<PAGE>
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, 2000
Commission File Number 1-9750
Sotheby's Holdings, Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2478409
-------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
No.)
500 North Woodward Avenue, Suite 100
Bloomfield Hills, Michigan 48304
-------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 646-2400
---------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/.
No / /.
As of July 31, 2000, there were outstanding 42,328,365 shares of Class A Limited
Voting Common Stock, par value $0.10 per share, and 16,585,650 shares of Class B
Common Stock, par value $0.10 per share, of the Registrant. Each share of Class
B Common Stock is freely convertible into one share of Class A Limited Voting
Common Stock.
<PAGE>
INDEX
PART I: FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Statements of Income for the Three
and Six Months Ended June 30, 2000 and 1999 3
Consolidated Balance Sheets at June 30, 2000,
December 31, 1999 and June 30, 1999 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURE 29
EXHIBIT INDEX 30
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
Ended June 30, Ended June 30,
----------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Auction and related $139,203 $131,694 $179,592 $183,358
Other 18,158 14,315 32,539 25,855
----------------------------------------------------------------------------------------------------------
TOTAL REVENUES 157,361 146,009 212,131 209,213
EXPENSES:
Direct costs of services 26,114 25,231 44,862 38,238
Salaries and related costs 44,108 37,397 86,111 73,565
General and administrative 29,081 28,497 58,679 53,798
Depreciation and amortization 6,069 3,885 12,162 7,224
Special charges 2,010 - 3,818 -
----------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 107,382 95,010 205,632 172,825
----------------------------------------------------------------------------------------------------------
Operating income 49,979 50,999 6,499 36,388
Interest income 1,664 824 2,847 1,947
Interest expense (4,774) (1,414) (7,669) (2,856)
Other income/(expense) 62 (96) (195) (287)
----------------------------------------------------------------------------------------------------------
Income before taxes 46,931 50,313 1,482 35,192
Income tax expense 16,894 18,616 533 13,021
----------------------------------------------------------------------------------------------------------
NET INCOME $30,037 $31,697 $949 $22,171
----------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $0.51 $0.55 $0.02 $0.39
----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $0.51 $0.53 $0.02 $0.38
----------------------------------------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (IN MILLIONS) 58.9 57.6 58.9 57.5
----------------------------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (IN MILLIONS) 59.3 60.3 59.1 58.8
----------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE - $0.10 - $0.20
----------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
CONSOLIDATED BALANCE SHEETS
SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
(UNAUDITED) (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 76,504 $ 42,319 $ 72,568
Accounts and notes receivable, net of allowance
for doubtful accounts of $10,906, $11,085 and $7,861
Accounts receivable 434,692 495,986 482,207
Notes receivable 117,621 145,359 138,551
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TOTAL ACCOUNTS AND NOTES RECEIVABLE, NET 552,313 641,345 620,758
Inventory, net 15,198 20,843 25,819
Deferred income taxes 12,986 12,986 14,595
Prepaid expenses and other current assets 30,888 18,754 30,380
-------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 687,889 736,247 764,120
Notes receivable 59,556 42,535 23,586
Properties, less allowance for depreciation
and amortization of $78,819, $72,463 and $63,363 236,423 232,661 145,548
Intangible assets, less allowance for
amortization of $16,224, $15,903 and $18,221 23,244 24,124 34,045
Investments 36,555 35,982 36,476
Other assets 1,397 1,238 5,581
-------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,045,064 $ 1,072,787 $ 1,009,356
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Due to consignors $ 319,773 $ 422,552 $ 403,845
Short-term borrowings -- 272 6,729
Accounts payable and accrued liabilities 93,330 126,263 102,441
Deferred revenues 8,064 7,273 11,199
Accrued income taxes 26,105 20,427 34,610
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TOTAL CURRENT LIABILITIES 447,272 576,787 558,824
LONG-TERM LIABILITIES
Long-term debt 197,178 99,275 99,247
Deferred income taxes 8,569 9,126 11,283
Other liabilities 13,333 10,555 10,514
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 666,352 695,743 679,868
SHAREHOLDERS' EQUITY
Common Stock, $0.10 par value 5,892 5,885 5,773
Authorized shares - 125,000,000 of Class A and 75,000,000 of Class B
Issued and outstanding shares - 42,313,815, 42,258,393 and
40,727,980 of Class A and 16,585,650, 16,585,650 and 16,995,299
of Class B, at June 30, 2000, December 31, 1999 and June 30, 1999,
respectively
Additional paid-in capital 157,162 156,125 112,388
Retained earnings 229,208 228,261 230,060
Accumulated other comprehensive income (13,550) (13,227) (18,733)
-------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 378,712 377,044 329,488
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,045,064 $ 1,072,787 $ 1,009,356
-------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 1999
------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 949 $ 22,171
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 12,162 7,224
Deferred income taxes (606) 1,253
Tax benefit of stock option exercises 25 4,231
Asset provisions 1,985 474
Other 295 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 50,082 (191,329)
Decrease (increase) in inventory 4,837 (9,349)
Increase in prepaid expenses and other current assets (12,593) (7,333)
Decrease (increase) in intangible and other assets 1,423 (555)
(Decrease) increase in due to consignors (90,440) 126,373
Increase (decrease) in accrued income taxes 5,589 (1,615)
(Decrease) increase in accounts payable, accrued liabilities
and other liabilities (23,761) 11,489
------------------------------------------------------------------------------------------
Net cash used by operating activities (50,053) (36,966)
INVESTING ACTIVITIES:
Increase in notes receivable (69,222) (94,733)
Collections of notes receivable 78,396 84,407
Capital expenditures (19,399) (46,249)
(Increase) decrease in investments (573) 262
------------------------------------------------------------------------------------------
Net cash used by investing activities (10,798) (56,313)
FINANCING ACTIVITIES:
Increase in long-term debt 97,903 99,247
(Decrease) increase in short-term borrowings (258) 5,034
Proceeds from exercise of stock options 725 4,123
Dividends paid 0 (11,493)
------------------------------------------------------------------------------------------
Net cash provided by financing activities 98,370 96,911
Effect of exchange rate changes on cash (3,334) (2,302)
------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 34,185 1,330
Cash and cash equivalents at beginning of period 42,319 71,238
------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 76,504 72,568
------------------------------------------------------------------------------------------
Income taxes paid $ 2,389 $ 11,730
------------------------------------------------------------------------------------------
Interest paid (net of capitalized interest) $ 6,409 $ 2,777
------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
<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 on Form 10-K for the year ended December 31, 1999 ("Form
10-K").
