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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 June 30, 1999
Commission File Number 1-9750
Sotheby's Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2478409
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 North Woodward Avenue, Suite 100
Bloomfield Hills, Michigan 48304
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(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 August 3, 1999, there were outstanding 41,785,068 shares of Class A
Limited Voting Common Stock, par value $0.10 per share, and 16,989,299 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.
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<PAGE>
INDEX
PART I: FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Statements of Income for the Three
and Six Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
EXHIBIT INDEX 22
<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 Six Months
Ended June 30, Ended June 30,
----------------------------------- --------------------------
1999 1998 1999 1998
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(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Auction and related revenue $131,694 $129,916 $183,358 $185,182
Other revenue 14,315 16,900 25,855 29,956
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Total revenues 146,009 146,816 209,213 215,138
Expenses:
Direct costs of services 25,231 23,494 38,238 41,371
Salaries and related costs 37,397 40,074 73,565 73,193
General and administrative 28,497 25,054 53,798 46,917
Depreciation and amortization 3,885 3,185 7,224 6,418
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Total expenses 95,010 91,807 172,825 167,899
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Operating Income 50,999 55,009 36,388 47,239
Interest income 824 672 1,947 1,320
Interest expense (1,414) (2,312) (2,856) (5,085)
Other expense (96) (98) (287) (174)
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Income before taxes 50,313 53,271 35,192 43,300
Income tax expense 18,616 19,709 13,021 16,021
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Net Income $31,697 $33,562 $22,171 $27,279
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Basic Income Per Share $0.55 $0.59 $0.39 $0.48
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Diluted Income Per Share $0.53 $0.59 $0.38 $0.48
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Basic Weighted Average Shares Outstanding (in millions) 57.6 56.8 57.5 56.4
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Diluted Weighted Average Shares Outstanding (in millions) 60.3 57.3 58.8 57.1
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Dividends Per Share $0.10 $0.10 $0.20 $0.20
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See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
Sotheby's Holdings, Inc. and Subsidiaries
<CAPTION>
June 30, December 31,
1999 1998
(UNAUDITED)
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(Thousands of dollars)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $72,568 $71,238
Accounts and notes receivable, net of allowance
for doubtful accounts of $7,861 and $14,585
Accounts receivable 461,582 286,922
Notes receivable 138,551 135,592
Other 20,625 18,368
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Total Accounts and Notes Receivable, Net 620,758 440,882
Inventory, net 25,819 16,915
Deferred income taxes 14,595 16,251
Prepaid expenses and other current assets 30,380 23,756
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Total Current Assets 764,120 569,042
Notes receivable 23,586 17,115
Properties, less allowance for depreciation
and amortization of $63,363 and $60,154 145,548 108,914
Intangible assets, less allowance for
amortization of $18,221 and $17,753 34,045 34,088
Investments 36,476 36,737
Other assets 6,334 5,614
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Total Assets $1,010,109 $771,510
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Liabilities And Shareholders' Equity
Current Liabilities
Due to consignors $403,845 $289,987
Other short-term borrowings 6,729 2,098
Accounts payable and accrued liabilities 111,110 105,751
Deferred revenues 11,199 6,921
Accrued income taxes 34,610 38,944
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Total Current Liabilities 567,493 443,701
Long-Term Liabilities
Long-term debt 100,000 0
Deferred income taxes 11,283 11,789
Other liabilities 1,845 1,933
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Total Liabilities 680,621 457,423
Shareholders' Equity
Common Stock, $0.10 par value: 5,773 5,716
Authorized shares - 125,000,000 of Class A and 75,000,000 of Class B
Issued and outstanding shares - 40,727,980 and 40,164,388 of
Class A and 16,995,299 and 16,995,299 of Class B, at June 30,
1999 and December 31, 1998, respectively
Additional paid-in capital 112,388 104,092
Retained earnings 230,060 219,383
Accumulated other comprehensive income (18,733) (15,104)
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Total Shareholders' Equity 329,488 314,087
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Total Liabilities And Shareholders' Equity $1,010,109 $771,510
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See accompanying Notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Sotheby's Holdings, Inc. and Subsidiaries
(UNAUDITED)
<CAPTION>
Six Months Ended June 30, 1999 1998
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(Thousands of dollars)
<S> <C> <C>
Operating Activities:
Net Income $22,171 $27,279
