 1999 there were no
outstanding commercial paper borrowings. At September 30, 1999,
the Company had $4.8 million outstanding under domestic and foreign
bank lines of credit at weighted average interest rates of 5.72%.
4. Property, Plant and Equipment
Included in Property, Plant and Equipment are costs related to the
construction of the Company's current facility on York Avenue ("the
York Property"). In September of 1999, York Avenue Development, Inc.
("York"), a wholly owned subsidiary of Sotheby's, Inc. (itself a wholly
owned subsidiary of the Company), exercised its right, under its
operating lease, to purchase the York Property. Included in the
Company's cash balance at September 30, 1999 is restricted cash in the
amount of $1.1 million, which is being held in escrow and will be paid
to the seller of the York Property at closing.
5. Shareholders'Equity and Earnings Per Share
On July 23, 1999, Amazon.com, Inc. purchased one million of newly
issued shares of the Company's Class A Common Stock at $35.44 per
share, and purchased for $10 million, a three-year warrant to purchase
an additional one million shares at $100 per share. The Company and
Amazon.com, Inc. also entered into an agreement to launch a
co-branded online auction site, sothebys.amazon.com that will be
devoted to the general antiques collector and to the world of
collectibles.
6. Comprehensive Income
The Company's other comprehensive income (loss) consisted of the change
in the foreign currency translation adjustment amount during the
period. Comprehensive income (loss) for the three months ended
September 30, 1999 and 1998 amounted to ($23.7) million and ($21.4)
million, respectively and for the nine months ended September 30, 1999
and 1998 amounted to ($5.2) million and $6.4 million, respectively.
7. 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 $19.5 million at September
30, 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 September 30,
1999 and November 10, 1999, the Company had outstanding guarantees
totaling approximately $8.5 million, which covers auction property
having a mid-estimate sales price of approximately $11 million. Under
certain guarantees, the Company participates in a share of the proceeds
if the property under guarantee sells above a specified price. In
addition, the Company is obligated under the terms of certain
guarantees to fund a portion of the guarantee prior to the auction.
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 $10.5 million as of November 1, 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.
8. 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 September 30, 1999 (in thousands):
Auction Real Estate Finance other Total
Revenues $32,677 $8,001 $3,332 $1,265 $45,275
Profit/(Loss) ($39,909) $1,887 $872 ($559) ($37,709)
For the Three Months Ended September 30, 1998 (in thousands):
Auction Real Estate Finance other Unallocated Total
Revenues $34,478 $5,847 $9,828 $1,135 - $51,288
Profit/(Loss)($22,156) $1,207 $3,757 ($611) ($15,200) ($33,003)
For the Nine Months Ended September 30, 1999 (in thousands):
Auction Real Estate Finance other Total
Revenues $216,036 $22,432 $10,855 $5,165 $254,488
Profit/(Loss) ($9,002) $4,645 $2,526 ($687) ($2,518)
Assets $555,565 $12,767 $158,882 $1,999 $729,213
For the Nine Months Ended September 30, 1998 (in thousands):
Auction Real Estate Finance other Unallocated Total
Revenues $219,660 $19,001 $23,189 $4,576 - $266,426
Profit/(Loss) $16,137 $4,069 $6,121 ($830) ($15,200) $10,297
Assets $398,006 $9,594 $393,627 $1,975 $803,202
A reconciliation of the total assets reported for the reportable
operating segments to total assets on the consolidated balance sheets
is as follows as of September 30, 1999 and 1998:
1999 1998
---- ----
Total assets for reportable segments $727,214 $801,227
Other assets 1,999 1,975
Goodwill not allocated to segments 9,921 10,595
Other unallocated amounts 14,989 11,936
-------- --------
Consolidated total $754,123 $825,733
======== ========
The other unallocated amounts consist primarily of deferred tax assets
and income tax receivable balances.