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, 2000 and 1999 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. In connection with its
principal investments in works of art acquired for resale, the Company
also makes unsecured loans to collectors and dealers, which totaled $21.6
million at June 30, 2000.
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
6
<PAGE>
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.
The Company purchases works of art for resale, either as sole investor for
its own account and also with art dealers who participate in the purchase
and resale through unsecured loans. Any net profit or loss generated by
these transactions with art dealers is shared by the Company and the
dealer. The total of all such unsecured loans as of June 30, 2000 was
$33.6 million.
As of June 30, 2000, no individual loan or group of related loans amounted
to more than 10% of the Company's notes receivable (current and
non-current).
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, 2000 and 1999 (in thousands):
2000 1999
---- ----
Allowance for credit losses
at December 31, 1999 and 1998 $ 2,904 $ 2,874
Provisions -- --
Write-offs (46) --
Other (27) (34)
------- -------
Allowance for credit losses
at June 30, 2000 and 1999 $ 2,831 $ 2,840
======= =======
As of June 30, 2000, an amount equal to approximately 11% of the Company's
accounts receivable balance was due from one purchaser.
3. CREDIT ARRANGEMENTS
During the first quarter of 2000, the Company amended and restated its
Bank Credit Agreement (the "Credit Agreement") with its existing
banking group. Borrowings under the Credit Agreement are available for
general corporate purposes. Under the Credit Agreement, the Company has
up to $300 million of committed senior secured financing with an
international syndicate of banks arranged through Chase Manhattan Bank
available through July 11, 2001. (See Item 2: Management's Discussion
and Analysis of Results of Operations and Financial Condition, under
Liquidity and Capital Resources.) The amount available for borrowings
under the Credit Agreement is reduced by the amount of outstanding
commercial paper, if any. The Company's obligations under the Credit
Agreement are secured by substantially all of the assets of the Company
and its domestic subsidiaries. In addition, borrowings
7
<PAGE>
by the Company's U.K. based affiliates are secured by the Company's U.K.
loan portfolio. Borrowings under the Credit Agreement are permitted in
either U.S. dollars or Pounds Sterling. Interest rates on borrowings under
the Credit Agreement are determined on a pricing matrix based on the
Company's long-term debt rating assigned by Standard & Poor's Ratings
Group and Moody's Investor Services. Commitment fees are determined on a
similar pricing matrix based on the Company's long-term debt rating and
charged quarterly in arrears. The Company incurred arrangement and
amendment fees of $3.6 million in connection with amending and restating
the Credit Agreement, which are being amortized over the term of the
commitment. The Credit Agreement contains certain financial covenants,
including covenants requiring the Company to maintain a minimum net worth,
to meet certain leverage ratio and interest coverage ratio tests (as
defined in the Credit Agreement) and to limit dividend payments. At June
30, 2000 the Company was in compliance with respect to all financial and
other covenants. The Company had outstanding borrowings of $97.9 million
under this facility at a weighted average interest rate of 7.9% at June
30, 2000.
In February 1999, the Company sold a tranche of senior unsecured long-term
debt securities (the "Notes"), 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%. If and to the extent required under the
Indenture pursuant to which the Notes were issued and subject to certain
exceptions contained in the Indenture, the security documents executed in
connection with the Credit Agreement provide that the obligations under
the Notes shall be secured equally and ratably with that portion of the
obligations under the Credit Agreement that exceed the permitted
exceptions contained in the Indenture.
The Company may issue up to $300 million in notes under its U.S.
commercial paper program. The amount available for issuance under the
commercial paper program is reduced by the amount of outstanding
borrowings under the Credit Agreement. At June 30, 2000 there were no
outstanding commercial paper borrowings. At June 30, 2000 there were no
amounts outstanding under domestic and foreign bank lines of credit.
8
<PAGE>
Long-term debt consists of the following:
As of
------------------------------------
June 30, December 31, June 30,
2000 1999 1999
--------- ----------- ----------
Borrowings under the
Credit Agreement $ 97,874 $ -- $ --
Long-term debt securities
(net of unamortized
discount of $696, $725
and $753) 99,304 99,275 99,247
-------- -------- --------
Total $197,178 $ 99,275 $ 99,247
======== ======== ========
4. 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, 2000 and 1999
amounted to $31.2 million and $28.3 million, respectively, and for the six
months ended June 30, 2000 and 1999 amounted to $0.6 million and $18.5
million, respectively.
5. COMMITMENTS AND CONTINGENCIES
In May 1997, the Antitrust Division of the United States Department of
Justice began an investigation of certain art dealers and major auction
houses, including the Company and it's principal competitor, Christie's.
Among other matters, the investigation has reviewed whether Sotheby's and
Christie's had any agreement regarding the amounts charged for commissions
in connection with auctions. The Company has been informed that it is now
a target of the investigation. The Company has met and is continuing to
meet with the Department of Justice in order to discuss an appropriate
resolution of this investigation. The European Commission and the Swiss
Competition Commission are also conducting inquiries regarding commissions
charged by the Company and Christie's for auction services. An earlier
investigation by the Australian Competition Commission has been closed
without any action being taken.
