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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO , AND
COMMISSION FILE NUMBER 1-9750.
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SOTHEBY'S HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MICHIGAN 38-2478409
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3800 WOODWARD AVENUE, SUITE 100 48304
BLOOMFIELD HILLS, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(248) 646-2400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Class A Limited Voting Common Stock, New York Stock Exchange
$0.10 Par Value London Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
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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 periods 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of March 6, 2001, the aggregate market value of the 22,607,960 shares of
Class A Limited Voting Common Stock held by non-affiliates of the registrant was
$579,894,174 based upon the closing price ($25.65) on the New York Stock
Exchange composite tape on such date. (For this computation, the registrant has
excluded the market value of all shares of its Class A Limited Voting Common
Stock reported as beneficially owned by the controlling shareholder, directors
and executive officers of the registrant; such exclusion shall not be deemed to
constitute an admission that any such person is an 'affiliate' of the
registrant.) As of March 6, 2001, there were outstanding 42,521,429 shares of
Class A Limited Voting Common Stock (the 'Class A Common Stock') and 16,549,650
shares of Class B Common Stock (the 'Class B Common Stock'), freely convertible
into 16,549,650 shares of Class A Common Stock. There is no public market for
the registrant's Class B Common Stock, which is held by affiliates and
non-affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2001 annual meeting of shareholders
are incorporated by reference into Part III.
________________________________________________________________________________
PART I
ITEM 1. BUSINESS
GENERAL
Sotheby's Holdings, Inc. (together with its subsidiaries, unless the context
otherwise requires, the 'Company') is one of the world's two largest auctioneers
of fine arts, antiques and collectibles, offering property in over 90 collecting
categories, among them paintings, jewelry, decorative arts, and books. The
worldwide Auction segment of the Company's business is conducted through a
division known as 'Sotheby's.' In addition to both live and Internet
auctioneering, the Auction segment is engaged in a number of related activities,
including the purchase and resale of art and other collectibles and the
brokering of art and collectible purchases and sales through private treaty
sales. In certain circumstances, the Company provides loans to dealers to
finance the purchase of property by dealers and shares in the gain or loss if
the property sells either above or below its cost. The Company also markets and
brokers luxury residential real estate through its Real Estate segment, conducts
art-related financing activities through its Finance segment and is engaged, to
a lesser extent, in insurance brokerage, art education and restoration
activities.
The Company believes it is one of the world's leaders in art-related
financing activities. The Company lends money generally secured by works of art
that the Company either has in its possession or permits the borrower to possess
in order to facilitate clients' bringing property to auction and also makes
loans to collectors and dealers secured by collections not presently intended
for sale. Additionally, under certain circumstances, the Company makes unsecured
loans.
The Company, through its subsidiary, Sotheby's International Realty, Inc.
('SIR'), is engaged in the marketing and brokering of luxury residential real
estate.
The Company was incorporated in Michigan in August 1983. In October 1983,
the Company acquired Sotheby Parke Bernet Group Limited, which was then a
publicly held company listed on the International Stock Exchange of the United
Kingdom and the Republic of Ireland Limited (the 'London Stock Exchange') and
which, through its predecessors, had been engaged in the auction business since
1744. In 1988, the Company issued shares of Class A Common Stock to the public.
The Class A Common Stock is listed on the New York Stock Exchange (the 'NYSE')
and the London Stock Exchange.
THE AUCTION SEGMENT
The purchase and sale of works of art in the international art market are
primarily effected through numerous dealers, the two major auction houses, the
smaller auction houses and also directly between collectors. Although dealers
and smaller auction houses generally do not report sales figures publicly, the
Company believes that dealers account for the majority of the volume of
transactions in the international art market.
The Company and Christie's, a privately held auction house based in the
United Kingdom ('U.K.'), are the two largest art auction houses in the world.
The Company conducted aggregate auction sales in 2000 of approximately $1.9
billion.
The Company auctions a wide variety of property, including fine arts,
jewelry, decorative arts, and rare books. In 2000, the Company's auction sales
by type of property were as follows: fine arts accounted for approximately
$1,106.4 million, or 57%, of auction sales; decorative arts accounted for
approximately $520.7 million, or 27%, of auction sales; and jewelry, rare books
and other property accounted for approximately $309.2 million, or 16%, of
auction sales.
Most of the objects auctioned by the Company are unique items, and their
value, therefore, can only be estimated prior to sale. The Company's principal
role as an auctioneer is to identify, evaluate and appraise works of art through
its international staff of specialists; to stimulate purchaser interest through
professional marketing techniques; and to match sellers and buyers through the
auction process.
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In its role as auctioneer, the Company generally functions as an agent
accepting property on consignment from its selling clients. The Company sells
property as agent of the consignor, billing the buyer for property purchased,
receiving payment from the buyer and remitting to the consignor the consignor's
portion of the buyer's payment after deducting the Company's commissions,
expenses, and applicable taxes. From time to time, the Company releases property
sold at auction to buyers before the Company receives payment. In such event,
the Company must pay the seller the net sale proceeds for the released property
at the time payment is due to the consignor, even if the Company has not
received payment from the buyer. (See Note D of Notes to Consolidated Financial
Statements under Item 8.)
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 (or, if the property does not sell, the amount of the guarantee
must be paid). Under certain guarantees, the Company participates in a share of
the proceeds if the property under guarantee sells above an agreed minimum
price. In addition, the Company is obligated under the terms of certain
guarantees to fund a portion of the guarantee prior to the auction. (See Note O
of Notes to Consolidated Financial Statements under Item 8.)
All buyers pay a buyer's premium to the Company on auction purchases. For
live auction purchases made at principal auction locations and for most
collecting categories, the buyer's premium is 20% of the hammer (sale) price up
to $15,000, 15% on the next $85,000 of the hammer (sale) price up to $100,000
and 10% on any remaining amount over $100,000.
The buyer's premium on Internet purchases was 10% of the hammer (sale) price
until March 5, 2001. Effective on that date, the Company increased the buyer's
premium charged on Internet purchases to 15% of the hammer (sale) price on the
first $15,000, while leaving the buyer's premium at 10% of the hammer (sale)
price on any remaining amount over $15,000.
The Company's current published seller's commission structure gives credit
to the seller both for auction sales through the Company during the current year
and for auction purchases made from the Company during the current year when
determining the applicable commission rate to be paid. Under the current
published seller's commission structure, the applicable rate paid varies
according to the aggregate amount of purchases and sales by the seller and the
type of seller, with different rate schedules for private parties, art dealers
and museums. For sales under $100,000, the Company charges a seller's commission
determined on a per lot basis according to a fixed schedule. In certain
situations, the Company waives the seller's commission.
In addition to auctioneering, the Auction segment is engaged in a number of
related activities, including the brokering of art and collectible purchases and
sales through private treaty sales and the purchase and resale of art and other
collectibles. For example, the Company acts as a principal through its
investment in Acquavella Modern Art (the 'Partnership' or 'AMA'), a partnership
consisting of a wholly-owned subsidiary of the Company and Acquavella
Contemporary Art, Inc. ('ACA'). The term of the AMA partnership agreement
expires on March 31, 2002. The Company uses the equity method to account for its
investment in AMA in the Consolidated Financial Statements under Item 8. The
assets of the Partnership consist principally of art inventory. The Company
reflects its 50% interest in the net assets of the Partnership in Investments in
the Consolidated Balance Sheets under Item 8. This investment totaled $31.7
million and $33.0 million at December 31, 2000 and 1999, respectively. Since the
Company has received the return of its initial investment, cash distributions
are made on a 50-50 basis. To the extent that the Partnership requires working
capital, the Company has agreed to lend the same to the Partnership. Any amounts
loaned to the Partnership by the Company would bear interest, compounded
monthly, at the prime rate, plus 1%. As of December 31, 2000, no such amounts
were outstanding. (See Notes B and F of Notes to Consolidated Financial
Statements under Item 8.)
The Company's auction business is seasonal, with peak revenues and operating
income primarily occurring in the second and fourth quarters of each year as a
result of the traditional
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spring and fall art auction seasons. (See 'Management's Discussion and Analysis
of Results of Operations -- Seasonality' under Item 7 and Note R of Notes to
Consolidated Financial Statements under Item 8.)
THE AUCTION MARKET AND COMPETITION
Competition in the international art market is intense. A fundamental
challenge facing any auctioneer or dealer is to obtain high quality and valuable
property for sale. The Company's primary auction competitor is Christie's,
although Phillips, de Pury & Luxembourg and a variety of Internet auction
websites are beginning to provide competition in certain areas.
The owner of a work of art wishing to sell it has three options: sale or
consignment to, or private brokerage by, an art dealer; consignment to, or
private sale by, an auction house; or private sale to a collector or museum
without the use of an intermediary. The more valuable the property, the more
likely it is that the owner will consider more than one option and will solicit
proposals from more than one potential purchaser or agent, particularly if the
seller is a fiduciary representing an estate or trust.
A complex array of factors may influence the seller's decision. These
factors include: the level of expertise of the dealer or auction house with
respect to the property; the extent of the prior relationship, if any, between
the seller and the firm; the reputation and historic level of achievement by a
firm in attaining high sale prices in the property's specialized category; the
breadth of staff expertise; the desire for privacy on the part of sellers and
buyers; the amount of cash offered by a dealer, auction house or other purchaser
to purchase the property outright compared with the estimates, guarantees or
other financial options given by auction houses; the time that will elapse
before the seller will receive sale proceeds; the desirability of a public
auction in order to achieve the maximum possible price (a particular concern for
fiduciary sellers, such as trustees and executors); the amount of commission
proposed by dealers or auction houses to sell a work on consignment; the cost,
style and extent of presale marketing and promotion to be undertaken by a firm;
recommendations by third parties consulted by the seller; personal interaction
between the seller and the firm's staff; and the availability and extent of
related services, such as a tax or insurance appraisal and short-term financing.
The Company's ability to obtain high quality and valuable property for sale
depends, in part, on the relationships that certain employees of the Company,
particularly its senior art specialists or management, have established with
potential sellers.
The Company conducts Internet auctions through its website, sothebys.com.
Approximately 5,100 fine art, antique and collectibles professionals have been
selected, together with the Company, to sell traditional fine and decorative
arts, jewelry and books on sothebys.com. The Company manages all operations of
sothebys.com.
In November 2000, the Company and Amazon.com, Inc. ('Amazon') combined the
activities of sothebys.amazon.com, a co-branded auction site with Amazon.com
Auctions, Inc., which is a subsidiary of Amazon, with those of sothebys.com. The
Company continues to have a formal marketing relationship with Amazon, including
maintaining a link from the Amazon.com Auctions site to sothebys.com. (See
Note N of Notes to Consolidated Financial Statements under Item 8.)
The Company's success in its ongoing development and implementation of its
Internet strategy is substantially dependent upon the following factors (which
are not listed in any particular order of importance): 1) competition in the
auction business; 2) the level of use of the Internet and online services;
3) consumer confidence in and acceptance of the Internet and other online
services for commerce; 4) consumer confidence in Internet security; 5) the
functionality of the Company's computer and communication systems; 6) the
Company's ability to upgrade and develop its systems and infrastructure to
accommodate growth; and 7) government regulation of e-commerce generally.
With respect to all statements made herein regarding the Internet, see
statement on Forward Looking Statements, incorporated by reference from Item 7.
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It is not possible to measure the entire international art market or to
reach any conclusions regarding overall competition because dealers and smaller
auction firms frequently do not publicly report annual sales totals.
AUCTION REGULATION
Regulation of the auction business varies from jurisdiction to jurisdiction.
In many jurisdictions, the Company is subject to laws and regulations that are
not directed solely toward the auction business, including, but not limited to,
import and export regulations and value added sales taxes. Such regulations do
not impose a material impediment to the worldwide business of the Company but do
affect the market generally, and a material adverse change in such regulations
could affect the business. In addition, the failure to comply with such local
laws and regulations could subject the Company to civil and/or criminal
penalties in such jurisdictions.
THE FINANCE SEGMENT
The Company provides collectors, estates and dealers with financing
generally secured by works of art that the Company either has in its possession
or permits the borrower to possess. The Company's financing activities are
conducted through its wholly-owned direct and indirect subsidiaries.
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 or privately (a 'consignor advance'); and
(2) general purpose loans to collectors 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 dealers
and collectors. The loans are generally made with full recourse to the borrower.
In certain instances, however, loans are made with recourse limited to the works
of art pledged as security for the loan. To the extent that the Company is
looking wholly or partially to the collateral for repayment of its loans,
repayment can be adversely impacted by a decline in the art market in general or
in the value of the particular collateral. In addition, in situations where the
borrower becomes subject to bankruptcy or insolvency laws, the Company's ability
to realize on its collateral may be limited or delayed by the application of
such laws. The majority of the Company's loans are variable interest rate loans.
At December 31, 2000, $156.2 million of the total $192.2 million net loan
portfolio was due within one year. Under certain circumstances, the Company also
makes unsecured loans to collectors and dealers. The net balance of such loans
totaled $44.8 million at December 31, 2000.
Although the Company's general policy is to make secured loans at loan to
value ratios (principal loan amount divided by the low auction estimate of the
collateral) of 50% or lower, the Company will lend, primarily on a secured
basis, at loan to value ratios higher than 50%. In certain of these situations,
the Company finances the purchase of works of art by certain art dealers through
unsecured loans. The property purchased pursuant to such unsecured loans is sold
by the dealer or at auction with any net profit or loss shared by the Company
and the dealer. The net total of all such unsecured loans was $23.0 million at
December 31, 2000.