9. 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%
==== ==== ====
10. 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 was 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 was 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 of September 30, 1999, The Company has recorded in
other liabilities on the Consolidated Balance Sheet, approximately $1.1
million related to these future obligations, which will be paid out
starting approximately in October, 2000 through September 2003.
<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 9 of 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 months ended September 30, 1999 and 1998
(in thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
--------------------- ---------------------
North America $45,511 $32,224 $639,555 $599,848
Europe 78,964 122,952 482,024 493,590
Asia 5,017 2,515 43,233 31,829
------- ------- ------- --------
Total $129,492 $157,691 $1,164,812 $1,125,267
========= ======== ========== ==========
For the quarter ended September 30, 1999, worldwide auction sales of
$129.5 million decreased $28.2 million, or 18%, compared to the third
quarter of 1998. The decrease in third quarter consolidated sales was
due to a 12% decrease in the average selling price per lot sold in 1999
as compared to 1998, and an 8% decrease in the number of lots sold. The
decrease in Europe was due to the timing of the Contemporary art Part I
and II sales and Impressionist Part II sale and a decrease in the
English Furniture sale. The series of Contemporary art sales and
Impressionist Part II sale, which were held in June of 1999, were held
in the third quarter of 1998. The increase in North America was
primarily due to the sale of the Barry Halper Collection of Baseball
Memorabilia for which there was no comparable sale in the prior year.
The increase in Asia was due primarily to favorable sales results for
the Australia Paintings sale. Auction sales recorded by the Company's
foreign operations were not materially affected by translation into
U.S. dollars for the third quarter of 1999.
Consolidated sales for the first nine months of the year increased due
to increases in North America and Asia offset by a decrease in Europe.
The consolidated sales increase is due to a 13% increase in the average
selling price per lot sold in 1999 as compared to 1998, partially
offset by a 8% decrease in the number of lots sold. The increase in
North America is primarily due to the single-owner sale of paintings
and sculptures from the Collection of Mr. and Mrs. John Hay Whitney and
the sale of furniture, decorative and fine arts from the Estate of Mrs.
John Hay Whitney for which there were no comparable sales in the prior
year. As previously mentioned above, the sale of the Barry Halper
Collection of Baseball Memorabilia in the third quarter of 1999 also
contributed to this increase. This increase was offset by two
significant single-owner sales in 1998 for which there were no
comparable sales in the current year as well as decreases in Old
Masters and American Paintings. The two significant single-owner sales
were the sale of silver, furniture, rare books and manuscripts from the
Collection of Jamie Ortiz-Patino, held in the second quarter of 1998,
and the sale of the Collection of H.R.H. the Duke and Duchess of
Windsor held in the first quarter of 1998. The increase in Asia was due
to the item previously mentioned above, as well as favorable sales
results in Hong Kong related to a single-owner sale. The decrease in
Europe was primarily due to decreases in Jewelry, Contemporary art and
English Furniture offset by an increase in Impressionist art. The
decrease was also offset by the inclusion in 1999 results of the
single-owner sale of Important French and Italian Furniture, Porcelain,
Paintings, Silver and Decorative Arts from the Estate of dott. Giuseppe
Rossi, for which there was no comparable sale in 1998. Auction sales
recorded by the Company's foreign operations were not materially
affected by translation into U.S. dollars for the nine months ended
September 30, 1999.
For the third quarter of 1999, worldwide auction and related revenues
decreased $1.8 million, or 5%, compared to 1998. Foreign currency
exchange rate movements did not materially affect revenues in the third
quarter of 1999. This decrease was primarily a result of lower
commission revenue due to the decreased sales discussed above partially
offset by an increase in private treaty sales. Commission revenue as a
percentage of sales for the third quarter has decreased slightly in
1999 as compared to 1998.