A number of private civil complaints, styled as class action complaints,
have also been filed against the Company alleging violation of federal and
state antitrust laws based upon alleged agreements between Christie's and
the Company regarding commission pricing. In addition, several shareholder
class action complaints have been filed against the Company and certain
directors and
9
<PAGE>
officers, alleging failure to disclose the alleged agreements and their
impact on the Company's financial condition and results of operations. And
a number of shareholder derivative suits have been filed against the
directors of the Company based on allegations related to the foregoing
lawsuits and investigations. Although the outcome of the investigation by
the Department of Justice, other governmental inquiries and investigations
and these various lawsuits cannot presently be determined, any loss
resulting from these matters could well have a material impact on the
Company's financial condition and/or results of operations. The amount of
any such loss is not currently estimatable.
The Company, in the normal course of business, is also a defendant in
various other legal actions.
During the first quarter of 2000, the Compensation Committee of the Board
of Directors approved a special grant of 3 million stock options under the
terms of the 1997 Stock Option Plan in addition to the normal annual grant
and approved a cash award pool of up to $7 million for the retention of
certain key employees. The cash awards will be paid and expensed only upon
the fulfillment of full-time employment through February 28, 2002.
In conjunction with the client loan program (see Note 2), 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 $32.0 million at June 30,
2000.
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 June 30, 2000 and
July 31, 2000, the Company had outstanding guarantees totaling
approximately $2.1 million and $1.8 million which covers auction property
having a mid-estimate sales price of approximately $2.4 million and $2.2
million, respectively. 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. At June 30, 2000, no amounts had been funded under outstanding
guarantees. At July 31, 2000, $1.8 million had been funded.
10
<PAGE>
The Company has outstanding financial commitments of approximately $6.7
million as of July 31, 2000 related to construction of the York Property.
As of June 30, 2000, the Company has outstanding letters of credit of
approximately $21.2 million primarily relating to bank guarantees on U.K.
Temporary Import VAT and rental obligations in Europe.
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, with the possible exception
of the investigation by the Department of Justice, other governmental
investigations and inquiries and related civil lawsuits, as any losses
resulting from these latter matters could well have a material impact on
the Company's financial condition and/or results of operations.
6. SEGMENT REPORTING
For the three months ended June 30, 2000, the Company's operating segment
information is as follows (in thousands):
Auction Real Estate Finance Other Total
------- ----------- ------- ----- -----
Revenues $139,203 $ 12,362 $ 3,892 $ 1,904 $157,361
Profit/(Loss) $ 42,066 $ 4,915 ($ 26) ($ 24) $ 46,931
For the three months ended June 30, 1999,the Company's operating segment
information is as follows (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 six months ended June 30, 2000, the Company's operating segment
information is as follows (in thousands):
Auction Real Estate Finance Other Total
------- ----------- ------- ----- -----
Revenues $ 179,592 $ 20,570 $ 8,201 $ 3,768 $ 212,131
(Loss)/Profit ($ 5,869) $ 7,087 $ 526 ($ 262) $ 1,482
11
<PAGE>
For the six months ended June 30, 1999,the Company's operating segment
information is as follows (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
7. SEASONALITY OF BUSINESS
The worldwide art auction market has two principal selling seasons, spring
and fall. During the summer and winter, sales are considerably lower. The
table below demonstrates that approximately 80% of the Company's auction
sales are derived from the second and fourth quarters of the year.
Percentage of Annual
Auction Sales
------------------------------
1999 1998 1997
---- ---- ---
January - March 11% 13% 11%
April - June 35% 37% 35%
July - September 6% 8% 8%
October - December 48% 42% 46%
--- --- ---
100% 100% 100%
=== === ===
8. SPECIAL CHARGES
For the three and six months ended June 30, 2000, the Company recorded
special charges of $2.0 million and $3.8 million, respectively, consisting
primarily of legal and other professional fees related to the investigation
by the Department of Justice, other governmental inquiries and
investigations, and related civil lawsuits as discussed in Note 5.
12
<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 results
than the second and fourth quarters due to the fixed nature of many of the
Company's operating expenses. (See Note 7 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, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
North America $ 479,161 $ 460,605 $ 606,457 $ 594,044
Europe 326,876 302,026 375,636 403,060
Asia 58,042 37,016 58,042 38,216
---------- ---------- ---------- ----------
Total $ 864,079 $ 799,647 $1,040,135 $1,035,320
========== ========== ========== ==========
</TABLE>
For the quarter ended June 30, 2000, worldwide auction sales of $864.1
million increased $64.4 million, or 8%, compared to the second quarter of
1999. Excluding the impact of unfavorable foreign currency translations,
worldwide auction sales increased 11%. The increase in second quarter
sales was due to a 5.3% increase in the number of lots sold in 2000 as
compared to 1999, as well as a 5.2% increase in the average selling price
per lot sold. The increase in sales in North America was primarily
attributed to significantly stronger Impressionist and Contemporary Art
Part I and II sales, respectively, the single-owner sale of paintings,
furniture and ceramics from the Collection of Mr. and Mrs. Saul P.
Steinberg, as well as the commencement of Internet sales. Also,
influencing the year-to-year comparison was the 1999 single-owner sales 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 current year. Sales attributable to single-owner collections in
North America decreased approximately 75% in the second quarter of 2000
compared to the same period in 1999. The sales increase in Europe was
primarily attributable to the single-owner Benacre House sale in the U.K.,
the single-owner magnificent jewelry sale of the Marie Vergottis
Collection in Geneva and stronger Islamic art results. The increase in
Asia was primarily due to stronger results in Hong Kong,
13
<PAGE>
specifically from the Chinese Ceramics and Works of Art and the Jadeite
Jewelry sales.