The Company regularly reviews its loan portfolio. Secured loans are analyzed
based on the current estimated realizable value of the collateral securing the
loan. For financial statement purposes, the Company establishes reserves for
specific secured loans where management believes the loan is
under-collateralized and with respect to which the under-collateralized amount
may not be collectible from the borrower. Unsecured loans are analyzed based on
management's estimate of the current collectibility of each loan. A reserve is
established for probable losses inherent in the remainder of the loan portfolio
based on historical data and current market conditions. (See Notes B and D of
Notes to Consolidated Financial Statements under Item 8.)
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The Company funds its financing activities generally through borrowings
under the Amended Credit Agreement and internally generated funds. (See
'Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources' under Item 7 and Note H of Notes
to Consolidated Financial Statements under Item 8.)
THE FINANCE MARKET AND COMPETITION
A considerable number of traditional lending sources offer conventional
loans at a lower cost to borrowers than the average cost of those offered by the
Company. However, the Company believes that only Christie's and a few other
lenders are willing to accept works of art as sole collateral. The Company
believes that its financing alternatives are attractive to clients who wish to
obtain liquidity from their art assets.
THE REAL ESTATE SEGMENT
SIR was founded in 1976 as a wholly-owned subsidiary of the Company. A
natural extension of the Company's auction services, SIR's early mission was to
assist fine arts, furniture and collectibles clients in buying and selling
distinctive properties. Since that time SIR has evolved into a worldwide
organization serving an international customer base. Today, SIR provides
brokerage, marketing and consulting services for luxury residential, resort,
farm and ranch properties nationally and internationally.
SIR offers real estate clients a global network of brokerage operations,
including 16 company-owned brokerage offices, five regional offices, and a
buyers' representative in Hong Kong.
The company-owned brokerage offices of SIR are located on the upper East
Side and SoHo in Manhattan; Southampton, Bridgehampton and East Hampton, New
York; Palm Beach, Florida; Beverly Hills, Brentwood, Santa Barbara and San
Francisco, California; Greenwich, Connecticut; Santa Fe, New Mexico; Sydney,
Australia; London, England and, most recently, Jackson Hole, Wyoming and Paris,
France.
SIR's five regional offices, located in Manhattan; Palm Beach, Florida;
Newport Beach, California; Boston, Massachusetts; and Munich, Germany, manage
the Company's affiliation with more than 175 independent brokerage offices in
the U.S., Europe, Canada and the Caribbean. In selecting its affiliates, SIR
evaluates a firm's expertise in the high-end segment of its local market,
community reputation and dedication to customer service. Each affiliate is the
exclusive SIR representative in its respective territory.
Through the SIR global network, company-owned and affiliate offices offer
buyers access to distinctive properties, in a range of prices, in both domestic
and international luxury real estate markets. The network, combined with SIR's
connection to the Company's auction and finance businesses, provides sellers
access to a unique, qualified group of buyers.
In 2000, SIR and Lehman Brothers Bank, FSB, a wholly-owned subsidiary of
Lehman Brothers Holdings Inc., launched a joint venture, Sotheby's Lehman
Mortgage Services ('SLMS') to accommodate the unique financing needs of the
purchasers of high-end residential real estate. The Company uses the equity
method to account for its investment in SLMS in the Consolidated Financial
Statements under Item 8. (See Notes B and F of Notes to Consolidated Financial
Statements under Item 8.)
REAL ESTATE COMPETITION
SIR's primary competitors are small, local real estate brokerage firms that
deal exclusively with luxury real estate and the 'distinctive property'
divisions of large regional and national real estate firms. A significant trend
during 2000 was the substantial increase in competition from such 'distinctive
property' divisions. Competition in the luxury real estate business takes many
forms, including competition in commission rates, marketing expertise,
attracting and retaining key personnel and the provision of personalized service
to sellers and buyers.
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REAL ESTATE REGULATION
The real estate brokerage business is subject to regulation in most
jurisdictions in which SIR operates. Typically, individual real estate brokers
and brokerage firms are subject to licensing requirements. Depending on a
jurisdiction's requirements and the nature of SIR's business conducted there,
SIR may register to conduct business, maintain a real estate brokerage license,
and/or act as an exclusive marketing agent providing services to licensed real
estate brokers in a particular jurisdiction.
FACTORS AFFECTING OPERATING REVENUES
The Company's Auction, Finance and Real Estate operating revenues are
significantly influenced by a number of factors not within the Company's
control, including: the overall strength of the international economy and
financial markets and, in particular, the economies of the United States
('U.S.'), the U.K., and the major countries or territories of Continental Europe
and Asia (principally Japan and Hong Kong); interest rates; political conditions
in various nations; the presence of export and exchange controls; local taxation
of sales and donations of potential auction property; competition; the success
of the Company in attracting and retaining qualified personnel; and the amount
of property being consigned to art auction houses (specifically, the number of
single-owner sales consignments).
FINANCIAL AND GEOGRAPHICAL INFORMATION ABOUT OPERATING SEGMENTS
See Note C of Notes to Consolidated Financial Statements under Item 8 for
financial and geographical information about the Company's operating segments.
PERSONNEL
At December 31, 2000, the Company had 2,048 employees: 916 located in North
America; 777 in the United Kingdom and 355 in the rest of the world. The
following table provides a breakdown of employees by operating segment as of
December 31, 2000:
OPERATING SEGMENT NUMBER OF EMPLOYEES
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Auction.................................. 1,709
Real Estate.............................. 110
Finance.................................. 8
Other.................................... 221
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Total................................ 2,048
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The Company regards its relations with its employees as good.
In February 2000, the Board of Directors of the Company announced a number
of management changes. A. Alfred Taubman stepped down as Chairman of the
Company. In addition, Diana D. Brooks resigned as President and Chief Executive
Officer of the Company. Concurrently, the Company announced the appointment of
Michael I. Sovern, former President of Columbia University, as the new Chairman
of the Company and the appointment of William F. Ruprecht as the President and
Chief Executive Officer of the Company. In October 2000, Ms. Brooks pled guilty
to a violation of the U.S. antitrust laws.
(See Note P of Notes to Consolidated Financial Statements for information on
the Company's Restructuring Plan.)
ITEM 2. PROPERTIES
Sotheby's, Inc., a wholly-owned subsidiary of the Company, is headquartered
at 1334 York Avenue, New York, New York (the 'York Property'). The Company also
currently leases office and warehouse space in four other locations in the New
York City area, and leases office and
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exhibition space in several other major cities throughout the United States,
including Los Angeles, San Francisco, Chicago, Palm Beach, Philadelphia, and
Boston.
The Company acquired the York Property on July 18, 2000. In November 2000,
the Company granted a mortgage on the York Property to the banks under its
credit facility. (See 'Management's Discussion and Analysis of Results of
Operations -- Liquidity and Capital Resources' under Item 7 and Notes G and H of
Notes to Consolidated Financial Statements under Item 8.)
The Company is nearing the completion of construction of a six-story
addition and renovation of the York Property. This construction will expand the
Company's auction, warehouse and office space in New York City and will enable
the Company to consolidate many of its New York City operations including
reducing the number of other spaces leased by the Company in the New York City
area. (See Note P of Notes to Consolidated Financial Statements under Item 8.)
SIR leases approximately 10,900 square feet of office space at 980 Madison
Avenue, New York, New York, from unaffiliated parties under leases expiring in
2001 for its corporate headquarters and Manhattan brokerage and regional
operations. SIR will relocate, most likely in the third quarter of 2001, to
approximately 25,000 square feet of office space at 38 East 61st Street, New
York, New York, under a lease from an unaffiliated party. The increased space
will allow SIR to consolidate its Madison Avenue operations with its other
operations located at separate Company properties within New York City. SIR also
leases office space at a number of domestic and international locations,
totaling another 62,926 square feet.
The Company's U.K. operations (primarily auction) are centered at New Bond
Street, London, where the main salesrooms and administrative offices of
Sotheby's (U.K.) are located. The New Bond Street premises are approximately
200,000 square feet. The Company entered into a lease in November 2000 for
approximately 54,000 square feet at Olympia, a landmark building located in
Kensington, West London. The Olympia facility will permit the Company to expand
its London salesrooms and offices. The Company expects to open Olympia in the
second half of 2001. In addition, warehouse space is leased at King's House in
West London. The Company also owns a salesroom in Sussex where it conducts
auctions.
The Company also leases office space primarily for auction operations in
various locations throughout Continental Europe, including Amsterdam, Geneva,
Madrid, Milan, Munich, Paris, Rome and Zurich; in Asia, including Hong Kong,
Seoul, Singapore, Taipei, and Tokyo; in Australia; in South America and in
Canada.
In management's opinion, the Company's worldwide premises are generally
adequate for the current conduct of its business.
ITEM 3. LEGAL PROCEEDINGS
In April 1997, the Antitrust Division of the United States Department of
Justice (the 'DOJ') began an investigation of certain art dealers and major
auction houses, including the Company and its principal competitor, Christie's
International, PLC. On October 5, 2000, the Company entered into a plea
agreement with the DOJ, subject to court approval of the plea and the sentence.
The Company pled guilty to a violation of the United States antitrust laws in
connection with a conspiracy to fix auction commission rates charged to sellers
in the United States and elsewhere and agreed to a fine of $45 million payable
without interest over a period of five years. On February 2, 2001, the United
States District Court for the Southern District of New York accepted the
Company's plea and imposed on the Company the $45 million fine provided for in
the plea agreement. The European Commission is also conducting an investigation
regarding commissions charged by the Company and Christie's for auction
services, and the Company is cooperating with such investigation.
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
7
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.
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 in connection with auctions in the United States.
Christie's International, PLC and Christie's Inc. (collectively 'Christie's')
have also been named as defendants 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 through
February 7, 2000. 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 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
theretofore 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 behalf of buyers and sellers in
United States auctions. On May 26, 2000, the court appointed the firm of Boies,
Schiller & Flexner to act as lead counsel in the consolidated action.
On September 24, 2000, the Company agreed to settle, subject to court
approval, the certified class action relating to auctions conducted in the
United States (the 'U.S. Antitrust Litigation'). A formal settlement agreement
was executed and filed with the court on October 27, 2000. Pursuant to the
settlement agreement, the Company agreed to deposit in an escrow account:
(a) $100 million in cash within 30 days of preliminary court approval of the
settlement, (b) an additional $106 million in cash within 30 days of final court
approval of the settlement, and (c) vendor's commission discount certificates
with a fair market value of $50 million within 30 days of final court approval
of the settlement. A. Alfred Taubman, holder of approximately 13.2 million
shares of the Company's Class B common stock, the Company's former chairman and
a co-defendant in the U.S. Antitrust Litigation agreed to fund $156 million of
the cash payments due under the settlement agreement. The amount to be funded by
A. Alfred Taubman is to be paid to the Company as follows: (a) $50 million
within 29 days of preliminary court approval of the settlement, which amount was
paid in December 2000, and (b) $106 million within 29 days of final court
approval of the settlement.
On February 22, 2001, the court conditionally approved the settlement
agreement with respect to the U.S. Antitrust Litigation, subject to agreement by
the parties as to certain issues. Prior to such approval, in order to satisfy
the requirement in the settlement agreement that the certificates have a fair
market value of not less than $50 million, the parties had agreed that the
amount of vendor's commission discount certificates to be included as part of
the settlement would be $62.5 million in face value and that unused certificates
would be redeemable for cash after four years. On March 8, 2001, the Company,
Christie's and lead counsel for the class submitted documentation to the court
which the Company believes satisfies the conditions stated by the court in its
conditional order. If approved by the court, the proposal that has been
submitted would not change any of the economic terms of the settlement described
above. The court has issued an order requiring interested parties to submit any
responses to this proposal no later than March 22, 2001.
8
Three other purported class action lawsuits were filed in the United States
District Court for the Southern District of New York against the Company and its
wholly-owned subsidiary, Sotheby's, Inc., beginning in August 2000, alleging
violations of the federal antitrust laws and international law, on behalf of
purchasers and sellers in auctions conducted outside the United States.
Christie's was also named as a defendant in these actions. The complaints in
these actions (the 'International Antitrust Litigation') contained allegations
identical to the complaints in the U.S. Antitrust Litigation but were considered
separately from the U.S. Antitrust Litigation. On October 30, 2000, plaintiffs
filed a consolidated amended complaint in the International Antitrust
Litigation. On January 30, 2001, the court granted the Company's motion to
dismiss the International Antitrust Litigation on the grounds of lack of
jurisdiction over auctions held by the Company and its subsidiaries outside of
the United States. On February 13, 2001, the plaintiffs filed a motion seeking
reconsideration of the court's decision, and on February 15, 2001, the court
entered an order denying plaintiffs' request for reconsideration. Plaintiffs
have the right to appeal the court's decision by filing a notice of appeal no
later than March 19, 2001. The plaintiffs have not yet filed a notice of appeal.
In addition to the federal actions, six 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, alleging
violations of the Cartwright Act, California's antitrust statute, and the
California Unfair Competition Act. 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.