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation and amortization 7,224 6,532
Deferred income taxes 1,253 (467)
Tax benefit of stock option exercises 4,231 2,154
Asset provisions 474 2,208
Other - 297
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (191,329) 18,136
(Increase) decrease in inventory (9,349) 4,917
Increase in prepaid expenses and other current assets (7,333) (1,832)
Increase in intangible and in other assets (1,308) (1,015)
Increase (decrease) in due to consignors 126,373 (56,605)
(Decrease) increase in accrued income taxes (1,615) 6,959
Increase in accounts payable and accrued liabilities and other liabilities 11,489 19,573
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Net cash (used) provided by operating activities (37,719) 28,136
Investing Activities:
Increase in notes receivable (94,733) (144,834)
Collections of notes receivable 84,407 48,844
Capital expenditures (46,249) (12,764)
Decrease in investments 262 452
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Net cash used by investing activities (56,313) (108,302)
Financing Activities:
Increase in commercial paper - 38,000
Increase in long-term debt 100,000 -
Increase in short term borrowings 5,034 8,695
Proceeds from exercise of stock options 4,123 13,444
Dividends (11,493) (11,288)
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Net cash provided by financing activities 97,664 48,851
Effect of exchange rate changes on cash (2,302) (916)
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Decrease in cash and cash equivalents 1,330 (32,231)
Cash and cash equivalents at beginning of period 71,238 33,642
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Cash and cash equivalents at end of period $72,568 $1,411
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Income taxes paid $11,730 $5,561
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Interest paid $2,777 $5,696
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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 six months
ended June 30, 1999 and 1998 have been included.
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 June 30, 1999, an amount equal to approximately 22% of the
Company's notes receivable (current and non-current) was extended to
two borrowers.
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 six months
ended June 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 - -
Other (34) (222)
------ ------
Allowance for credit losses
at June 30, 1999 and 1998 $2,840 $3,636
====== ======
As of June 30, 1999, an amount equal to approximately 21% 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 June 30, 1999 there were no outstanding
commercial paper borrowings. At June 30, 1999, the Company had
$6.8 million outstanding under domestic and foreign bank lines of
credit at weighted average interest rates of 6.23%.
4. Shareholders'Equity and Earnings Per Share
On July 23, 1999, Amazon.com, Inc. purchased one million shares of the
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 joint online auction
site, sothebys.amazon.com that will be devoted to the general
antiques collector and to the world of collectibles.
5. Comprehensive Income
The Company's other comprehensive income consisted of the change in the
foreign currency translation adjustment amount during the period.
Comprehensive income for the three months ended June 30, 1999 and 1998
amounted to $28.3 million and $35.1 million, respectively and for the
six months ended June 30, 1999 and 1998 amounted to $18.5 million and
$27.7 million, respectively.
6. 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 June 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 August 3,
1999, the Company had no outstanding guarantees. 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.
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 $15.5 million as of July 30, 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.
7. 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 June 30, 1999 (in thousands):
Auction Real Estate Finance Other Total
------- ----------- ------- ------ -----
Revenues $131,695 $8,489 $3,898 $1,927 $146,009
Profit/(Loss)$47,354 $2,363 $665 ( $69) $50,313
For the Three Months Ended June 30, 1998 (in thousands):
Auction Real Estate Finance Other Total
------- ----------- ------- ------ -----
Revenues $129,918 $7,952 $7,180 $1,766 $146,816
Profit/(Loss)$49,893 $2,617 $845 ($84) $53,271
For the Six Months Ended June 30, 1999 (in thousands):
Auction Real Estate Finance Other Total
------- ----------- ------- ------ -----
Revenues $183,358 $14,430 $7,525 $3,900 $209,213
Profit/(Loss) $30,940 $2,737 $1,647 ($132) $35,192
Assets $798,909 $15,031 $166,683 $1,725 $982,348
For the Six Months Ended June 30, 1998 (in thousands):
Auction Real Estate Finance Other Total
------- ----------- ------- ------ -----
Revenues $185,182 $13,154 $13,352 $3,450 $215,138
Profit/(Loss)$38,572 $2,850 $2,097 ($219) $43,300
Assets $500,216 $8,903 $374,872 $2,176 $886,167
A reconciliation of the total assets reported for the reportable
operating segments to total assets on the consolidated balance sheets
is as follows:
June 30, 1999 June 30, 1998
------------- -------------
Total assets for reportable segments $980,623 $883,991
Other assets 1,725 2,176
Goodwill not allocated to segments 10,179 10,660
Other unallocated amounts 17,582 9,487
---------- --------
Consolidated total $1,010,109 $906,314
========== ========
The other unallocated amounts consist primarily of deferred tax assets
and income tax receivable balances.