For the six months ended June 30, 2000, worldwide auction sales increased
$4.8 million compared to the first six months of 1999. Excluding the
impact of unfavorable foreign currency translations, worldwide auction
sales increased 3%. The increase in first half sales was due to a 8.8%
increase in the average selling price per lot sold in 2000 as compared to
1999, partially offset by a 5.5% decrease in the number of lots sold. The
increase in North America and Asia was primarily due to the items
previously mentioned above. The decrease in Europe was primarily due to
the lack of a single-owner sale in 2000 comparable to the 1999 sale of
Important French and Italian Furniture, Porcelain, Paintings, Silver and
Decorative Arts from the Estate of Dr. Giuseppe Rossi.
For the second quarter of 2000, worldwide auction and related revenues
increased $7.5 million, or 6%, compared to 1999. Excluding the impact
of unfavorable foreign currency translations, worldwide auction and
related revenues increased 9%. The increase was principally due to
higher buyer's premium revenue and private treaty commissions offset in
part by lower seller's commission revenue and principal activities.
Principal activities consist of net gains (losses) on sales of
inventory, the Company's share of operating earnings (losses) from its
equity investments, net income (loss) earned on guarantees and the net
gains (losses) related to sales of secured loan collateral where the
Company shares in the gain (loss) if the property sells either above or
below a targeted amount. The increase in buyer's premium revenue was
primarily due to the increased sales in 2000 (discussed above),as well
as a benefit resulting from the new commission structure (discussed
below). The decrease in seller's commission revenue was primarily a
result of the competitive environment in which the Company operates,
the impact of the new commission structure and the increased average
selling price of live auction sales per lot sold in 2000 which resulted
in lower seller's commission rates. The decrease in principal
activities was primarily due to a decrease in net gains on sales of
inventory and a decrease in net gains related to sales of secured loan
collateral, as discussed above.
For the six months ended June 30, 2000, auction and related revenues
decreased $3.8 million, or 2%, compared to the same period in 1999.
Excluding the impact of unfavorable foreign currency translations,
worldwide auction and related revenues increased 1%. This increase was due
primarily to higher buyer's premium revenue and private treaty commissions
partially offset by decreased seller's commission revenue, expense
recoveries and principal activities. The increase in buyer's premium
revenue, as well as the decrease in seller's commission revenue and
principal activities was primarily due to the factors discussed in the
previous paragraph. The decrease
14
<PAGE>
in expense recoveries is principally the result of the competitive
environment in which the Company operates.
On February 29, 2000, the Company announced a new commission structure for
both buyers and sellers at its principal auction locations. The Company's
new seller's commission represents a reduction in the commission charged
to its sellers for all levels of aggregate transactions over $100,000. For
buyers in most collecting categories, the Company now charges an increased
buyer's premium of 20% of the hammer price on the first $15,000, 15% on
the next $85,000 up to $100,000 and 10% on any amount over $100,000 on
property sold. The buyer's premium on Internet purchases is 10% of the
hammer price.
Other revenue increased $3.8 million, or 27%, in the second quarter of
2000 compared to the same quarter of 1999. For the six months ended June
30, 2000, other revenue increased $6.7 million, or 26%, compared to the
same period in 1999. Excluding the impact of unfavorable foreign currency
translations, other revenue increased 32% and 28% for the three and six
months ended June 30, 2000, respectively. These increases were primarily
due to higher revenues from the Real Estate business resulting from both
increased unit sales and higher average selling prices from Company-owned
and affiliated brokerage offices.
The Company cannot at present determine the impact on future sales and
future revenues of the Department of Justice investigation and other
related investigations and civil lawsuits, as discussed in more detail
below. (See Statement on Forward Looking Statements).
Total expenses, excluding special charges, increased $10.4 million, or
11%, in the second quarter of 2000 compared to 1999. For the six months
ended June 30, 2000, total expenses, excluding special charges, increased
$29.0 million compared to the same period in 1999. Excluding the impact of
favorable foreign currency translations, total expenses, excluding special
charges, increased 14% and 20% for the three and six months ended June 30,
2000, respectively.
Direct costs of services (which consist largely of catalogue production
and distribution costs as well as corporate marketing and sale marketing
expenses) increased $0.9 million, or 3%, during the second quarter of 2000
compared to the same period of 1999. Excluding the impact of favorable
foreign currency translations, direct costs of services increased 8%. This
increase was primarily due to increased marketing expenses, mainly a
result of the Company's Internet initiative.
Direct costs of services increased $6.6 million, or 17%, in the first half
of 2000 as compared to the same period in 1999. Excluding the
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impact of favorable foreign currency translations, direct costs of
services increased 21%. This increase was also primarily due to increased
marketing expenses, a direct result of the Company's Internet initiative.
The increase in marketing expenses during the first six months of 2000 was
partially offset by a decrease in direct costs associated with live
auction sales resulting from the lower number of lots sold during the
period.
Excluding special charges, all other operating expenses (which include
salaries and related costs, general and administrative expenses as well as
depreciation and amortization) totaled $79.3 million for the second
quarter of 2000, an increase of 14% compared to the second quarter of
1999. For the six months ended June 30, 2000, these expenses increased
$22.4 million, or 17%, compared to the same period in 1999. Excluding the
impact of favorable foreign currency translations, all other operating
expenses, excluding special charges, increased 16% and 19% for the three
and six months ended June 30, 2000.