Pursuant to a stipulation among the parties, plaintiffs have until April 2, 2001
to file a consolidated amended complaint; defendants can then decide whether to
file a further demurrer; and all discovery is stayed until August 6, 2001.
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. On May 19, 2000 Lead Plaintiff submitted a
consolidated amended complaint, alleging violations of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder
(the 'Complaint'). The Complaint named as defendants the Company, its Sotheby's
Inc. subsidiary, A. Alfred Taubman, Diana D. Brooks and certain other officers
of the Company. The Complaint sought to recover damages in unspecified amounts
on behalf of Lead Plaintiff and a class of all other purchasers of the Company's
Class A 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
failed to state a claim and (with respect to certain defendants) failed to plead
fraud with sufficient particularity. 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 Sotheby's Holdings, Inc. during the period
from February 11, 1997 until February 18, 2000, inclusive, and who sustained a
loss thereby. On August 30, 2000, the Court issued a decision granting the
motions to dismiss in part and denying them in part. Specifically, the Court
granted the motions of certain officers of the Company and Sotheby's Inc. and
dismissed the Complaint, without prejudice, with respect to these defendants, on
the ground that the Complaint fails to plead fraud with sufficient
particularity. The Court denied the motions to dismiss of the Company, A. Alfred
Taubman and Diana D. Brooks.
On September 24, 2000, the Company agreed to settle, subject to court
approval, the shareholder class action litigation (the 'Shareholder
Litigation'). The Company entered into the
9
settlement agreement for the aforementioned litigation without any admission of
liability. According to the terms of the Shareholder Litigation settlement, the
Company agreed to deposit in an escrow account: (a) $30 million in cash within
30 days of the court's approval of notice to potential class members and the
court's setting a date for the hearing to consider final approval of the
settlement and (b) Sotheby's Class A Common Stock with a value of $40 million
or, at the Company's option, $40 million in cash, after a pricing period
beginning 30 days after final court approval of the settlement. The Company
currently expects to issue stock. A. Alfred Taubman, holder of approximately
13.2 million shares of the Company's Class B common stock, the Company's former
chairman and a co-defendant in the Shareholder Litigation, agreed to fund the
$30 million of cash payments due under the terms of the Shareholder Litigation
settlement, which amount was funded in December 2000.
On February 16, 2001, the court approved the settlement of the Shareholder
Litigation pursuant to the terms described above. Plaintiffs have the right to
appeal the court's decision by filing a notice of appeal by March 23, 2001. The
plaintiffs have not yet filed a notice of appeal.
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
its Sotheby's Inc. subsidiary 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.
Three additional derivative actions have also been filed: Huscher V. Curley,
Case No. 00-021379-CZ (Mich. Cir. Ct. Oakland County) (filed March 3, 2000);
Weiss V. Curley, No. 00 Civ. 3807 (DLC) (S.D.N.Y.) (filed May 22, 2000); and
Orestano V. Taubman, No. 00-025317-CZ (Mich. Cir. Ct. Oakland County) (filed
August 15, 2000). The Huscher and Weiss complaints contain substantially
identical allegations to those in the Derivative Complaint. The Orestano
complaint differs from the other derivative complaints in that it only names as
defendants A. Alfred Taubman and Diana D. Brooks, and the Company and its
Sotheby's Inc. subsidiary as nominal defendants. In addition, the Orestano
complaint alleges violations of Michigan Business Corporation Act Sections 271
and 541a for alleged ultra vires actions and breach of duties as directors and
officers, respectively. The Company has not yet answered or otherwise responded
to these additional complaints.
In addition, the Company's Board of Directors has received four letters on
behalf of putative shareholders (the named plaintiffs in the Huscher, Weiss, and
Orestano actions referenced above and Libby Grill), requesting that the Company
investigate and commence litigation against the individuals responsible for the
possible damage to the Company and Sotheby's Inc. resulting from the alleged
agreements between the Company and Christie's.
The parties have reached an agreement in principle to settle all of the
above shareholder derivative litigation and the issues raised in the above
letters. Pursuant to this agreement in principle, Sotheby's will recover $1.1
million from its directors and officers liability insurance carrier. In
addition, as described above, the Company is receiving certain cash payments
from A. Alfred Taubman in connection with settlement of the U.S. Antitrust
Litigation and the Shareholder Litigation and Diana D. Brooks, the Company's
former President and Chief Executive Officer, has agreed to relinquish all of
her Sotheby's stock options. (See Note K of Notes to Consolidated Financial
Statements under Item 8.) In the proposed settlement, plaintiffs, on behalf of
themselves and the Company, will provide a release of all claims which have been
or could have been asserted in the derivative litigation relating to the
allegations involved in the derivative
10
litigation to all present and past directors and officers of Sotheby's (other
than Mr. Taubman and Ms. Brooks). Plaintiffs will also assign to Sotheby's any
claims they may have against Mr. Taubman and Ms. Brooks. The Company and the
defendants in the derivative action will also release certain claims they may
have against the Company's directors and officers liability insurance carrier.
Finally, the Company has agreed to pay to plaintiffs' counsel an amount up to
$1.5 million in legal fees and costs, as may be approved by the court. The
proposed settlement remains subject to the completion of satisfactory settlement
documentation between the parties and a release agreement with the Company's
directors and officers liability insurance carrier, and is subject to court
approval.
The Company is also aware of a governmental investigation in Italy arising
from certain allegations of improper conduct by current and former Company
employees. These allegations arose from an early 1997 television program aired
in the United Kingdom as well as the publication of a related book. The Company
has been in contact during the past several years with and is continuing to work
with the relevant authorities.
The Company also becomes involved, from time to time, in various claims and
lawsuits incidental to the ordinary course of its business. The Company does not
believe that the outcome of any such pending claims or proceedings will have a
material effect upon its business or financial condition. (See statement on
Forward Looking Statements, in Item 7 below.)
(See Note N of Notes to Consolidated Financial Statements under Item 8.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of 2000.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION
The principal U.S. market for the Company's Class A Common Stock is the NYSE
(symbol: BID). The Class A Common Stock is also traded on the London Stock
Exchange.
The Company also has Class B Common Stock, convertible on a share for share
basis into Class A Common Stock. There is no public market for the Class B
Common Stock. Per share cash dividends, if any, are equal for the Class A and
Class B Common Stock.
The quarterly price ranges on the New York Stock Exchange of the Class A
Common Stock and dividends per share for 2000 and 1999 are shown in the
following schedules:
2000
----------------- CASH DIVIDEND
QUARTER ENDED HIGH LOW DECLARED
- ------------- ---- --- --------
March 31.................................. $29.063 $15.625 $--
June 30................................... $19.438 $14.750 $--
September 30.............................. $24.844 $17.938 $--
December 31............................... $27.563 $21.188 $--
1999
----------------- CASH DIVIDEND
QUARTER ENDED HIGH LOW DECLARED
- ------------- ---- --- --------
March 31.................................. $41.500 $27.062 $0.10
June 30................................... $46.750 $30.688 $0.10
September 30.............................. $38.625 $25.563 $0.10
December 31............................... $36.000 $25.063 $0.10
The Company does not expect to pay a dividend for the foreseeable future.
(See 'Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Liquidity and Capital Resources' under Item 7).
The number of holders of record of the Class A Common Stock as of March 9,
2001 was 1,252. The number of holders of record of the Class B Common Stock as
of March 9, 2001 was 26.
12
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Auction sales (1)............... $1,936,316 $2,258,752 $1,939,743 $1,843,335 $1,599,595
Auction and related revenues.... $ 336,027 $ 390,101 $ 367,204 $ 335,511 $ 302,196
Other revenues.................. $ 61,761 $ 52,484 $ 79,848 $ 46,281 $ 34,300
Total revenues.................. $ 397,788 $ 442,585 $ 447,052 $ 381,792 $ 336,496
Operating (loss) income......... $ (237,083)(2) $ 54,173 $ 80,778(3) $ 67,759(4) $ 68,208
(Loss) income before taxes...... $ (250,127)(2) $ 52,150 $ 73,813(3) $ 64,457(4) $ 68,244
Net (loss) income............... $ (189,694)(5) $ 32,854 $ 45,025(6) $ 40,608(7) $ 40,946
Basic (loss) earnings
per share..................... $ (3.22)(5) $ 0.57 $ 0.79(6) $ 0.73(7) $ 0.73
Diluted (loss) earnings
per share..................... $ (3.22)(5) $ 0.56 $ 0.79(6) $ 0.72(7) $ 0.73
Cash dividends declared
per share..................... $ -- $ 0.40 $ 0.40 $ 0.40 $ 0.32
Working capital................. $ 39,515 $ 159,460 $ 132,326 $ 123,522 $ 57,966
Total assets.................... $1,074,158 $1,072,787 $ 769,646 $ 860,241 $ 656,098
Short-term borrowings........... $ 116,000 $ 272 $ 2,098 $ 2,168 $ 3,211
Commercial paper................ $ -- $ -- $ -- $ 117,000 $ --
Long-term debt.................. $ 99,334 $ 99,275 $ -- $ -- $ --
Net (debt) cash (8)............. $ (160,709) $ (57,228) $ 69,140 $ (85,526) $ 63,675
Shareholders' equity............ $ 188,054 $ 377,044 $ 319,674 $ 260,068 $ 253,972
- ---------
(1) Auction sales represent sales at the hammer price plus buyer's premium.
(2) Includes 2000 special charges of $203.1 million and restructuring charges of
$12.6 million.
(3) Includes 1998 restructuring charges of $15.2 million.
(4) Includes 1997 special charges of $11.7 million.
(5) Includes 2000 special charges of $159.6 million and restructuring charges of
$8.1 million, after tax.
(6) Includes 1998 restructuring charges of $9.3 million, after tax.
(7) Includes 1997 special charges of $7.4 million, after tax.
(8) Long-term debt, short-term borrowings and commercial paper borrowings less
cash and cash equivalents.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations Years Ended December 31, 2000 and 1999 -- Note C
('Segment Reporting') of Notes to Consolidated Financial Statements should be
read in conjunction with this discussion.
Auction sales for the Company totaled $1,936.3 million during 2000, a
decrease of $322.4 million, or 14%, compared to the prior year. Excluding the
impact of unfavorable foreign currency translations, auction sales decreased
11%. The decrease in worldwide auction sales was due to a 7.9% decrease in the
number of lots sold and a 3.3% decrease in the average selling price per lot
sold in 2000 as compared to 1999. The following is a geographical breakdown of
the Company's auction sales for 2000 and 1999:
2000 1999
---- ----
(THOUSANDS OF DOLLARS)
North America................................ $1,043,229 $1,264,475
Europe....................................... 785,992 904,515
Asia......................................... 107,095 89,762
---------- ----------
Total.................................... $1,936,316 $2,258,752
---------- ----------
---------- ----------
The auction sales decrease in North America of $221.2 million, or 17%,
during 2000 was primarily the result of a 79% decline in auction sales
attributable to single-owner collections as auction sales in 1999 included the
single-owner sales of paintings and sculptures from the Collection of Mr. and
Mrs. John Hay Whitney, the Collection of Eleanore and Daniel Saidenberg,
Masterpieces from the Time Museum including Watches, Clocks and Scientific
Instruments, the sale of the Barry Halper Collection of baseball memorabilia
(the 'Barry Halper Collection') 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. The unfavorable year-to-year comparison in North
America was partially offset by stronger various owner Impressionist Art and
Contemporary Art and Old Master Paintings sales, as well as the commencement of
Internet sales.
Excluding the impact of unfavorable foreign currency translations, auction
sales in Europe, which for purposes of this discussion consists of the U.K. and
Continental Europe, decreased $44.7 million, or 5%. The decrease was primarily
attributable to the rescheduling of the Impressionist Art and Contemporary Art
sales in the U.K., traditionally held in December, to February 2001. The results
of such sales (approximately $82.9 million), included in the fourth quarter of
1999, are not reflected in the Company's results for the fourth quarter of
2000. The impact of the rescheduled sales was partially offset by the
single-owner Benacre House sale, the single-owner Illuminated Manuscripts
sale and the Surrealist: Dreams and Imagery sale for which there were no
comparable sales in 1999.
Asian auction sales increased $17.3 million, or 19%, primarily due to the
single-owner sale of An Extraordinary Collection of Ming and Qing Imperial
Porcelain and Works of Art in the fourth quarter of 2000 for which there was no
comparable sale in 1999, as well as stronger sales results from the Chinese
Ceramics and Works of Art sale. Asian auction sales were not materially affected
by translation to U.S. dollars.
On February 29, 2000, the Company announced a new commission structure for
both buyers and sellers at its principal live auction locations. The new
commission structure for sellers was effective upon the announcement; the new
rates for buyers became effective April 1, 2000.
The Company's new published seller's commission structure gives credit to
the seller both for auction sales through the Company during the current year
and for auction purchases made from the Company during the current year when
determining the applicable commission rate to be paid. Under the new published
seller's commission structure, the applicable rate paid varies according to the
aggregate amount of purchases and sales by the seller and the type of seller,
with different rate schedules for private parties, art dealers and museums. For
sales under $100,000, the Company charges a seller's commission determined on a
per lot basis according to a fixed schedule. The new published sellers
commission structure represents an overall reduction in the fees charged to
sellers.