For the nine months ended September 30, 1999, auction and related
revenues decreased $3.6 million, or 2%, compared to the same period in
1998. Foreign currency exchange rate movements did not materially
affect revenues for the first nine months of 1999. This decrease was
due primarily to 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 and, to a
lesser extent, a decrease in principal activities. This decrease was
partially offset by higher commission and catalogue revenue due to the
increased sales discussed above and increased private treaty sales.
Commission revenue as a percentage of sales has declined approximately
one percentage point in 1999, principally the result of sales mix and
margin pressure for high end single-owner collections, most notably in
North America.
Other revenue, which includes revenues from the Company's Real Estate
and Finance operating segments decreased $4.2 million, or 25%, in the
third quarter of 1999 compared to the same quarter of 1998. For the
nine months ended September 30, 1999, other revenue decreased $8.3
million, or 18%, compared to the same period in 1998. These decreases
were 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 third quarter and first
nine months of 1999 compared to same periods in 1998. The increase in
Real Estate revenues was primarily due to increased unit sales from
both new and mature Company-owned brokerage offices.
Total expenses, excluding non-recurring charges, increased $16.8
million in the third quarter of 1999 compared to 1998. For the nine
months ended September 30, 1999 total expenses, excluding non-recurring
charges, increased $21.7 million compared to the same period in 1998.
Movements in foreign currency exchange rates did not have a material
impact on expenses for the three and nine months ended September 30,
1999.
Direct costs of services (which consist largely of catalogue production
and distribution costs as well as corporate marketing and sale
marketing expenses) increased $2.5 million during the third quarter of
1999 compared to the same period of 1998. This increase was primarily
due to an increase in North America related to the sale of the Barry
Halper Collection of Baseball Memorabilia and Internet related costs
offset by a decrease in Europe.
Direct costs of services decreased $0.7 million in the first nine
months of 1999 as compared to the same period in 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 partially offset by the inclusion of costs
associated with the sale of the Barry Halper Collection of Baseball
Memorabilia in 1999 and Internet related 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 $71.7 million for the
third quarter of 1999, an increase of 25% compared to the third quarter
of 1998. For the nine months ended September 30, 1999, these expenses
increased $22.4 million, or 12%, compared to the same period in 1998.
For the three and nine months ended September 30, 1999 these increases
were due to an increase in general and administrative expenses and an
increase in salaries and related costs. The increases in general and
administrative expenses were primarily the result of Internet related
expenses and, to a lesser extent, increased Information Technology
costs related to new initiatives, provisions for property claims and
associated legal fees and costs associated with the Company's
consolidation of its operations to the York Property, as defined in
Liquidity and Capital Resources. The increase in salaries and related
costs is primarily due to the Internet initiative. Offsetting the
aforementioned salary and related cost increase for the nine month
results was a reduction, recorded in the second quarter, of accrued
compensation costs of approximately $4.2 million previously expensed by
the Company for its 1997 Performance Share Purchase Plan option grant.
During the second quarter of 1999, the Company's management determined
that fulfillment of the financial performance criteria for the 1997
grant (necessary for these options to ultimately become exercisable
under the terms of the plan) are not likely to be achieved.
Total Internet related expenses amounted to approximately $12.2 million
and $23.0 million for the three and nine months ended September 30,
1999, respectively. These costs include primarily marketing, salary and
related and professional fees. Although the Company continues to
evaluate its planned expenditures in the initial development phase of
sothebys.com and sothebys.amazon.com, the Company expects to invest an
additional amount in the range of $15 to $20 million. A majority of
this amount is expected to be incurred in the fourth quarter of 1999.
Although these investments are likely to have a dilutive effect on the
Company's results in the near term, the Company believes that these
expenditures are appropriate in light of the potential of the Internet
business.
As discussed in Note 10 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 was 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 was 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.
Net interest expense decreased $3.0 million and $5.8 million for the
three and nine months ended September 30, 1999 primarily as a result of
lower average borrowings due to the decreased average loan portfolio
and capitalized interest on the Company's building construction.
The consolidated effective tax rate was 37% for the three and nine
months ended September 30, 1999 and 1998.