For the three months ended June 30, 2000 the increase in all other
operating expenses was principally due to a $6.7 million, or 18%,
increase in salaries and related costs and a $2.2 million, or 56%,
increase in depreciation and amortization. Excluding the impact of
favorable foreign currency translations, salaries and related costs and
depreciation and amortization increased 21% and 59%, respectively. For
the six months ended June 30, 2000 these increases were principally due
to a $12.5 million, or 17%, increase in salaries and related costs,
$4.9 million, or 9%, increase in general and administrative expenses
and a $4.9, or 68%, increase in depreciation and amortization.
Excluding the impact of favorable foreign currency translations,
salaries and related costs, general and administrative expenses and
depreciation and amortization increased 20%, 11% and 71%, respectively.
The increase in salaries and related costs was primarily the result of
the Internet initiative. Also, impacting the year-to-year comparison of
salaries and related costs was a reduction of accrued compensation
costs, recorded in the second quarter of 1999, of approximately $4.2
million previously expensed by the Company for its 1997 Performance
Share Purchase Plan grant for which there was no comparable event in
2000. 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) was not likely to be achieved.
The increase in general and administrative expenses was primarily due
to Internet related expenses, higher professional fees, increased
travel and entertainment expenses resulting from the competitive
environment for consignments and increased Information Technology
costs. The increase in depreciation was primarily related to the
commencement of depreciation on the York Property in the fourth quarter
of 1999 and other capital projects that were placed in service
subsequent to the second quarter of 1999.
Total Internet related expenses amounted to $13.9 million and $33.2
million for the three and six months ended June 30, 2000, respectively.
Internet related expenses decreased 28% from the first quarter of 2000.
This decrease is due to higher marketing costs associated with the
launch of sothebys.com and sothebys.amazon.com during the first quarter
of 2000. For the three and six months ended June 30, 1999, total
Internet related expenses were $8.5 million and $10.8 million,
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respectively. These expenses include primarily marketing and salary and
related costs. Internet costs will continue to have a dilutive effect
on the Company's results in the near term. The Company will evaluate its
current costs and future expenditures for sothebys.com and
sothebys.amazon.com in conjunction with the Company's strategic and
operational review as discussed below.
In May 1997, the Antitrust Division of the United States Department of
Justice began an investigation of certain art dealers and major auction
houses, including the Company and its principal competitor, Christie's.
Among other matters, the investigation has reviewed whether Sotheby's and
Christie's had any agreement regarding the amounts charged for commissions
in connection with auctions. The Company has been informed that it is now
a target of the investigation. The Company has met and is continuing to
meet with the Department of Justice in order to discuss an appropriate
resolution of this investigation. The European Commission and the Swiss
Competition Commission are also conducting inquiries regarding commissions
charged by the Company and Christie's for auction services. An earlier
investigation by the Australian Competition Commission has been closed
without any action being taken.
A number of private civil complaints, styled as class action complaints,
have also been filed against the Company alleging violation of the federal
and state antitrust laws based upon alleged agreements between Christie's
and the Company regarding commission pricing. In addition, several
shareholder class action complaints have been filed against the Company
and certain of its officers, alleging failure to disclose the alleged
agreements and their impact on the Company's financial condition and
results of operations. And a number of shareholder derivative suits have
been filed against the Directors of the Company based on allegations
related to the foregoing lawsuits and investigations. Although the outcome
of the investigation by the Department of Justice, other governmental
inquiries and investigations and these various lawsuits cannot presently
be determined, any loss resulting from these matters could well have a
material impact on the Company's financial condition and/or results of
operations. For the three and six months ended June 30, 2000, the Company
recorded special charges of $2.0 million and $3.8 million, respectively,
primarily for legal and other professional fees relating to the foregoing
investigations and lawsuits. (See Statement on Forward Looking
Statements.)
Net interest expense increased $2.5 million and $3.9 million for the three
and six months ended June 30, 2000, respectively. This increase was
primarily a result of higher borrowings in the current year, higher
interest rates and related fees related to the new credit facility, lower
capitalized interest related to the York Property in
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2000 and an additional month of interest expense in 2000 related to the
bonds issued in February 1999.
The consolidated effective tax rate was 36% for the three and six months
ended June 30, 2000 compared to 37% for the same period in 1999.
For the second quarter of 2000, the Company's net income decreased 5% to
$30.0 million from net income of $31.7 million in the second quarter of
1999. Diluted earnings per share for the second quarter of 2000 decreased
to $0.51 per share from $0.53 per share for the second quarter of 1999.
The impact on diluted earnings per share related to the Company's Internet
operating loss was ($0.12) per share for the quarter ended June 30, 2000.
For the six months ended June 30, 2000, net income decreased $21.2 million
compared to the same period in 1999. Diluted earnings per share for the
first half of 2000 decreased to $0.02 from $0.38 in the first half of
1999. The impact on diluted earnings per share related to the Company's
Internet operating loss was ($0.30) per share for the six months ended
June 30, 2000. The Company expects that its continued investments in the
Internet initiative, subject to the Company's strategic and operational
review (discussed below), lack of scheduled significant single-owner
sales, and costs related to the investigation by the Department of
Justice, other governmental inquiries and investigations and civil
lawsuits will continue to have a dilutive effect on the Company's results
in the near term.
As a result of the competitive environment in the international art
auction marketplace, management has commenced a comprehensive strategic
and operational review of the Company's businesses. This review is
expected to be completed in the fourth quarter of 2000.
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 $120.7 million at June 30, 2000 compared to a net
debt position of $57.2 million and $33.4 million at December 31, 1999 and
June 30, 1999, respectively. The increase in the net debt position as of
June 30, 2000 compared to December 31, 1999 and June 30, 1999 was
primarily due to the use of proceeds from borrowings under the Credit
Agreement, as defined below. Working capital (current assets less current
liabilities) at June 30, 2000 was $240.6 million compared to $159.5
million and $205.3 million at December 31, 1999 and June 30, 1999,
respectively.