14
For buyer's in most collecting categories, the Company now charges a buyer's
premium of 20% of the hammer (sale) price up to $15,000, 15% on the next $85,000
of the hammer (sale) price up to $100,000 and 10% of the hammer (sale) price on
any remaining amount over $100,000. The new buyer's premium rates represent an
overall increase in the fees charged to buyers.
The buyer's premium on Internet purchases was 10% of the hammer (sale) price
until March 5, 2001. Effective on that date, the Company increased the buyer's
premium charged on Internet purchases to 15% of the hammer (sale) price on the
first $15,000, while leaving the buyer's premium at 10% of the hammer (sale)
price on any remaining amount over $15,000.
Worldwide revenues from auction and related operations decreased $54.1
million, or 14%, in 2000 compared to 1999. Excluding the impact of unfavorable
foreign currency translations, worldwide revenues from auction and related
operations decreased 10%. The decrease was principally due to lower seller's
commission revenue, buyer's premium revenue and expense recoveries. The decrease
in seller's commission revenue was primarily a result of the decreased sales
discussed above, the business environment in which the Company operates
discussed below, the impact of the new commission structure discussed above and
a decrease in the number of lots sold at live auctions as well as an increase in
the average selling price of lots sold at live auctions which resulted in lower
seller's commission rates. The decrease in buyer's premium revenue was due
primarily to the decreased sales discussed above partially offset by the impact
of the new commission structure discussed above. The decrease in expense
recoveries was primarily a result of the business environment in which the
Company operates as discussed in more detail below.
Over the past year, the business environment in the art market has become
more difficult, and the Company has faced increased competition for
consignments. In addition to the Company's traditional competitor, Christie's,
other auctioneers such as Phillips, de Pury and Luxembourg and a variety of
Internet auction websites have started to provide competition in certain areas.
As a result of these factors and the impact of the new commission structure
discussed above, the Company has experienced a decrease in seller's commission
revenue and expense recoveries in 2000 as compared to 1999. The Company
currently believes that this business environment will continue. (See statement
on Forward Looking Statements.)
Other revenues consist primarily of revenues from the Company's Real Estate
and Finance operating segments. Other revenues increased $9.3 million, or 18%,
in 2000 compared to 1999. The increase was principally due to increases in the
Real Estate and Finance segments. The increase in Real Estate revenues was
primarily the result of both increased unit sales and higher average selling
prices from Company-owned and affiliated brokerage offices. The increase in
Finance revenues was due primarily to an increase in the weighted average
interest rates charged on notes receivable and an increase in the average loan
portfolio balance. Other revenues were not materially affected by translation to
U.S. dollars.
Total expenses increased $246.5 million, or 63%, compared to 1999. Excluding
special charges and restructuring charges, total expenses increased $30.8
million, or 8%, compared to 1999. Excluding the impact of favorable foreign
currency translations, total expenses, excluding special charges and
restructuring charges, increased 12%.
Direct costs of services (consisting largely of catalogue production and
distribution costs as well as corporate marketing and sale marketing expenses)
totaled $82.0 million in 2000, a decrease of $3.6 million, or 4%, compared to
1999. Excluding the impact of favorable foreign currency translations, direct
costs of services were essentially flat. Direct costs of services in 2000
included significantly higher marketing expenses, a direct result of the
Company's Internet spend due to the launch of its websites, as discussed below.
This spending was offset by a decrease in direct costs associated with live
auction sales resulting from fewer lots sold during the period, a decrease in
the number of significant single-owner sale events and lower catalogue
production costs in the current year as prior year results include in particular
the cost of producing the catalogue for the sale of the Barry Halper Collection.
Excluding special charges and restructuring charges, all other operating
expenses (which consist of salaries and related costs, general and
administrative expenses and depreciation and amortization) increased $34.3
million, or 11%, in 2000 compared to 1999. Excluding the impact of
15
favorable foreign currency translations, all other expenses, excluding special
charges and restructuring charges, increased 13%. The increase was principally
due to a $29.3 million, or 18%, increase in salaries and related costs, an $8.7
million, or 7%, increase in general and administrative expenses and a $7.0
million, or 40%, increase in depreciation and amortization. The increase in
salaries and related costs was primarily the result of the Internet, amounts
expensed related to the Company's retention programs (for future effects, see
Note O of Notes to Consolidated Financial Statements) and annual merit pay
increases. Also, impacting the year-to-year comparison of salaries and related
costs was a reduction of accrued compensation costs in 1999 of approximately
$5.9 million for amounts previously expensed by the Company for its 1997 and
1998 Performance Share Purchase Plan option grants for which there was no
comparable event in 2000. The Company determined that fulfillment of the
financial performance criteria for the 1997 and 1998 grants (necessary for these
options to ultimately become exercisable under the terms of the Performance
Share Purchase Plan) was not likely to be achieved (see Note K of Notes to
Consolidated Financial Statements). General and administrative expenses
increased primarily due to a $9.0 million provision recorded during the fourth
quarter of 2000 for an unsecured loan (see Note D of Notes to Consolidated
Financial Statements), increased provisions for uncollectible auction accounts
receivable, higher facility costs and increased travel and entertainment
expenses resulting from the business environment for consignments discussed
above. These increases were partially offset by lower Internet related expenses.
The increase in depreciation and amortization was primarily due to the
commencement of depreciation on the York Property in the fourth quarter of 1999
and other capital projects that were placed in service during 2000.
On January 19, 1999 the Company announced its intention to launch
sothebys.com, an Internet auction website for art, antiques, jewelry and
collectibles. In July 1999, the Company and Amazon entered into an agreement to
launch a co-branded auction site, sothebys.amazon.com, that was devoted to the
general antiques collector and to the world of collectibles. In the fourth
quarter of 1999, the Company launched sothebys.amazon.com and in the first
quarter of 2000 it launched sothebys.com.
In November 2000, pursuant to an agreement with Amazon, the activities of
sothebys.amazon.com were combined with those of sothebys.com. The agreement
provides for Amazon to promote the sothebys.com website and otherwise provide
marketing services relating to sothebys.com. Under the agreement, Amazon is
entitled to share in the revenues earned on sothebys.com and to receive
additional performance-based payments, subject to annual minimums. The agreement
also provides for releases from any potential claims relating to the operation
of sothebys.amazon.com and the purchase by Amazon in July 1999 of the Company's
Class A Common Stock and warrants to purchase additional shares of the Company's
Class A Common Stock (See Liquidity and Capital Resources). The Company has
determined that $9.5 million of the minimum payments required under the
agreement constitutes consideration for the release of these claims and has
recorded its present value of $8.1 million as part of special charges (see
Note N of Notes to Consolidated Financial Statements). The minimum payments are
being paid ratably over the four-year term of the agreement.
Excluding restructuring charges, Internet related expenses amounted to $56.0
million and $42.3 million for the year ended December 31, 2000 and 1999,
respectively. These expenses include primarily marketing and salary and related
costs. The 32% increase in Internet related expenses is principally due to
higher marketing and salary and related costs associated with the launch of
sothebys.com and sothebys.amazon.com.
Excluding restructuring charges, fourth quarter Internet related expenses
decreased 37% and 13%, respectively, from the first and second quarters of 2000
and increased 12% from the third quarter of 2000. The decrease compared to the
first quarter is due to higher marketing costs associated with the launch of
sothebys.com and sothebys.amazon.com during the first three months of 2000. The
reduction in costs compared to the second quarter is primarily due to a decrease
in marketing costs and salaries and related expenses. The increase in costs
compared to the third quarter is primarily attributable to higher marketing
costs related to the announcement of the combination of sothebys.com and
sothebys.amazon.com as discussed above. In conjunction with the Company's
Restructuring Plan as discussed below, the Company currently expects to achieve
cost
16
savings related to the Internet approximating $25 million upon full
implementation of the Restructuring Plan. (See statement on Forward Looking
Statements.)
Although the Company is currently focused on revenue growth related to the
Internet and will balance its costs accordingly, management currently believes
that the Internet will continue to have a dilutive effect on the Company's
results in the near term. (See statement on Forward Looking Statements.)
Special Charges -- During 2000, the Company recorded pre-tax special charges
of $203.1 million. See discussion below for details on the composition of such
charges.
In April 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 reviewed whether Sotheby's and Christie's had any
agreement regarding the amounts charged for commissions in connection with
auctions.
A number of private civil complaints, styled as class action complaints,
were also 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 were filed against the Company and certain directors and officers,
alleging failure to disclose the alleged agreements and their impact on the
Company's financial condition and results of operations. A number of shareholder
derivative suits were also filed against the directors of the Company based on
allegations related to the foregoing lawsuits and investigations. (See Note N to
Notes to Consolidated Financial Statements and See Part I, Item 3 'Legal
Proceedings'.)
On September 24, 2000, the Company agreed to settle the antitrust class
action relating to auctions conducted in the United States (the 'U.S. Antitrust
Litigation') and the shareholder class action litigation (the 'Shareholder
Litigation') and, as a result, recorded a special charge of $140.0 million
(pre-tax) for the year ended December 31, 2000. The court conditionally approved
the U.S. Antitrust Litigation settlement on February 22, 2001, and the parties
have made a submission to the court concerning how the conditions stated in its
conditional order would be satisfied. If the settlement becomes final in its
current form, the Company will issue vendor's commission discount certificates
('Discount Certificates') with a face value of $62.5 million. Any unused
Discount Certificates may be redeemed for cash four years after their date of
issuance. The Court determined that the $62.5 million face value of the Discount
Certificates had a fair market value of $50 million, which equals the value of
the Discount Certificates that is included in special charges. In conjunction
with court approval of the Shareholder Litigation settlement on February 16,
2001, the Company currently expects to issue Sotheby's Class A Common Stock with
a value of $40 million in the first or second quarter of 2001. These shares, if
issued, would have a dilutive effect on the Company's earnings per share
subsequent to their issuance. (See Note N of Notes to Consolidated Financial
Statements and Part I, Item 3 'Legal Proceedings'.) (See statement on Forward
Looking Statements.)
On October 5, 2000, the Company entered into a plea agreement with the DOJ
related to its investigation. On February 2, 2001, the court accepted the
Company's plea and imposed on the Company the $45 million fine provided for in
the plea agreement, payable without interest over five years. For the year ended
December 31, 2000, the Company recorded a special charge of $34.1 million
(pre-tax) relating to the plea agreement with the DOJ. This amount represents
the present value of the amount due to the DOJ discounted at the Company's
approximate cost of borrowing. The $10.9 million discount on the amount payable
will be amortized to interest expense over the payment period. (See Note N of
Notes to Consolidated Financial Statements and Part I, Item 3 'Legal
Proceedings'.)
For the year ended December 31, 2000, the Company recorded pre-tax special
charges of $11.6 million consisting primarily of legal and other professional
fees related to the investigation by the DOJ, other governmental inquiries and
investigations, and the related U.S. Antitrust Litigation and Shareholder
Litigation, as discussed in Notes N and O of Notes to Consolidated Financial
Statements and Part I, Item 3 'Legal Proceedings.' Also included in this amount
are $2.0 million
17
of costs related to the notification of the members of the class of plaintiffs
in the U.S. Antitrust Litigation. The Company expects that such costs will
continue to have a dilutive effect on the Company results in the near term. In
addition, the Company expects to incur costs in 2001 for printing, issuing and
redeeming the Discount Certificates related to the U.S. Antitrust Litigation
settlement. These costs have not been expensed since they are currently not
estimatable. The Discount Certificates are currently expected to be printed and
issued during the second half of 2001. (See Note N of Notes to Consolidated
Financial Statements.)
During the fourth quarter of 2000, as a result of the DOJ investigation and
other related matters as discussed above, in Note N of Notes to Consolidated
Financial Statements and Part I, Item 3 'Legal Proceedings,' the Compensation
Committee of the Board of Directors (the 'Compensation Committee') approved
special recognition bonuses of up to $9.8 million for certain key employees.
Such special recognition bonuses were in addition to the recipients' regular
compensation. During the fourth quarter of 2000, the Company recorded pre-tax
special charges of $10.2 million, which included approximately $0.4 million in
payroll taxes and were paid during the fourth quarter of 2000.
During the fourth quarter of 2000, 50,000 options issued pursuant to the
1996 Performance Share Purchase Plan were relinquished by the Company's former
Chief Executive Officer pursuant to an agreement between the Company and the
former Chief Executive Officer related to the DOJ investigation and other
related matters. Accordingly, for the year ended December 31, 2000, the Company
recorded in special charges a reduction of accrued compensation cost of
approximately $1.4 million (pre-tax) for an amount previously expensed for these
options. (See Notes K and N of Notes to Consolidated Financial Statements.)
Restructuring Charges -- During the fourth quarter of 2000, management
completed the comprehensive strategic and operational review previously
announced in August 2000. Based on the results of this review, the Board of
Directors approved a restructuring plan (the 'Restructuring Plan') in the
Company's Auction segment in December 2000. Management believes that the
Restructuring Plan will make the Company more competitive both in key high-end
markets worldwide and in the middle market in London and will also enhance
profitability through the realization of cost savings. To achieve this goal, the
Company expects to focus resources on high-end markets, including the paintings
and jewelry categories. Through the consolidation of certain departmental
resources and sales, the Company will be reducing operating costs in lower-end
markets, which contribute a much lower percentage of revenues. The Company plans
to achieve operating efficiencies by managing certain markets globally rather
than regionally, including the principal fine arts categories of Impressionist,
Contemporary, Old Masters and 19th Century Paintings as well as Jewelry and
Asian works of art. As part of the Company's strategy to become more competitive
in the middle market in London, a specially dedicated middle market salesroom
will be opened at Olympia in West London in the second half of 2001. The Olympia
facility will incorporate certain departments from the Company's existing New
Bond Street, London salesroom, as well as certain departments from the Company's
auction center in Sussex. Additionally, the Company expects to focus its
Internet activities on generating sales growth through its dealer network and
will achieve cost savings by the elimination of employees, reducing marketing
programs and limiting its consigned property handling activities. The
consolidation and integration of the Company's live and Internet operations in
the flagship York Avenue location, which is expected to take place by the end of
the first quarter of 2001, will also contribute to cost savings.