8. 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 8 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 six months ended June 30, 1999 and 1998
(in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------------------- --------------------
North America $460,605 $393,820 $594,044 $567,493
Europe 302,026 292,506 403,060 370,638
Asia 37,016 29,444 38,216 29,444
-------- -------- ---------- --------
Total $799,647 $715,770 $1,035,320 $967,575
======== ======== ========== ========
For the quarter ended June 30, 1999, worldwide auction sales of $799.6
million increased $83.9 million, or 12%, compared to the second quarter
of 1998. The increase in second quarter sales was due to a 25% increase
in the average selling price per lot sold in 1999 as compared to 1998,
offset by an 11% decrease in the number of lots sold. The increase in
North America was 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. This increase was offset by the single-owner sale of silver,
furniture, rare books and manuscripts from the Collection of Jamie
Ortiz-Patino in the second quarter of 1998 for which there was no
comparable sale in the current year, as well as a decrease in
American paintings. The sales increase in Europe was principally due to
increases in Impressionist and Modern art and the timing of the
Contemporary art sales, offset by decreases in Manuscripts and 19th
Century paintings. The series of Contemporary art sales, which were
held in the second quarter of 1999, were held in July 1998. The
increase in Asia was due primarily to favorable sales results in
Hong Kong related to a single owner sale. Auction sales recorded by
the Company's foreign operations were not materially affected by
translation into U.S. dollars for the second quarter of 1999.
Sales for the first six months of the year increased due to the items
previously mentioned as well as Europe's sale of Important French and
Italian Furniture, Porcelain, Paintings, Silver and Decorative Arts
from the Estate of dott. Giuseppe Rossi. For the six months, the
increase in North America was offset by the sale of the Collection of
H.R.H. the Duke and Duchess of Windsor in the first quarter of 1998 for
which there was no comparable sale in the current year and a decrease
in Old Masters paintings. Auction sales recorded by the Company's
foreign operations were not materially affected by translation into
U.S. dollars for the six months ended June 30, 1999.
For the second quarter of 1999, worldwide auction and related revenues
increased $1.8 million, or 1%, compared to 1998. Foreign currency
exchange rate movements did not materially affect revenues in the
second quarter of 1999. This increase was primarily a result of higher
commission revenue due to the increased sales discussed above offset by
a decrease in principal activities. Auction and related revenues as a
percentage of sales has declined in 1999, principally the result of
sales mix (the aforementioned changes in average lot value and lot
volume), most notably in North America.
For the six months ended June 30, 1999, auction and related revenues
decreased $1.8 million, or 1%, compared to the same period in 1998.
Foreign currency exchange rate movements did not materially affect
revenues for the first six 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 offset by
higher commission revenue due to the increased sales discussed above.
Auction and related revenues as a percentage of sales has declined in
1999, principally the result of sales mix, most notably in North
America.
Other revenue, which includes revenues from the Company's Real Estate
and Finance operating segments decreased $2.6 million, or 15%, in the
second quarter of 1999 compared to the same quarter of 1998. For the
six months ended June 30, 1999, other revenue decreased $4.1 million,
or 14%, 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 second quarter and first half of
1999 compared to same periods in 1998. The increase in Real Estate
revenues was primarily due to revenue earned in the second quarter and
first half of 1999 by new Company owned brokerage offices for which no
revenue was earned in the comparable periods in 1998.
Total expenses increased $3.2 million in the second quarter of 1999
compared to 1998. For the six months ended June 30, 1999, total
expenses increased $4.9 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 six months ended June 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 $1.7 million during the second quarter of
1999 compared to the same period of 1998. This increase was primarily
due to Internet related costs and an increase in Real Estate direct
costs related to new Company owned brokerage offices.
