-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OL1lbxziiEAL6irH/jp+wpLiUeItyiTn9DNWhZRnjdlPLgsaghWt4zxK3e6O3uDU 1XTqm5yTBWhazJcFO3FkHw== /in/edgar/work/20000808/0000912057-00-035247/0000912057-00-035247.txt : 20000921 0000912057-00-035247.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-035247 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOTHEBYS HOLDINGS INC CENTRAL INDEX KEY: 0000823094 STANDARD INDUSTRIAL CLASSIFICATION: [7389 ] IRS NUMBER: 382478409 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09750 FILM NUMBER: 688148 BUSINESS ADDRESS: STREET 1: 500 NORTH WOODWARD AVENUE STREET 2: SUITE 100 CITY: BLOOMFIELD HILLS STATE: MI ZIP: 48304 BUSINESS PHONE: 2486462400 MAIL ADDRESS: STREET 1: 500 NORTH WOODWARD AVENUE STREET 2: SUITE 100 CITY: BLOOMFIELD HILLS STATE: MI ZIP: 48304 10-Q 1 a10-q.txt FORM 10-Q 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. 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 PART 1: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES (UNAUDITED)
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) 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 - ----------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3 CONSOLIDATED BALANCE SHEETS SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES
June 30, December 31, June 30, 2000 1999 1999 (UNAUDITED) (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------- (THOUSANDS OF DOLLARS) 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 - ------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4 CONSOLIDATED STATEMENTS OF CASH FLOWS SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 1999 - ------------------------------------------------------------------------------------------ (THOUSANDS OF DOLLARS) 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 - ------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5 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 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 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 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 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 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 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 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):
For the Three Months For the Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 ----------- ---------- ---------- ---------- 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 ========== ========== ========== ==========
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 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 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 15 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, 16 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 17 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 18 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 19 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 20 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. 21 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: 22 (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. 23 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 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 25 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 26 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 27 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 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 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 27. Financial Data Schedule 30 EX-27 2 ex-27.txt EXHIBIT 27
5 6-MOS DEC-31-2000 JUN-30-2000 76,504 0 552,313 10,906 15,198 687,889 236,423 78,819 1,045,064 447,272 99,304 0 0 5,892 372,820 1,045,064 0 212,131 0 44,862 160,770 0 7,669 1,482 533 949 0 0 0 949 .02 .02
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