The Restructuring Plan includes the termination of approximately 175
employees worldwide in the Company's Auction segment. These terminations will
primarily impact the administrative and support functions of the Auction
segment.
As part of the Restructuring Plan, the Company also wrote-off certain
investments as a result of the curtailment of certain activities.
Total estimated cost savings following the full implementation of the
Restructuring Plan will approximate $15.0 to $20.0 million in the live auction
business and approximately $25.0 million in the Internet. The estimated live
auction savings will be partially offset by incremental costs of approximately
$7.0 million associated with the new Olympia middle market salesroom in London,
18
as discussed above. These savings will be initiated during 2001 and are
currently expected to be realized fully by 2002. Most of the anticipated savings
are expected to be achieved through lower salaries and related expenses and
reductions in direct costs of services. The Company also intends to increase
spending on various strategic initiatives that further the goals of the
Restructuring Plan, which will offset a portion of the total savings.
In connection with the implementation of the Restructuring Plan, the Company
recorded pre-tax charges of approximately $12.6 million in the fourth quarter of
2000. The components of the restructuring charges include severance and
termination benefits of $7.1 million, asset write-offs of $3.8 million, lease
and contract termination costs of $1.1 million and other restructuring costs of
$0.6 million.
Total cash expenditures related to the Restructuring Plan are expected to be
approximately $8.8 million, of which approximately 20% will be paid in the first
quarter of 2001. The remaining cash expenditures related to the Restructuring
Plan are expected to be made throughout the remainder of 2001.
(See Note P of Notes to Consolidated Financial Statements.)
With respect to all statements made herein regarding the Restructuring Plan,
see statement on Forward Looking Statements.
Interest Income and Expense -- Interest income increased $2.1 million in
2000 compared to 1999 due primarily to higher average cash balances throughout
the year. Interest expense increased $13.2 million in 2000 as compared to 1999
as a result of higher borrowings in the current year, higher interest rates and
the amortization of related fees associated with the Amended Credit Agreement
(as defined below), lower capitalized interest related to the York Property in
2000 and an additional month of interest expense in 2000 related to the bonds
issued in February 1999.
Income Taxes -- The consolidated effective tax rate was approximately 24% in
2000 compared to 37% in 1999. The reduction in the effective tax was primarily
due to the fact that the DOJ settlement is not tax deductible and only a portion
of the U.S. Antitrust Litigation settlement is tax deductible.
Net (Loss) Income and (Loss) Earnings Per Share -- Net loss for 2000 was
($189.7) million compared to net income of $32.9 million in 1999. Diluted loss
per share for 2000 was ($3.22) compared to earnings per share of $0.56 in 1999.
The impact of the special charges and the restructuring charges discussed above
on diluted loss per share was ($2.85) per share for the year ended December 31,
2000. The impact on diluted loss per share related to the Company's Internet
operating loss, excluding any Internet related restructuring charges, was
($0.52) per share and ($0.44) per share in 2000 and 1999, respectively.
Factors Affecting Operating Revenues -- The Company's Auction, Finance and
Real Estate operating revenues are significantly influenced by a number of
factors not within the Company's control, including: the overall strength of the
international economy and financial markets and, in particular, the economies of
the U.S., the U.K., and the major countries or territories of Continental Europe
and Asia (principally Japan and Hong Kong); interest rates; political conditions
in various nations; the presence of export and exchange controls; local taxation
of sales and donations of potential auction property; competition (as discussed
above); the success of the Company in attracting and retaining qualified
personnel; and the amount of property being consigned to art auction houses
(specifically, the number of single-owner sales consignments).
The Company cannot at present determine the impact, if any, on future
auction sales and future revenues of the outstanding investigation by the
European Commission, as discussed in more detail below. (See statement on
Forward Looking Statements.)
Contingencies -- The European Commission is conducting an investigation
regarding commissions charged by the Company and Christie's for auction
services. Although the outcome of this investigation cannot presently be
determined, any loss resulting from this investigation could have a material
impact on the Company's financial condition, liquidity and/or results of
operations. The amount of any such loss is not currently estimatable.
19
The Company's settlement of the U.S. Antitrust Litigation is subject to
final court approval. (See Note N of Notes to Consolidated Financial Statements
and Part I, Item 3 'Legal Proceedings' for further discussion related to the
U.S. Antitrust Litigation and the Shareholder Litigation.)
(See Note O of Notes to Consolidated Financial Statements for additional
information on Contingencies and information on the Company's employee retention
programs.)
Results of Operations Years Ended December 31, 1999 and 1998 -- Note C
('Segment Reporting') of Notes to Consolidated Financial Statements should be
read in conjunction with this discussion.
Auction sales for the Company totaled $2,258.8 million during 1999, an
increase of $319.0 million, or 16%, compared to the prior year. The increase in
worldwide sales was due to a 24% increase in the average selling price per lot
sold in 1999 as compared to 1998, partially offset by a 6% decrease in the
number of lots sold. Auction sales recorded by the Company's foreign operations
were not materially affected by translation to U.S. dollars.
The following is a geographical breakdown of the Company's auction sales for
1999 and 1998:
1999 1998
---- ----
(THOUSANDS OF DOLLARS)
North America................................ $1,264,475 $1,074,428
Europe....................................... 904,515 803,931
Asia......................................... 89,762 61,384
---------- ----------
Total.................................... $2,258,752 $1,939,743
---------- ----------
---------- ----------
The sales increase in North America of $190.1 million, or 18%, during 1999
was primarily a result of successful single-owner sales, most notably the
paintings and sculptures from the Collection of Mr. and Mrs. John Hay Whitney,
the Collection of Eleanore and Daniel Saidenberg, the sale of furniture,
decorative and fine arts from the Estate of Mrs. John Hay Whitney, Masterpieces
from the Time Museum including Watches, Clocks and Scientific Instruments and
the Barry Halper Collection, all of which there were no comparable sales in the
prior year. The growth was also due to increases in Impressionist and Modern art
and Contemporary art. The increase in sales was partially offset by a decrease
in Old Masters Paintings and Drawings. Also, influencing the year to year
comparison are single-owner sales in 1998 for which there were no comparable
sales in 1999. The single owner sales in 1998 included the Reader's Digest
Corporate Collection; the Collection of Jamie Ortiz-Patino comprised of silver,
furniture, rare books and manuscripts and the Collection of H.R.H. the Duke and
Duchess of Windsor. Sales in Europe, which for purposes of this discussion
consist of the U.K. and the Continent, increased $100.6 million, or 13%. The
increase was primarily attributable to growth in Impressionist and Modern art,
Old Masters Paintings and Drawings and French and Continental Furniture.
Similarly contributing to the growth were the results of the single-owner sale
of Important French and Italian Furniture, Porcelain, Paintings, Silver and
Decorative Arts from the Estate of dott. Giuseppe Rossi and the sale of
twenty-five works by Picasso from the private collection of Gianni Versace, for
which there were no comparable sales in 1998. Asian sales increased $28.4
million, or 46% primarily due to increases in Ceramics and Works of art and a
successful single-owner sale for which there was no comparable sale in 1998.
Worldwide revenues from auction and related operations increased $22.9
million, or 6%, in 1999 compared to 1998. This increase is primarily due to
higher buyer's premium that resulted from the increased auction sales discussed
above partially offset by decreased seller's commissions and expense recoveries.
The decrease in seller's commissions is primarily due to sales mix and margin
pressure for high-end single-owner collections, most notably in North America.
The decrease in expense recoveries was primarily due to the inclusion in 1998 of
recoveries from the Collection of H.R.H. the Duke and Duchess of Windsor for
which there was no comparable sale in the current year.
Other revenues consist primarily of revenues from the Company's Real Estate
and Finance operating segments. Other revenues decreased $27.4 million, or 34%,
in 1999 compared to 1998.
20
This decrease was primarily due to a decrease in Finance revenues, partially
offset by an increase in Real Estate revenues. The decrease in Finance revenue
was partially due to a decrease in the average loan portfolio balance to $176.8
million in 1999 from $301.2 million in 1998. Also, significantly influencing the
year to year comparison of revenues was the recognition of $21.0 million in
origination fee revenue related to a significant loan, as discussed below, in
1998 with no comparable transaction in 1999. The decrease in the average loan
portfolio balance was primarily due to a significant loan extended in May 1998
to a group of affiliated corporate borrowers, for which there was no comparable
loan in 1999. The loan to this group was to mature on December 31, 2001;
however, during the fourth quarter of 1998 it was repaid in full. The prepayment
of this loan resulted in the recognition of $18.7 million of additional revenue
in the fourth quarter of 1998 relating to the origination fee that would have
been amortized through 2001. The increase in Real Estate revenue was primarily
due to increased real estate unit sales from both mature and new Company owned
brokerage offices.
Direct costs of services (consisting largely of catalogue production and
distribution costs as well as corporate marketing and sale marketing expenses)
totaled $85.6 million in 1999, an increase of $9.3 million, or 12%, compared to
1998. This increase was primarily due to increased marketing expenses, a direct
result of the Company's Internet spending. Also, influencing the year to year
comparison are the impact of costs associated with the sale of the Collection of
H.R.H. the Duke and Duchess of Windsor which were partially recovered and
reflected in auction and related revenue in 1998 with no comparable costs in
1999. Direct costs as a percentage of sales were consistent in 1999 and 1998.
Excluding restructuring charges of $15.2 million in 1998, all other
operating expenses (which consist of salaries and related costs, general and
administrative expenses and depreciation and amortization) increased $28.1
million, or 10%, in 1999 compared to 1998. This increase was primarily due to a
$17.5 million, or 16%, increase in general and administrative expenses, a $5.8
million, or 4%, increase in salaries and related costs and a $4.8 million, or
38%, increase in depreciation and amortization. The increase in general and
administrative expenses was primarily due to Internet related expenses and, to a
lesser extent, increased Information Technology costs related to new
initiatives, provisions for property claims and associated legal fees, and
higher facility costs associated with the York Property. These increases were
partially offset by a decrease in write-offs and provisions of uncollectible
auction receivable accounts in 1999 as compared to 1998. The increase in
salaries and related costs was primarily due to Internet spending and annual
merit increases. Offsetting the aforementioned salaries and related costs
increase was a reduction of accrued compensation costs of approximately $5.9
million for amounts previously expensed by the Company for its 1997 and 1998
Performance Share Purchase Plan option grants. The Company determined that
fulfillment of the financial performance criteria for the 1997 and 1998 grants
(necessary for these options to ultimately become exercisable under the terms of
the Performance Share Purchase Plan) was not likely to be achieved (see Note K
of Notes to Consolidated Financial Statements). Also, influencing the year to
year comparison was the $9.0 million of expense recorded in 1998 related to the
Performance Share Purchase Plan due to the appreciation of the Company's stock
price during 1998. The increase in depreciation was primarily related to the
commencement of depreciation on the floors currently in service of the York
Property during the fourth quarter of 1999 and other capital projects that were
placed in service during 1999.
On January 19, 1999, the Company announced its intention to launch
sothebys.com, an Internet auction business for art, antiques, jewelry and
collectibles. In July 1999, the Company and Amazon entered into an agreement to
launch a co-branded auction site, sothebys.amazon.com, that was devoted to the
general antiques collector and to the world of collectibles. In the fourth
quarter of 1999, the Company launched sothebys.amazon.com and in the first
quarter of 2000 it launched sothebys.com. Total Internet related expenses
amounted to $42.3 million for the twelve months ended December 31, 1999. These
expenses include primarily marketing, salary and related costs, professional
fees and technology related costs. In November 2000, pursuant to an agreement
with Amazon, the activities of sothebys.amazon.com were combined with those of
sothebys.com. The agreement provides for Amazon to promote the sothebys.com
website and otherwise provide marketing services relating to sothebys.com.
21
In 1998, the Company recorded restructuring charges of $15.2 million
relating to the construction of the York Property. Approximately $14.1 million
of this amount was a non-cash charge resulting from the impairment of existing
leasehold improvements and related furniture and fixtures. The remaining amount
of approximately $1.1 million was a provision resulting from the cost of future
rental obligations and certain lease termination costs on rental space in New
York City that are being abandoned as part of the Company's plan to consolidate
its auction operations within the York Property. As of December 31, 1999 and
1998, the Company has recorded in other liabilities in the Consolidated Balance
Sheets, approximately $1.1 million related to the remaining future obligations.
During 2000, the Company paid $0.2 million in settlement of a portion of these
obligations. The remaining amounts will be paid out starting approximately March
2001 through September 2003.
Interest Income and Expense -- Interest income increased $0.8 million in
1999 compared to 1998 due to higher average cash balances throughout the year.