The Company's client loan portfolio decreased to $180.0 million at June
30, 2000 from $190.8 million at December 31, 1999. These
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amounts include $59.6 million and $42.5 million of loans which have a
maturity of more than one year at June 30, 2000 and December 31, 1999,
respectively.
The Company relies on internally generated funds and borrowings to meet
its financing requirements. As a result of the events related to the
Department of Justice investigation and other related investigations and
civil lawsuits, as discussed previously, the Company amended and restated
its $300 million Bank Credit Agreement during the first quarter of 2000.
Under the amended and restated Bank Credit Agreement (the "Credit
Agreement"), the Company has up to $300 million of committed senior
secured financing with an international banking syndicate arranged through
the Chase Manhattan Bank available through July 11, 2001. The Company's
obligations under the Credit Agreement are secured by substantially all
the assets of the Company and its domestic subsidiaries. In addition,
borrowings by the Company's U.K. based affiliates are secured by the
Company's U.K. loan portfolio. The Company incurred arrangement and
amendment fees of $3.6 million, which are being amortized over the term of
the commitment. The Company may also issue up to $300 million of
short-term notes pursuant to its U.S. commercial paper program. The amount
available for issuance under the commercial paper program is reduced by
the amount of outstanding borrowings under the Credit Agreement. At June
30, 2000 there was no commercial paper outstanding. The Company supports
any short-term notes issued under its U.S. commercial paper program with
its committed credit facility under the Credit Agreement. The amount
available for borrowings under the Credit Agreement is reduced by the
outstanding commercial paper. 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 June 30, 2000. During the first quarter of 2000,
Moody's Investors Service, Standard and Poor's Rating Group and other
credit agencies downgraded the Company's long-term and short-term credit
ratings. Both ratings remain on review.
For the six months ended June 30, 2000, the Company's primary sources of
liquidity were derived from collections of outstanding accounts
receivables and from borrowings under the Credit Agreement. The most
significant cash uses during the first six months of 2000 were payments to
consignors, Internet spending and capital expenditures.
Capital expenditures, consisting primarily of costs associated with the
construction of the York Property, as defined below, totaled $19.4 million
and $46.2 million for the first six months of 2000 and 1999, respectively.
The decrease in expenditures in 2000 as compared to 1999 was due primarily
to lower spending on the York Property construction and computer and
software costs during the first six months of 2000. The capital
expenditures relating to the
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construction of the Company's current facility on York Avenue ("the York
Property") are currently estimated to be in the range of $151 million, of
which the Company has paid approximately $122.2 million through July 31,
2000. As of July 31, 2000, the Company had outstanding financial
commitments in relation to this project of approximately $6.7 million. In
July 2000, York Avenue Development, Inc. ("York"), a wholly owned
subsidiary of Sotheby's Inc. (itself a wholly owned subsidiary of the
Company), purchased the York Property pursuant to a pre-existing option.
The Company believes that it has sufficient capital resources to carry out
planned capital spending relating to this project.
While the Company paid shareholder dividends in the first and second
quarters of 1999, due to the significant cash needs required for the
funding of the Internet initiative, the completion of the construction of
the York Property, as well as uncertainties surrounding the Department of
Justice investigation and other related investigations and civil lawsuits,
the Company did not declare a cash dividend for the first and second
quarters of 2000. Management believes that this is an appropriate decision
due to the Company's present and anticipated cash needs. Management will
continue to assess the dividend in conjunction with operating results,
capital spending needs, internet spending requirements and developments in
the Department of Justice investigation and other related investigations
and civil lawsuits.
From time to time, the Company has off-balance sheet commitments to
consignors that property will sell at a minimum price and legally binding
lending commitments in conjunction with the client loan program. (See Note
5 in the Notes to the Consolidated Financial Statements for additional
information.) The Company does not believe that material liquidity risk
exists relating to these commitments.
The Company currently believes that current cash balances, operating cash
flows and borrowings under the Credit Agreement will be adequate to meet
its operating needs and capital requirements over the next twelve months,
which include the funding of the Company's client loan program, peak
seasonal working capital requirements, other short-term commitments to
consignors, the project on the York Property and the Company's Internet
initiative, subject to the resolution of the Department of Justice
investigation and other related investigations and civil lawsuits, as
discussed previously. The Company's current Credit Agreement is available
through July 11, 2001. An extension, amendment or restatement of the
current Credit Agreement will be necessary to supplement operating cash
flows to meet long-term operating needs and capital requirements, subject
to the resolution of the Department of Justice investigation and other
related investigations and civil lawsuits. Alternatively, the Company
currently believes that it has other options available for long-term
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capital resources and is currently evaluating such items. Although the
Company currently believes it is likely to secure long-term funding, there
can be no guarantee that such funding will be available under terms
acceptable to the Company. If the Company is unable to obtain such
long-term funding, this could have a material adverse effect on the
Company's business, results of operations and/or financial condition. (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. (See Statement on Forward Looking Statements).
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") 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.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative
Instruments and Hedging Activities," an amendment to SFAS No. 133.
SFAS No. 138 amends the accounting and reporting standards of SFAS No.
133 for certain derivative instruments and certain hedging activities.
The Company will adopt this Statement concurrently with SFAS No. 133.
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In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101 summarizes some of the
staff's interpretations of the application of generally accepted
accounting principles to revenue recognition. SAB 101 is required to be
implemented no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999.
The Company is currently evaluating the impact that the adoption of these
FASB statements and the Staff Accounting Bulletin 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, 2000 from that set forth in the Form 10-K.