For the third quarter of 1999, the Company's net loss increased 14% to
($23.8) million from a net loss of ($20.8) million in the third quarter
of 1998. Diluted loss per share for the third quarter of 1999 increased
to ($0.41) per share from ($0.37) per share for the third quarter of
1998. The impact on diluted loss per share related to the Company's
Internet initiative was ($0.13) per share for the quarter ended
September 30, 1999. For the nine months ended September 30, 1999, net
income/(loss) decreased $8.1 million compared to the same period in
1998. Diluted earnings/(loss) per share for the first nine months of
1999 decreased to ($0.03) from $0.11 in the first nine months of 1998.
The impact on diluted loss per share related to the Company's Internet
initiative was ($0.25) per share for the nine months ended September
30, 1999.
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 $100.9 million at September 30, 1999 compared to a
net debt position of $301.5 million at September 30, 1998. The decrease
in the net debt position is primarily related to a smaller loan
portfolio balance at September 30, 1999 as compared to the same period
in 1998. The Company had a net cash position of $69.1 million at
December 31, 1998. The increase in the net debt position at September
30, 1999 as compared December 31, 1998 is due primarily to the
Company's issuance of unsecured debt securities during the first
quarter of 1999 and to the seasonal nature of the business. Working
capital (current assets less current liabilities) at September 30, 1999
was $144.2 million compared to $161.4 million and $125.3 million at
September 30, 1998 and December 31, 1998, repectively.
The Company's client loan portfolio increased slightly to $156.1
million at September 30, 1999 from $155.6 million at December 31, 1998.
These amounts include $31.7 million and $17.1 million of loans which
have a maturity of more than one year at September 30, 1999 and
December 31, 1998, respectively.
The Company primarily 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, under
which $100 million was available for issuance as of September 30, 1999.
In February 1999, the Company sold a tranche of these debt securities
for an aggregate offering price of $100 million.
On July 23, 1999, Amazon.com, Inc. purchased one million of newly
issued shares of the Company's Class A Common Stock at $35.44 per
share, and purchased for $10 million, a three-year warrant to purchase
an additional one million shares at $100 per share. The Company and
Amazon.com, Inc. also entered into an agreement to launch a
co-branded online auction site, sothebys.amazon.com that will be
devoted to the general antiques collector and to the world of
collectibles.
For the nine months ended September 30, 1999, the Company's primary
sources of liquidity were derived from the issuance of the long-term
debt securities and proceeds from the common stock and warrant issuance
to Amazon.com, Inc. The most significant cash uses during the first
nine months of 1999 were capital expenditures, operations, 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 $86.7 and $27.4 million for the first nine months of
1999 and 1998, respectively. The increase in expenditures in 1999 as
compared to 1998 is due primarily to the York Property construction.
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 7 in the Notes of Consolidated Financial Statements
for additional information.) The Company does not believe that material
liquidity risk exists relating to these commitments.
The capital expenditures relating to the construction of the Company's
current facility on York Avenue ("the York Property") are currently
estimated to be in the range of $138 million of which the Company has
spent approximately $98 million as of September 30, 1999. As of
November 1, 1999 the Company had financial commitments in relation to
this project of approximately $10.5 million. In September of 1999, York
Avenue Development, Inc. ("York"), a wholly owned subsidiary of
Sotheby's, Inc. (itself a wholly owned subsidiary of the Company),
exercised its right, under its operating lease, to purchase the York
Property. The closing of this purchase will take place in 2000. 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, the shelf
registration and the proceeds received from the sale of stock and the
warrant to Amazon.com, Inc. will continue to be adequate to fund the
client loan program, peak working capital requirements, other
short-term commitments to consignors or purchasers, 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.
In connection with the assessment of its worldwide financial and
information systems, the Company has decided to replace a significant
majority of its existing financial and information systems, which the
Company believes will not only address many of its year 2000 issues,
but will also produce operational efficiencies. The replacement of
those portions of its financial and information systems that the
Company believes are critical to year 2000 issues has been completed.