Interest expense decreased $5.0 million in 1999 as compared to 1998 as a result
of lower borrowings related to the decreased average loan portfolio and
capitalized interest on the Company's York Property construction.
Income Taxes -- The consolidated effective tax rate was 37% in 1999 compared
to 39% in 1998. This decrease was primarily a result of higher earnings during
1998 in the United States.
Net Income and Earnings Per Share -- Net income decreased $12.2 million, or
27%, in 1999 compared to 1998. Diluted earnings per share for 1999 decreased to
$0.56 from $0.79 in 1998. The impact on diluted earnings per share related to
the Company's Internet operating loss was ($0.44) per share. The impact of the
non-recurring charge on diluted earnings per share in 1998 was ($0.16).
Movements in foreign currencies did not have a material impact on 1999 and 1998
revenues or expenses.
Liquidity and Capital Resources -- The Company's net debt position (total
debt, which includes short-term borrowings and long-term debt, less cash and
cash equivalents) totaled $160.7 million at December 31, 2000, compared to a net
debt position of $57.2 million at December 31, 1999. The increase in the net
debt position in 2000 compared to 1999 was primarily the result of borrowings
under the Amended Credit Agreement, as defined below, which were used to fund
the Company's share of the U.S. Antitrust Litigation settlement, capital
expenditures, Internet spending, the net increase in the client loan portfolio,
legal fees related to the DOJ investigation and other related matters and
special recognition payments made to certain employees. Working capital (current
assets less current liabilities) at December 31, 2000 was $39.5 million,
compared to $159.5 million at December 31, 1999. The significant decrease in
working capital was primarily due to borrowings under the Amended Credit
Agreement which are classified as current liabilities on the Consolidated
Balance Sheets.
The Company's net client loan portfolio increased to $192.2 million at
December 31, 2000, from $187.9 million at December 31, 1999. These amounts
include $36.0 million and $42.5 million of loans that have a maturity of more
than one year at December 31, 2000 and 1999, respectively. During the fourth
quarter of 2000, the Company recorded a $9.0 million provision for an unsecured
loan that it believes is not collectible. During 2001, the Company currently
intends to reduce its net loan portfolio by approximately $50 million, but no
assurance can be given that the Company's efforts will be successful. (See
statement on Forward Looking Statements.)
The Company relies on internally generated funds and borrowings to meet its
financing requirements. During the first quarter of 2000, as a result of the
events related to the DOJ investigation and other related investigations and
civil lawsuits, as discussed previously, the Company amended and restated its
$300 million Bank Credit Agreement. 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, including a
mortgage on the York Property. 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.
22
In connection with the Company's settlements of the U.S. Antitrust
Litigation and the Shareholder Litigation and its plea agreement with the DOJ,
the Company amended the Credit Agreement in November 2000 (the 'Amended Credit
Agreement'). (See Note N of Notes to Consolidated Financial Statements and
Part I, Item 3 'Legal Proceedings' for additional information related to the
settlements and the plea agreement.) The principal purpose of the amendments
contained in the Amended Credit Agreement is to adjust the financial covenants
contained in the Credit Agreement to reflect the terms of the settlements and
the plea agreement and the Company's obligations thereunder. These amendments,
among other things, adjust certain of the financial covenants, including the
covenants requiring the Company to maintain a minimum net worth, and to meet
certain leverage ratio and interest coverage ratio tests. The Amended Credit
Agreement retains the covenant that requires the Company to limit dividend
payments. During the fourth quarter of 2000, the Company paid $1.5 million
of arrangement and amendment fees in connection with adjusting the financial
covenants contained in the Amended Credit Agreement, which are being amortized
over the remaining term of the commitment. At December 31, 2000, the Company
was in compliance with respect to all financial and other covenants. All
current outstanding borrowings under the Amended Credit Agreement are
classified as current liabilities on the Consolidated Balance Sheets.
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 Amended Credit Agreement. At December 31, 2000 there were no
commercial paper borrowings outstanding. The Company supports any short-term
notes issued under its U.S. commercial paper program with its committed credit
facility under the Amended Credit Agreement. The amount available for borrowings
under the Amended Credit Agreement is reduced by the amount of outstanding
commercial paper borrowings, if any.
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 December 31, 2000.
During the first quarter of 2000, Moody's Investors Service ('Moody's'),
Standard & Poor's Rating Group and other credit agencies downgraded the
Company's long-term and short-term credit ratings. During the fourth quarter of
2000, Moody's further downgraded the Company's long-term and short-term credit
ratings. Both ratings remain on review.
On July 23, 1999, Amazon purchased one million of newly issued shares of the
Company's Class A Common Stock at $35.44 per share, and purchased for $10
million a three year warrant to purchase an additional one million shares at
$100 per share.
During 2000, the Company's primary sources of liquidity were derived from
collections of outstanding accounts receivable and from borrowings under the
Amended Credit Agreement. The most significant cash uses during 2000 were the
funding of the Company's share of the U.S. Antitrust Litigation settlement,
legal fees related to the DOJ investigation and other related matters, capital
expenditures, Internet spending in the Auction segment, the net funding of the
client loan portfolio and special recognition payments made to certain
employees.
During 1999, the Company's primary sources of liquidity were derived from
the issuance of long-term debt securities and proceeds received from Amazon
related to the common stock and warrant discussed above. The most significant
cash uses during 1999 were the increase in accounts receivable and other
receivables, capital expenditures, the net funding of the client loan portfolio,
payment of shareholder dividends and Internet spending.
While the Company paid shareholder dividends in 1999, due to the significant
cash needs required for the funding of the settlements of the U.S. Antitrust
Litigation and the plea agreement with the DOJ, Internet spending, and the
completion of the construction of the York Property, the Company did not declare
a cash dividend during 2000. The Company believes that this is an appropriate
decision due to the Company's present and anticipated cash needs. The Company
will continue to assess whether to pay shareholder dividends in conjunction with
operating results,
23
capital spending needs, Internet spending requirements, the funding requirements
of the plea agreement with the DOJ, the funding requirements of the Company's
employee retention programs and developments related to the investigation by the
European Commission, as discussed previously. (See Notes N and O of Notes to
Consolidated Financial Statements and Part I, Item 3 'Legal Proceedings' for
additional information related to the Company's settlements of the U.S.
Antitrust Litigation and the Shareholder Litigation and its plea agreement with
the DOJ.)
Capital expenditures in 2000, consisting primarily of costs associated with
the construction of the York Property totaled $47.6 million. During 1999,
capital expenditures were $120.7 million. The decrease in capital expenditures
in 2000 as compared to 1999 was due primarily to lower spending on the York
Property construction and computer and software costs during 2000. The capital
expenditures relating to the construction of the York Property are currently
estimated to be in the range of $151 million, of which the Company has paid
approximately $138.8 million through February 19, 2001. As of February 19, 2001,
the Company had financial commitments in relation to this project of
approximately $2.6 million. In July 2000, York Avenue Development, Inc., 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 the
remaining planned capital spending relating to this project, which should be
completed during the first half of 2001.
From time to time, the Company has off-balance sheet commitments which
include short-term 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 O of Notes to Consolidated Financial Statements).
The Company does not believe that material liquidity risk exists related to
these commitments.
The Company currently believes that current cash balances, operating cash
flows and borrowings under the Amended Credit Agreement will be adequate to meet
its operating needs and capital requirements, as well as the first payment due
under the Company's plea agreement with the DOJ (see Note N of Notes to
Consolidated Financial Statements) through July 11, 2001. Such operating needs
and capital requirements 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, the Company's
Internet spending and severance payments related to the Company's restructuring
plan as discussed above. The remaining cash payments due in conjunction with the
U.S. Antitrust Litigation settlement will be funded by A. Alfred Taubman. (See
Note N of Notes to Consolidated Financial Statements and Part I, Item 3 'Legal
Proceedings' for additional information related to the Company's settlement of
the U.S. Antitrust Litigation and its plea agreement with the DOJ).
The Company's Amended Credit Agreement is available through July 11, 2001.
On this date the Amended Credit Agreement will expire and any borrowings
outstanding will be due and payable to the Company's existing banking group.
(See Note H of Notes to Consolidated Financial Statements). In order to fund the
repayment of any such borrowings outstanding, as well as to provide for the
Company's continuing operating needs (see above), capital requirements (see
above), the remaining funding requirements related to the Company's plea
agreement with the DOJ (see Note N of Notes to Consolidated Financial
Statements) and payments for the retention of certain key employees, an
extension or refinancing of the Amended Credit Agreement will be necessary to
supplement operating cash flows. Alternatively, the Company currently believes
that it has other options available for capital resources, including the
issuance of additional equity, as well as a mortgage on the York Property, and
is currently evaluating such options. The Company currently believes it is
likely to be able to extend or refinance the Amended Credit Agreement or to
secure alternative funding. However, there can be no guarantee that such funding
will be available on terms acceptable to the Company. Although unlikely, if the
Company is unable to obtain such funding on acceptable terms, this would have a
material adverse effect on the Company's business, results of operations and/or
financial condition. (See statement on Forward Looking Statements.)
24
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, 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.)
Quantitative and Qualitative Disclosure About Market Risk -- The Company
continually 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 Company believes that its interest
rate risk is minimal as a hypothetical ten percent increase or decrease in
interest rates is immaterial to the Company's cash flow, earnings and fair value
related to financial instruments. (See statement on Forward Looking Statements.)
The Company enters into forward exchange contracts to hedge foreign currency
transactions. The Company's forward exchange contracts do not subject the
Company to material risk from exchange rate movements because gains and losses
on such contracts substantially offset gains and losses on the assets or
transactions being hedged. The Company is exposed to credit-related losses in
the event of nonperformance by counterparties to forward exchange contracts, but
the Company does not expect any counterparties to fail to meet their obligations
given their high-credit ratings. At December 31, 2000, the Company had $31.7
million of notional value forward currency exchange 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 fair value of these contracts was a $0.6 million asset at December 31, 2000.
The Company believes that its foreign currency translation risk is minimal
as a hypothetical 10% strengthening or weakening of the U.S. dollar relative to
all other currencies is immaterial to the Company's cash flow and fair value
related to financial instruments. (See statement on Forward Looking Statements.)
FORWARD LOOKING STATEMENTS
This Form 10-K 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 Company's liquidity and capital resources. 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:
I -- The Company's business is seasonal, with peak revenues
and operating income primarily occurring in the second and
fourth quarters of each year as a result of the
traditional spring and fall art auction season
II -- 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
or territories of Continental Europe and Asia (principally
Japan and Hong Kong)
III -- Competition with other auctioneers and art dealers,
including Internet auction sites
IV -- The volume of consigned property and the marketability at
auction of such property
25
V -- Final court approval of the Company's settlement of the
U.S. Antitrust Litigation and resolution of the appeals,
if any, of the settlement of the U.S. Antitrust Litigation
and Shareholder Litigation.
VI -- The resolution of the European Commission investigation
regarding commissions charged by the Company and
Christie's for auction services.
VII -- The European Monetary Union
VIII -- The Company's success in developing and implementing its
Internet auction strategy
IX -- The demand for art-related financing
X -- The demand for luxury residential real estate
XI -- The effects of market risk
XII -- The extension or refinancing of the Amended Credit
Agreement or the Company's ability to secure alternative
funding.
XIII -- The successful implementation of the Company's
Restructuring Plan
XIV -- Changes in the Company's credit ratings.
XV -- The expected reduction of the loan portfolio in 2001.
Seasonality -- The worldwide art auction market has two principal selling
seasons, spring and fall. During the summer and winter auction sales are
considerably lower. The table below demonstrates that approximately 84% of the
Company's auction sales are derived from the second and fourth quarters of the
year (see Note R of Notes to Consolidated Financial Statements).
PERCENTAGE OF ANNUAL
AUCTION SALES
----------------------
2000 1999 1998
---- ---- ----
January - April............................................. 9% 11% 13%
April - June................................................ 45 35 37
July - September............................................ 7 6 8
October - December.......................................... 39 48 42
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
Future Impact of Recently Issued Accounting Standards -- Statement of
Financial Accounting Standards ('SFAS') No. 133, 'Accounting for Derivative
Instruments and Hedging Activities,' and SFAS No. 138, 'Accounting for Certain
Derivative Instruments and Certain Hedging Activities,' were adopted by the
Company on January 1, 2001. These statements require that an entity recognize
all derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on how the
derivative is used. Management believes that adoption of these new accounting
standards will not have a material impact on the Company's results of
operations. On January 1, 2001, other comprehensive income will be increased by
approximately $0.6 million as a result of the adoption of these standards.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, 'Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,' which replaces SFAS No. 125 of the same name.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The Company is
currently evaluating the impact that the adoption of this statement will have on
its financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion under this caption contained in Item 7.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareholders of
SOTHEBY'S HOLDINGS, INC.