Direct costs of services decreased $3.1 million in the first half 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 slightly offset by Internet related costs and
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 $69.8 million for the second quarter of 1999, an
increase of 2% compared to the second quarter of 1998. For the six
months ended June 30, 1999, these expenses increased $8.1 million, or
6%, compared to the same period in 1998. For the three months ended
June 30, 1999 these increases were principally due to an increase in
general and administrative expenses. For the six months ended June 30,
1999 these increases were principally due to an increase in salaries
and related costs and an increase in general and administrative
expenses. These increases were primarily the result of Internet related
expenses and, to a lesser extent, ongoing initiatives. Offsetting the
aforementioned salary and related cost increase 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 $8.5 million
and $10.8 million for the three and six months ended June 30, 1999,
respectively. 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
and sothebys.amazon.com.
Net interest expense decreased $1.1 million and $2.9 million for the
three and six months ended June 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 and other
projects.
The consolidated effective tax rate was 37% for the three and six
months ended June 30, 1999 and 1998.
For the second quarter of 1999, the Company's net income decreased 6%
to $31.7 million from net income of $33.6 million in the second quarter
of 1998. Diluted earnings per share for the second quarter of 1999
decreased to $0.53 per share from $0.59 per share for the second
quarter of 1998. The impact on diluted earnings per share related to
the Company's Internet initiative was ($0.09) per share for the quarter
ended June 30, 1999. The impact of dilution related to the Company's
stock options was ($0.02) for the quarter. For the six months ended
June 30, 1999, net income decreased $5.1 million, or 19%, compared to
the same period in 1998. Diluted earnings per share for the first half
of 1999 decreased to $0.38 from $0.48 in the first half of 1998. The
impact on diluted earnings per share related to the Company's Internet
initiative was ($0.12) per share for the six months ended June 30,
1999. The impact of dilution related to the Company's stock options was
($0.01) for the six months ended June 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 $34.2 million at June 30, 1999 compared to a net
cash position of $69.1 million at December 31, 1998. Working capital
(current assets less current liabilities) at June 30, 1999 was $196.6
million compared to $125.3 million at December 31, 1998.
The Company's client loan portfolio increased to $165.0 million at June
30, 1999 from $155.6 million at December 31, 1998. These amounts
include $23.6 million and $17.1 million of loans which have a maturity
of more than one year at June 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, of
which $100 million is available as of June 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 shares of the
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 joint online auction
site, sothebys.amazon.com that will be devoted to the general
antiques collector and to the world of collectibles.
For the six months ended June 30, 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 six 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 $46.2 and $12.8 million for the first six
months of 1999 and 1998, respectively. The increase in expenditures in
1999 as compared to 1998 is due primarily 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 6 of 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 July 30, 1999 the Company has financial
commitments in relation to this project of approximately $15.5 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, 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.
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 is currently assessing 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 distributed information
requests during the second quarter of 1999 and is currently evaluating
responses received. 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 $14.4 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 believes that its European financial and cash management
operations affected by the euro conversion have adequately been
prepared for its introduction. For the transition period and the
period after January 1, 2002, the Company has established an
internal group of management 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.
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 June 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
(i) On June 25, 1999, the Company reported on
Form 8-K the announcement of agreements with
Amazon.com, Inc.
<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 11th day of
August, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 72,568
<SECURITIES> 0
<RECEIVABLES> 620,758
<ALLOWANCES> 7,861
<INVENTORY> 25,819
<CURRENT-ASSETS> 764,120
<PP&E> 145,548
<DEPRECIATION> 63,363
<TOTAL-ASSETS> 1,010,109
<CURRENT-LIABILITIES> 567,493
<BONDS> 0
0
0
<COMMON> 5,773
<OTHER-SE> 323,715
<TOTAL-LIABILITY-AND-EQUITY> 1,010,109
<SALES> 0
<TOTAL-REVENUES> 209,213
<CGS> 0
<TOTAL-COSTS> 38,238
<OTHER-EXPENSES> 134,587
<LOSS-PROVISION> 470
<INTEREST-EXPENSE> 2,856
<INCOME-PRETAX> 35,192
<INCOME-TAX> 13,021
<INCOME-CONTINUING> 22,171
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,171
<EPS-BASIC> .39
<EPS-DILUTED> .38
</TABLE>