At June 30, 2000, the Company has $41.5 million of notional value forward
currency contracts outstanding. Notional amounts do not quantify risk or
represent assets or liabilities of the Company, but are used in the
calculation of cash settlements under contracts. The carrying amount of
these contracts approximates their fair value at June 30, 2000.
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 continued construction of the
York Property. 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:
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(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, including
Internet auction sites.
(4) The volume of consigned property and the marketability at auction of
such property.
(5) The expansion of the York Property.
(6) The resolution of the Department of Justice investigation and other
related investigations and civil lawsuits.
(7) The European Monetary Union.
(8) The Company's success in developing and implementing its Internet
auction strategy.
(9) The demand for art-related financing.
(10) The demand for Real Estate.
(11) The effects of Market Risk.
(12) The extension, amendment or restatement of the Credit Agreement.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1997, the Antitrust Division of the United States Department of Justice
began an investigation of certain art dealers and major auction houses,
including the Company and its principal competitor, Christie's. Among other
matters, the investigation has reviewed whether Sotheby's and Christie's had any
agreement regarding the amounts charged for commissions in connection with
auctions. The Company has been informed that it is now a target of the
investigation. The Company has met and is continuing to meet with the Department
of Justice in order to discuss an appropriate resolution of this investigation.
The European Commission and the Swiss Competition Commission are also conducting
inquiries regarding commissions charged by the Company and Christie's for
auction services. An earlier investigation by the Australian Competition
Commission has been closed without any action being taken.
A number of private civil complaints, styled as class action complaints, have
also been filed against the Company alleging violation of federal and state
antitrust laws based upon alleged agreements between Christie's and the Company
regarding commission pricing. In addition, several shareholder class action
complaints have been filed against the Company and certain of its directors and
officers, alleging failure to disclose the alleged agreements and their impact
on the Company's financial condition and results of operations. And a number of
shareholder derivative suits have been filed against the directors of the
Company based on allegations related to the foregoing lawsuits and
investigations. Although the outcome of the investigation by the Department of
Justice, other governmental inquiries and investigations and these various
lawsuits cannot presently be determined, any loss resulting from these matters
could well have a material impact on the Company's financial condition and/or
results of operations. The amount of any such loss is not currently estimable.
(See Statement on Forward Looking Statements contained in Part I).
Included in the lawsuits described above are more than fifty purported class
action lawsuits that have been filed against the Company and/or its wholly-owned
subsidiary, Sotheby's, Inc., beginning January 30, 2000, alleging violations of
the federal antitrust laws. Christie's International PLC or Christie's Inc.
(collectively "Christie's") has also been named as a defendant in these actions.
All of these federal antitrust actions are currently pending in the United
States District Court for the Southern District of New York. The complaints in
these lawsuits purport to be brought on behalf of individuals that purchased
and/or sold items auctioned by the defendants during various periods from
January 1, 1992, to the present. The complaints generally allege, among other
things, that the Company along with Christie's conspired to fix and raise the
commissions charged to purchasers and sellers of art and other
24
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items at auction. The complaints seek treble damages, injunctive relief,
attorneys' fees and costs.
On February 23, 2000, the United States District Court for the Southern District
of New York entered an Order consolidating all of the actions filed in that
court. Pursuant to the Court's consolidation Order, plaintiffs filed a
consolidated complaint on March 15, 2000, captioned IN RE AUCTION HOUSE
ANTITRUST LITIGATION, No. 00 Civ. 0648. On April 12, 2000, Sotheby's filed an
answer to the consolidated complaint, denying the material allegations contained
therein. On April 14, 2000, plaintiffs filed a Second Consolidated Amended
Complaint. The Company answered this amended complaint on May 30, 2000.
On April 20, 2000, the Court granted plaintiffs' motion to certify the
consolidated litigation as a class action. On May 26, 2000, the Court appointed
the firm of Boies, Schiller & Flexner to act as lead counsel in the consolidated
action.
In addition, five indirect purchaser class action lawsuits have been filed
against the Company, its subsidiary, Sotheby's, Inc., and Christie's in the
Superior Court of the State of California, City and County of San Francisco,
alleging violations of the Cartwright Act, California's antitrust statute, and
the California Unfair Competition Act. The complaints are captioned CHRISTENSEN
V. CHRISTIE'S INTERNATIONAL PLC, ET AL., No. 310313 (filed Feb. 29, 2000);
HOWARD V. CHRISTIE'S INTERNATIONAL PLC, ET AL., No. 310362 (filed March 1,
2000); LANG V. CHRISTIE'S INTERNATIONAL PLC ET AL., No. 310616 (filed March 10,
2000); PACIFIC WESTERN TRADERS V. CHRISTIE'S INTERNATIONAL PLC, ET AL., No.
310629 (filed March 13, 2000); and DANIELS AND WOLFSON V. CHRISTIE'S
INTERNATIONAL PLC ET AL., No. 311888 (filed May 3, 2000). The complaints in
these lawsuits purport to be brought on behalf of individuals that indirectly
purchased items in California from one or more of the defendants. The complaints
generally allege, among other things, that the Company along with Christie's
conspired to fix and raise the commissions charged to buyers and sellers of art
and other items at auction, and that, as a result, such indirect purchasers paid
more for art and other items than they otherwise would have paid in the absence
of defendants' conduct. The complaints seek, among other things, treble damages
in unspecified amounts, interest, disgorgement of gains, equitable relief,
attorneys' fees and costs. The Company filed a demurrer to these complaints on
May 10, 2000.