We have audited the accompanying consolidated balance sheets of Sotheby's
Holdings, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Sotheby's Holdings, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New York
February 19, 2001
27
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
---- ---- ----
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
Revenues (note B):
Auction and related..................................... $ 336,027 $390,101 $367,204
Other................................................... 61,761 52,484 79,848
--------- -------- --------
Total revenues...................................... 397,788 442,585 447,052
--------- -------- --------
Expenses:
Direct costs of services (note B)....................... 81,971 85,563 76,313
Salaries and related costs (notes K, L and O)........... 182,806 159,686 153,869
General and administrative (note J)..................... 130,500 125,711 108,240
Depreciation and amortization (notes B and G)........... 23,891 17,452 12,652
Special charges (note N)................................ 203,069 -- --
Restructuring charges (note P).......................... 12,634 -- 15,200
--------- -------- --------
Total expenses...................................... 634,871 388,412 366,274
--------- -------- --------
Operating (loss) income................................. (237,083) 54,173 80,778
--------- -------- --------
Interest income......................................... 6,425 4,373 3,560
Interest expense (note H)............................... (18,760) (5,589) (10,545)
Other (expense) income.................................. (709) (807) 20
--------- -------- --------
(Loss) income before taxes.............................. (250,127) 52,150 73,813
Income tax (benefit) expense (note I)................... (60,433) 19,296 28,788
--------- -------- --------
Net (loss) income....................................... $(189,694) $ 32,854 $ 45,025
--------- -------- --------
Basic (loss) earnings per share (note B)................ $ (3.22) $ 0.57 $ 0.79
--------- -------- --------
--------- -------- --------
Diluted (loss) earnings per share (note B).............. $ (3.22) $ 0.56 $ 0.79
--------- -------- --------
--------- -------- --------
Dividends per share..................................... $ -- $ 0.40 $ 0.40
--------- -------- --------
--------- -------- --------
See accompanying Notes to Consolidated Financial Statements
28
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
-------------------------
2000 1999
------------ ----------
(THOUSANDS OF DOLLARS)
ASSETS
Current Assets:
Cash and cash equivalents (note B)....................... $ 54,625 $ 42,319
Accounts and notes receivable, net of allowance for
doubtful accounts of $22,935 and $11,085 (note D)
Accounts receivable.................................. 316,833 495,986
Notes receivable..................................... 156,228 145,359
Settlement recovery -- related party (note N)........ 106,000 --
---------- ----------
Total accounts and notes receivable, net.......... 579,061 641,345
---------- ----------
Inventory, net (note E).................................. 14,022 20,843
Deferred income taxes (note I)........................... 47,954 12,986
Prepaid expenses and other current assets (note L)....... 30,906 18,754
---------- ----------
Total current assets.............................. 726,568 736,247
---------- ----------
Non-Current Assets:
Notes receivable (note D)................................ 35,951 42,535
Properties, less allowance for depreciation and
amortization of $78,379 and $72,463 (notes G and J).... 248,066 232,661
Intangible assets, less allowance for amortization of
$16,710 and $15,903
(note B)............................................... 22,647 24,124
Investments (note F)..................................... 33,837 35,982
Deferred income taxes (note I)........................... 4,963 --
Other assets............................................. 2,126 1,238
---------- ----------
Total assets...................................... $1,074,158 $1,072,787
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Due to consignors (note D)............................... $ 273,380 $ 422,552
Short-term borrowings (note H)........................... 116,000 272
Accounts payable and accrued liabilities (note P)........ 115,577 126,263
Deferred revenues........................................ 8,906 7,273
Accrued income taxes (note I)............................ 11,209 20,427
Deferred income taxes (note I)........................... 3,660 --
Short-term settlement liability (note N)................. 158,321 --
---------- ----------
Total current liabilities......................... 687,053 576,787
---------- ----------
Long-Term Liabilities:
Long-term debt (note H).................................. 99,334 99,275
Deferred income taxes (note I)........................... 1,882 9,126
Long-term settlement liability (note N).................. 79,506 --
Other liabilities........................................ 18,329 10,555
---------- ----------
Total liabilities................................. 886,104 695,743
---------- ----------
Shareholders' Equity (note K):
Common stock, $.10 par value............................. 5,909 5,885
Authorized shares -- 125,000,000 of Class A and
75,000,000 of Class B issued and outstanding shares
42,292,386 and 42,258,393 of Class A and 16,549,650 and
16,585,650 of Class B at December 31, 2000 and 1999
respectively
Additional paid-in capital............................... 158,421 156,125
Retained earnings........................................ 38,567 228,261
Accumulated other comprehensive loss..................... (14,843) (13,227)
---------- ----------
Total shareholders' equity........................ 188,054 377,044
---------- ----------
Total liabilities and shareholders' equity........ $1,074,158 $1,072,787
---------- ----------
---------- ----------
See accompanying Notes to Consolidated Financial Statements
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
---- ---- ----
(THOUSANDS OF DOLLARS)
Operating Activities:
Net (loss) income........................................ $(189,694) $ 32,854 $ 45,025
Adjustments to reconcile net (loss) income to net cash
(used) provided by operating activities:
Depreciation and amortization........................ 23,891 17,452 12,652
Stock compensation expense........................... (1,416) (5,851) 9,025
Deferred income taxes................................ (43,576) 6,501 (9,969)
Tax benefit of stock option exercises................ 270 2,450 2,965
Asset write-offs..................................... 3,625 -- 14,100
Asset provisions..................................... 17,642 2,127 8,253
Other................................................ (1,270) -- 402
Change in assets and liabilities:
Decrease (increase) in accounts and other
receivables........................................ 175,079 (198,539) 33,802
Decrease (increase) in inventory..................... 4,946 (4,105) 4,960
(Increase) decrease in prepaid expenses and other
current assets..................................... (13,140) 4,556 (5,612)
(Increase) decrease in intangible and other long-term
assets............................................. (798) 3,179 507
Settlement recovery -- related party................. (106,000) -- --
Short-term and long-term settlement liabilities...... 237,827 -- --
(Decrease) increase in due to consignors............. (150,895) 136,503 (59,766)
(Decrease) increase in accrued income taxes.......... (9,156) (17,984) 15,376
Increase in accounts payable, accrued liabilities,
and other liabilities.............................. 9,632 17,973 20,524
--------- --------- ---------
Net cash (used) provided by operating
activities..................................... $ (43,033) $ (2,884) $ 92,244
--------- --------- ---------
--------- --------- ---------
Investing Activities:
Increase in notes receivable............................. $(159,323) $(164,003) $(268,098)
Collections of notes receivable.......................... 144,000 128,070 387,363
Capital expenditures..................................... (47,635) (120,691) (53,735)
(Increase) decrease in investments....................... (496) 755 728
Acquisitions, net of cash acquired....................... -- (750) (1,875)
--------- --------- ---------
Net cash (used) provided by investing
activities..................................... $ (63,454) $(156,619) $ 64,383
--------- --------- ---------
--------- --------- ---------
Financing Activities:
Increase in short-term borrowings and long-term debt..... $ 115,762 $ 98,174 $ 18
Decrease in commercial paper............................. -- -- (117,000)
Proceeds from issuance of common stock................... -- 35,440 --
Proceeds from issuance of warrant to purchase stock...... -- 10,000 --
Proceeds from exercise of stock options.................. 2,428 10,163 19,608
Dividends paid........................................... -- (23,976) (22,669)
--------- --------- ---------
Net cash provided (used) by financing activities......... 118,190 129,801 (120,043)
Effect of exchange rate changes on cash.................. 603 783 1,012
--------- --------- ---------
Increase (decrease) in cash and cash equivalents......... 12,306 (28,919) 37,596
Cash and cash equivalents at beginning of year........... 42,319 71,238 33,642
--------- --------- ---------
Cash and cash equivalents at end of year................. $ 54,625 $ 42,319 $ 71,238
--------- --------- ---------
--------- --------- ---------
Non Cash Investing Activities:
Capital asset and lease obligation additions......... $ -- $ 12,323 --
--------- --------- ---------
--------- --------- ---------
See accompanying Notes to Consolidated Financial Statements
30
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE
INCOME STOCK CAPITAL EARNINGS INCOME
------ ----- ------- -------- ------
(THOUSANDS OF DOLLARS)
Balance at January 1, 1998.............. $5,582 $ 72,932 $ 197,027 $ (9,742)
Comprehensive income:
Net income.......................... $ 45,025 45,025
Other comprehensive income, net of
tax...............................
Foreign currency translation.... 225 225
---------
Other comprehensive income.......... 225
---------
Comprehensive income.................... 45,250
---------
---------
Stock options exercised................. 133 19,475
Tax benefit associated with exercise of
stock options......................... 2,965
Shares issued to directors.............. 1 179
Stock compensation expense.............. 8,541
Dividends............................... (22,669)
------ -------- --------- --------
Balance at December 31, 1998............ $5,716 $104,092 $ 219,383 $ (9,517)
------ -------- --------- --------
------ -------- --------- --------
Comprehensive income:
Net income.......................... $ 32,854 32,854
Other comprehensive loss, net of
tax...............................
Foreign currency translation.... (3,710) (3,710)
---------
Other comprehensive loss............ (3,710)
---------
Comprehensive income.................... 29,144
---------
---------
Stock options exercised................. 68 9,568
Tax benefit associated with exercise of
stock options......................... 2,450
Issuance of common stock................ 100 35,340
Issuance of warrant to purchase common
stock................................. 10,000
Shares issued to directors.............. 1 526
Stock compensation expense.............. (5,851)
Dividends............................... (23,976)
------ -------- --------- --------
Balance at December 31, 1999............ $5,885 $156,125 $ 228,261 $(13,227)
------ -------- --------- --------
------ -------- --------- --------
Comprehensive income:
Net loss............................ $(189,694) (189,694)
Other comprehensive loss, net of
tax...............................
Foreign currency translation.... (1,616) (1,616)
---------
Other comprehensive loss............ (1,616)
---------
Comprehensive loss...................... (191,310)
---------
---------
Stock options exercised................. 21 2,870
Tax benefit associated with exercise of
stock options......................... 270
Shares issued to directors.............. 3 572
Stock compensation expense (note N)..... (1,416)
------ -------- --------- --------
Balance at December 31, 2000............ $5,909 $158,421 $ 38,567 $(14,843)
------ -------- --------- --------
------ -------- --------- --------
See accompanying Notes to Consolidated Financial Statements
31
NOTE A -- ORGANIZATION AND BUSINESS
The Company conducts live and Internet auctions and private sales of fine
art, jewelry and decorative art. Auction activities occur primarily in New York
and London, but are also conducted elsewhere in North America, Europe and Asia.
In addition, the Company is engaged in art-related financing activities, the
marketing and brokering of luxury real estate and to a lesser extent, insurance
brokerage, fine arts education and art-related restoration.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The Consolidated Financial Statements include
the accounts of Sotheby's Holdings, Inc., and its wholly owned subsidiaries. The
Company uses the equity method to account for its investments in AMA and other
affiliates (see Note F).
REVENUE RECOGNITION -- Auction and related revenues are generally recognized
at the date of sale less estimates for allowances. Subscription revenue from the
sale of auction catalogues is recognized over the twelve-month period of the
subscription from the date that payment is received. Auction and related
revenues also include principal activities. Principal activities consist of net
gains (losses) on sales of inventory, the Company's share of operating earnings
(losses) from its investment in AMA and its other auction related equity
investment, net income (loss) earned from guarantees, and the net gains (losses)
related to the sales of loan collateral where the Company shares in the gain
(loss) if the property sells either above or below its cost. Other revenues
consist principally of revenues from art-related financing activities and real
estate operations. Other revenues are generally recognized at the time service
is rendered or revenue is earned by the Company. Revenues from the Real Estate
segment are reported net of commission payments to independent contractors.
DIRECT COSTS OF SERVICES -- Direct costs of services primarily include the
costs of obtaining and marketing property for auctions.
CASH EQUIVALENTS -- Cash equivalents are liquid investments comprised
primarily of bank and time deposits with an original maturity of three months or
less. These investments are carried at cost, which approximates fair value.
PROPERTIES -- Properties, consisting primarily of buildings and
improvements, leaseholds and leasehold improvements, furniture and fixtures and
equipment, are stated at cost less accumulated depreciation and amortization.
Depreciation is computed principally using the straight-line method over the
assets' estimated useful lives. Leaseholds and leasehold improvements are
amortized using the straight-line method over the lesser of the life of the
lease or the estimated useful life of the improvement. Equipment includes the
capitalized cost of purchased computer software. Direct external and internal
computer software development costs subsequent to the preliminary stage of
development are capitalized. These costs are amortized on a straight-line basis
over the estimated useful life of the software.
The Company capitalizes interest on projects when construction requires a
period of time to get the assets ready for their intended use. Capitalized
interest is allocated to properties once placed in service and amortized over
the life of the related assets. Capitalized interest totaled approximately $1.2
million, $2.8 million and $0.5 million in 2000, 1999 and 1998, respectively.
Repairs and maintenance costs are included in general and administrative
expenses.
FINANCIAL INSTRUMENTS -- The carrying amounts of cash and cash equivalents,
short-term borrowings and notes receivable are a reasonable estimate of their
fair value due to the variable interest rates associated with each of these
financial instruments. The fair value of long-term debt is approximately $73.4
million.