For those portions of the existing financial and information systems
that are not due to be replaced until 2000 or other information systems
that are not part of the worldwide replacement of the Company's
financial and information systems described above, the Company has
completed the modification or replacement of such systems where the
Company has identified 2000 issues. The Company's focus for the
remainder of 1999 is to continue to test and re-test these systems. The
Company currently believes that any necessary upgrades, changes or
fixes identified as a result of the testing and re-testing process will
be addressed in a timely manner and should not have a material impact
on its operations or financial statements.
The Company is continuing to assess its material non-information
technology systems. To date, the Company has completed an assessment of
a majority of its material non-information technology systems. For the
York Property, the Company has received representations from its
vendors that all critical non-information technology systems are year
2000 compliant. The Company has also received representations from
vendors for all critical areas in a majority of its other main selling
centers, including London. While the Company has no reason to doubt
these representations, there can be no assurance that such
representations are correct in all material respects and that no
disruption will result from the failure of any such systems. The
Company's focus for the remainder of 1999 is to complete its assessment
of all remaining material non-information systems. The Company does not
anticipate any material disruption to its operations due to year 2000
issues with its non-information technology systems. However, should the
Company experience any significant disruption from the failure of any
of its non-information technology systems, it has developed a
contingency plan in the event that difficulties arise. As is customary
during the month of January, the Company is scheduled to conduct a very
limited number of sales in January of 2000, which should significantly
lessen the impact of any disruptions. As a result of the seasonal break
in selling activity and the execution of contingency plans should any
disruption occur, the Company does not believe that a disruption in
non-information technology systems to any sales center will have a
material impact on the Company's results of operations, liquidity or
financial condition.
The Company is currently assessing the status of its suppliers and
other third party vendors. The Company distributed information requests
during the second quarter of 1999 and to date has received responses
from approximately 54% of the suppliers or third party vendors,
including all suppliers and third party vendors that the Company has
determined are essential to the Company's operations. None of the
responses identified issues or problems. While the Company has no
reason to doubt those responses received, there can be no assurance
that such responses are correct in all material respects. The Company
intends to develop a contingency plan in the event that it is not
satisfied with the responses from the vendors and third party suppliers
who have not yet responded.
The Company currently believes that the cost of replacing its worldwide
financial and information systems as discussed above, 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, assessing its existing information technology and
non-information technology systems for year 2000 issues, and
implementing the necessary modifications or remediation to address any
such issues, will be in the range of $19 million. To date, the
Company's expenditures for this project have been approximately $17.9
million, with the balance of such expenses expected to be incurred
during the rest of 1999 and 2000.
There can be no assurance that the Company will be completely
successful in its efforts to address the year 2000 issue. The Company
believes, however, that its most reasonably likely worst-case scenario
would be as a result of problems with the systems of suppliers or third
party vendors such as temporary power outages to offices, building
management issues and delayed supply or service vendor requests, rather
than with the Company's internal systems. As noted above, the Company
is limited in its efforts to address the year 2000 issue as it relates
to the systems of suppliers and third party vendors and is primarily
relying on assurances from such suppliers and vendors. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in
part from the inability to fully and independently evaluate 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. However, the completion of the
modification and replacement of worldwide financial and information
systems of the company has significantly reduced 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 were adequately prepared for its
introduction. For the transition period and the period after January 1,
2002, the Company's management will continue to analyze the potential
business implications of converting to a common currency. The Company
is unable to determine the ultimate financial impact, if any, of the
euro conversion on its operations given that the impact will be
dependent upon the competitive situations that 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,
2000. The Company expects to adopt SFAS No. 133 effective January 1,
2001. 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 September 30, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SOTHEBY'S HOLDINGS, INC.
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed this the 15th day of
November, 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
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<COMMON> 5,880
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