On May 11, 2000 the United States District Court for the Southern District of
New York issued an order consolidating the shareholder class action complaints
referred to above, and styling the consolidated shareholders' litigation as: IN
RE SOTHEBY'S HOLDINGS INC. SECURITIES LITIGATION, No. 00 Civ. 1041 (DLC). This
order also appointed an interim lead plaintiff (the "Lead Plaintiff") and
interim lead counsel ("Lead Counsel"). On May 19, 2000 Lead Plaintiff submitted
a consolidated amended complaint, alleging violations of Sections 10(b) and
20(a) of the
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Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder (the
"Complaint"). The Complaint names as defendants the Company, Sotheby's Inc.,
A. Alfred Taubman, Diana D. Brooks and certain other officers of the Company.
The Complaint seeks to recover damages in unspecified amounts on behalf of
Lead Plaintiff and a class of all other purchasers of the Company's common
stock during the period February 11, 1997 through February 18, 2000. On June
16, 2000, the Company and each of the other defendants named in the Complaint
moved to dismiss the Complaint on the grounds that the Complaint fails to
state a claim and, with respect to certain defendants, fails to plead fraud
with sufficient particularity. The motion to dismiss is pending before the
Court. On July 19, 2000 the Court entered an order certifying a class of
plaintiffs consisting of all persons and entities that purchased the Class A
Common Stock of the Company during the period from February 11, 1997 until
February 18, 2000, inclusive, and who sustained a loss thereby.
On May 11, 2000 the United States District Court for the Southern District of
New York issued an order consolidating the shareholder derivative complaints
referred to above, and styling the consolidated shareholders' derivative
litigation as: IN RE SOTHEBY'S HOLDINGS INC. DERIVATIVE LITIGATION, No. 00 Civ.
1373 (DLC). This order also appointed an interim lead counsel ("Lead Derivative
Counsel") for all plaintiffs in the consolidated derivative actions. On May 19,
2000 Lead Derivative Counsel filed an amended verified shareholder derivative
complaint (the "Derivative Complaint"), naming as defendants certain of the
Company's current and former directors and officers, and naming the Company and
Sotheby's Inc. as nominal defendants. The Derivative Complaint seeks an
unspecified amount of damages based on alleged breaches of fiduciary duty, gross
mismanagement and constructive fraud arising from the alleged agreements between
the Company and Christie's. On June 19, 2000, the Court issued an order
approving a stipulation between the parties to extend, until September 14, 2000,
the time in which defendants must respond to the Derivative Complaint, in order
to provide the Company and its Board of Directors an opportunity to consider and
address the Derivative Complaint.
Two additional derivative actions have also been filed: HUSCHER V. CURLEY,
Case No. 00-021379-CZ (Mich. Cir. Ct. Oakland County) (filed March 3, 2000);
and WEISS V. CURLEY, No. 00 Civ. 3807 (DLC) (S.D.N.Y.) (filed May 22, 2000).
These complaints contain substantially identical allegations to those in the
Derivative Complaint. The Company has not yet answered or otherwise
responded to these additional complaints.
In addition, the Company's Board of Directors has received three letters on
behalf of putative shareholders (including letters from the named plaintiffs in
the HUSCHER and WEISS actions referenced above), requesting that the Company
investigate and commence litigation against the individuals responsible for the
possible damage to the Company and
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Sotheby's Inc. resulting from the alleged agreements between the Company and
Christie's.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 3, 2000, the Company held its annual meeting of shareholders. The
matters on which the shareholders voted were: (i) the approval of an amendment
of the Company's Amended and Restated By-Laws, as amended, to increase the
maximum number of directors from fifteen to sixteen; (ii) the election of four
directors by the holders of Class A Common Stock; (iii) the election of twelve
directors by the holders of Class B Common Stock; (iv) the approval of an
amendment to the Sotheby's Holdings, Inc. 1997 Stock Option Plan; and (v) the
ratification of the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the year ended December 31, 2000. All nominees were
elected, and all proposals passed. The results of the voting are shown below:
APPROVAL OF AMENDMENT TO BY-LAWS
202,137,901 Votes were cast;
176,753,722 Votes were cast for the Resolution;
25,367,768 Votes were cast against the Resolution; and
16,411 Votes abstained;
ELECTION OF CLASS A DIRECTORS
NOMINEES FOR AGAINST WITHHELD
George Blumenthal 36,964,068 0 222,503
Steven B. Dodge 36,963,676 0 222,895
Dr. Henry G. Jarecki 36,525,614 0 661,137
Brian S. Posner 36,962,119 0 224,452
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ELECTION OF CLASS B DIRECTORS
NOMINEES FOR AGAINST WITHHELD
Conrad Black 164,951,330 0 0
Viscount Blakenham 164,951,330 0 0
Max M. Fisher 164,951,330 0 0
The Marquess of Hartington 164,951,330 0 0
Henry R. Kravis 164,951,330 0 0
Jeffrey H. Miro 164,951,330 0 0
Sharon Percy Rockefeller 164,951,330 0 0
William F. Ruprecht 164,951,330 0 0
Michael I. Sovern 164,951,330 0 0
Robert S. Taubman 164,951,330 0 0
Robin Woodhead 164,951,330 0 0
Deborah Zoullas 164,951,330 0 0
APPROVAL OF AMENDMENT TO 1997 STOCK OPTION PLAN
197,347,146 Votes were cast;
192,643,234 Votes were cast for the Resolution;
4,676,245 Votes were cast against the Resolution; and
27,667 Votes abstained;
RATIFICATION OF INDEPENDENT AUDITORS
202,137,901 Votes were cast;
201,648,852 Votes were cast for the Resolution;
463,063 Votes were cast against the Resolution; and
25,986 Votes abstained;
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
28
<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 8th day of
August, 2000, on its behalf by the undersigned, thereunto duly authorized
and in the capacity indicated.
SOTHEBY'S HOLDINGS, INC.
By: /s/ Michael L. Gillis
----------------------
Michael L. Gillis
Vice President, Controller
and Chief Accounting Officer
29
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27. Financial Data Schedule
30