DERIVATIVES -- The Company enters into forward exchange contracts to hedge
foreign currency transactions. The Company's forward exchange contracts do not
subject the Company to material risk from exchange rate movements because gains
and losses on such contracts substantially offset gains and losses on the assets
or transactions being hedged. The Company is exposed to credit-related losses in
the event of nonperformance by counterparties to forward exchange contracts, but
32
the Company does not expect any counterparties to fail to meet their obligations
given their high credit ratings. Gains and losses on contracts to hedge
identifiable foreign currency commitments are recognized in income and offset
the foreign exchange gains and losses on the underlying transactions at the time
these transactions occur. The premium or discount on forward contracts is
amortized to income over the life of the contract. At December 31, 2000, the
Company had $31.7 million of notional value forward currency exchange 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 the contracts. The fair value of these contracts was a $0.6 million asset
at December 31, 2000.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ('SFAS') No. 133, 'Accounting for Derivative Instruments and Hedging
Activities,' and SFAS No. 138, 'Accounting for Certain Derivative Instruments
and Certain Hedging Activities.' See discussion of recently issued accounting
standards below.
INVENTORY -- Inventory consists of objects obtained incidental to the
auction process as well as for investment purposes. Inventory is valued at the
lower of cost or management's estimate of net realizable value.
ALLOWANCE FOR LOAN LOSSES -- The Company regularly reviews its loan
portfolio. Secured loans are analyzed based on the current estimated realizable
value of the collateral securing each loan. The Company establishes reserves for
specific secured loans where management believes the loan is
under-collateralized and with respect to which the under-collateralized amount
may not be collectible from the borrower. Unsecured loans are analyzed based on
management's estimate of the current collectibility of each loan. A reserve is
established for probable losses inherent in the remainder of the loan portfolio
based on historical data and current market conditions.
INTANGIBLE ASSETS -- Intangible assets primarily consist of goodwill which
is amortized on a straight-line basis over useful lives ranging from fifteen to
forty years.
IMPAIRMENT OF LONG-LIVED ASSETS -- Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. In such situations,
long-lived assets are considered impaired when estimated future cash flows
(undiscounted and without interest charges) resulting from the use of the asset
and its eventual disposition are less than the asset's carrying amount.
EARNINGS (LOSS) PER SHARE -- Basic earnings (loss) per share is calculated
by dividing net income (loss) by the weighted average number of outstanding
shares of common stock. In 1999 and 1998, diluted earnings per share was
calculated by dividing net income (loss) by the weighted average number of
shares of common stock and common stock equivalents, such as stock options.
Since the Company reported a net loss in 2000, stock options have been excluded
from the calculation of the weighted average number of shares, as they would be
anti-dilutive. The weighted average number of shares used for calculating basic
and diluted earnings (loss) per share are as follows:
2000 1999 1998
---- ---- ----
(IN MILLIONS)
Basic..................................................... 58.9 58.1 56.7
Dilutive effect of options................................ -- 1.0 0.6
---- ---- ----
Diluted................................................... 58.9 59.1 57.3
---- ---- ----
---- ---- ----
There were no reconciling items between net income (loss) for basic and
diluted earnings (loss) per share.
FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of foreign
subsidiaries are translated at year-end exchange rates. Income statement amounts
are translated using weighted average monthly exchange rates during the year.
Gains and losses resulting from translating foreign currency financial
statements are recorded in accumulated other comprehensive loss until the
subsidiary is sold or substantially liquidated.
33
STOCK-BASED COMPENSATION -- The Company accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion ('APB') No.
25, 'Accounting for Stock Issued to Employees.' Accordingly, pro forma net
income and earnings per share information is presented in Note K as required
under SFAS No. 123, 'Accounting for Stock-Based Compensation.'
RECLASSIFICATIONS -- Certain amounts in the 1999 Consolidated Financial
Statements have been reclassified to conform with the current presentation.
USE OF ESTIMATES -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME (LOSS) -- SFAS No. 130, 'Reporting Comprehensive
Income,' requires certain transactions to be included as adjustments to net
income (loss) in order to report comprehensive income (loss). The Company's
comprehensive income (loss) includes the net income (loss) for the period, as
well as other comprehensive income (loss). Other comprehensive income (loss)
consists of the change in the foreign currency translation adjustment amount
during the period and is reported in the Consolidated Statement of Changes in
Shareholders' Equity. The foreign currency translation adjustment amount is
included in accumulated other comprehensive loss in the Consolidated Balance
Sheets.
RECENTLY ISSUED ACCOUNTING STANDARDS -- SFAS No. 133, 'Accounting for
Derivative Instruments and Hedging Activities' and SFAS No. 138, 'Accounting for
Certain Derivative Instruments and Certain Hedging Activities,' were adopted by
the Company on January 1, 2001. These Statements require that an entity
recognize all derivatives as either assets or liabilities measured at fair
value. The accounting for changes in the fair value of a derivative depends on
how the derivative is used. Management believes that adoption of these new
accounting standards will not have a material impact on the Company's results of
operations. On January 1, 2001, other comprehensive income will be increased by
approximately $0.6 million as a result of the adoption of these standards.
In September 2000, the Financial Accounting Standards Board issued
SFAS No. 140, 'Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,' which replaces SFAS No. 125 of the same name.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The Company is
currently evaluating the impact that the adoption of this statement will have on
its financial position and results of operations.
NOTE C -- SEGMENT REPORTING
The Company has three reportable operating segments consisting of Auction,
Real Estate and Finance. The Company's chief operating decision making group,
which is comprised of the Chief Executive Officer and the senior executives of
each of the Company's operating segments, regularly evaluates financial
information about these operating segments in deciding how to allocate resources
and in assessing performance.
The Auction segment is an aggregation of operations in North America, Europe
and Asia as they are similar in service, customers and the way the service is
provided. The Auction segment conducts both live and Internet auctions of
property in which the Company generally functions as an agent accepting property
on consignment from its selling clients. In addition to auctioneering, the
Auction segment is engaged in a number of related activities including the
purchase and resale of art and other collectibles and the brokering of art
collectible purchases and sales through private treaty sales. The Real Estate
segment provides brokerage, marketing and consulting services for luxury
residential, resort, farm and ranch properties nationally and internationally.
The Finance segment provides art-related financing generally secured by works of
art that the Company
34
either has in its possession or that the Company permits the borrower to
possess. Other primarily includes art education and restoration activities.
The Company's reportable operating segments are strategic business units
that offer different services. They are managed separately because each business
requires different resources and strategies. The Company evaluates performance
based on segment profit or loss from operations before income taxes and
excluding special charges, restructuring charges and foreign exchange gains and
losses.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note B). Revenues are
attributed to geographic areas based on the location of the actual sale. All
amounts in the tables below are in thousands of dollars.
For the year ended December 31, 2000:
AUCTION REAL ESTATE FINANCE OTHER TOTAL
------- ----------- ------- ----- -----
Revenues............................ $336,027 $37,329 $17,459 $6,973 $397,788
Interest income..................... 20,767 25 -- 64 20,856
Interest expense.................... 18,453 -- 307 -- 18,760
Depreciation and amortization....... 21,703 1,864 -- 324 23,891
Segment (loss)/profit............... (43,314) 9,801 49 (960) (34,424)
For the year ended December 31, 1999:
AUCTION REAL ESTATE FINANCE OTHER TOTAL
------- ----------- ------- ----- -----
Revenues............................ $390,101 $30,264 $14,804 $7,416 $442,585
Interest income..................... 13,109 24 1 58 13,192
Interest expense.................... 5,573 -- 16 -- 5,589
Depreciation and amortization....... 15,673 1,389 -- 390 17,452
Segment profit/(loss)............... 43,015 6,570 3,283 (718) 52,150
For the year ended December 31, 1998:
AUCTION REAL ESTATE FINANCE OTHER TOTAL
------- ----------- ------- ----- -----
Revenues............................ $367,204 $25,097 $47,876 $6,875 $447,052
Interest income..................... 19,044 -- 44 43 19,131
Interest expense.................... 10,480 14 48 3 10,545
Depreciation and amortization....... 11,218 1,124 -- 310 12,652
Segment profit/(loss)............... 58,156 4,053 27,501 (697) 89,013
A reconciliation of the totals reported for the operating segments to the
applicable line items in the Consolidated Financial Statements is as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
---- ---- ----
Revenues:
Total revenues for reportable segments........... $ 390,815 $435,169 $440,177
Other revenues................................... 6,973 7,416 6,875
--------- -------- --------
Total consolidated revenues...................... $ 397,788 $442,585 $447,052
--------- -------- --------
--------- -------- --------
Profit:
Total (loss) profit for reportable segments...... $ (33,464) $ 52,868 $ 89,710
Other loss....................................... (960) (718) (697)
Unallocated amounts:
Special charges.............................. (203,069) -- --
Restructuring charges........................ (12,634) -- (15,200)
--------- -------- --------
Consolidated (loss) income before tax............ $(250,127) $ 52,150 $ 73,813
--------- -------- --------
--------- -------- --------
35
Other significant items:
SEGMENT TOTALS ELIMINATIONS CONSOLIDATED TOTAL
-------------- ------------ ------------------
2000
Interest income........................ $20,856 $(14,431)(1) $ 6,425
Interest expense....................... 18,760 -- 18,760
Depreciation and amortization.......... 23,891 -- 23,891
1999
Interest income........................ $13,192 $ (8,819)(1) $ 4,373
Interest expense....................... 5,589 -- 5,589
Depreciation and amortization.......... 17,452 -- 17,452
1998
Interest income........................ $19,131 $(15,571)(1) $ 3,560
Interest expense....................... 10,545 -- 10,545
Depreciation and amortization.......... 12,652 -- 12,652
(1) Represents the elimination of interest charged by Auction to Finance for
funding Finance's loan portfolio.
Information concerning geographical areas is as follows:
FOR THE YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
---- ---- ----
Revenues:
United States..................................... $221,126 $248,223 $272,182
United Kingdom.................................... 116,801 141,115 132,325
Other International Countries..................... 59,861 53,247 42,545
-------- -------- --------
Total......................................... $397,788 $442,585 $447,052
-------- -------- --------
-------- -------- --------
NOTE D -- ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
AS OF DECEMBER 31
-----------------------
2000 1999
---- ----
(THOUSANDS OF DOLLARS)
Accounts and other receivables.............................. $328,246 $504,167
Allowance for doubtful accounts............................. (11,413) (8,181)
-------- --------
316,833 495,986
-------- --------
Notes receivable............................................ 203,701 190,798
Allowance for doubtful accounts............................. (11,522) (2,904)
-------- --------
192,179 187,894
-------- --------
Total....................................................... $509,012 $683,880
-------- --------
-------- --------
Under the standard terms and conditions of the Company's auction sales, the
Company is not obligated to pay consignors for items that have not been paid by
the purchaser. If the purchaser defaults on payment, the Company has the right
to cancel the sale and return the property to the owner, re-offer the property
at auction or negotiate a private sale.
In certain situations, when the purchaser takes possession of the property
before payment is made, the Company is liable to the seller for the net sale
proceeds. As of December 31, 2000 and 1999, accounts receivable included
approximately $79.7 million and $237.0 million, respectively, of such sales. As
of February 19, 2001, approximately $46.0 million of the amount outstanding at
December 31, 2000 has been collected. Amounts outstanding at December 31, 1999
which remained outstanding at December 31, 2000 totaled $1.0 million. Management
believes that adequate allowances have been established to provide for potential
losses on these amounts.
36
Approximately 10% and 11% of the Company's accounts receivable balance was
due from one purchaser at December 31, 2000 and 1999, respectively.
The Company provides collectors and dealers with financing generally secured
by works of art that the Company either has in its possession or permits the
borrower to possess. Under certain circumstances, the Company also makes
unsecured loans to collectors and dealers. Included in the Company's net notes
receivable balance are unsecured loans totaling $44.8 million and $49.7 million
at December 31, 2000 and 1999, respectively.
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 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 dealers and
collectors. The loans are generally made with full recourse to the borrower. In
certain instances, however, loans are made with recourse limited to the works of
art pledged as security for the loan. To the extent that the Company is looking
wholly or partially to the collateral for repayment of its loans, repayment can
be adversely impacted by a decline in the art market in general or in the value
of the particular collateral. In addition, in situations where the borrower
becomes subject to bankruptcy or insolvency laws, the Company's ability to
realize on its collateral may be limited or delayed by the application of such
laws.
Although the Company's general policy is to make secured loans at loan to
value ratios (principal loan amount divided by the low auction estimate of the
collateral) of 50% or lower, the Company will lend, primarily on a secured
basis, at loan to value ratios higher than 50%. In certain of these situations,
the Company finances the purchase of works of art by certain art dealers through
unsecured loans. The property purchased pursuant to such unsecured loans is sold
by the dealer or at auction with any net profit or loss shared by the Company
and the dealer. During the fourth quarter of 2000, the Company recorded a
$9.0 million provision related to one such unsecured loan. The net total of all
such unsecured loans was $23.0 million and $27.6 million at December 31, 2000
and 1999, respectively.
One individual loan amounted to approximately 12% of the notes receivable
balance (current and non-current) at December 31, 2000. This loan was fully
repaid by the borrower during the first quarter of 2001.
The weighted average interest rates charged on notes receivable were 9.4%
and 8.2% at December 31, 2000 and 1999, respectively. The carrying amounts of
notes receivable approximates their fair value at December 31, 2000.
Notes receivable included loans to employees of $0.4 million and $0.5
million at December 31, 2000 and 1999, respectively. The weighted average
interest rate on these loans was 12.5% at December 31, 2000.
Interest income on impaired loans is recognized to the extent cash is
received. Where there is doubt regarding the ultimate collectibility of
principal for impaired loans, cash receipts, whether designated as principal or
interest, are thereafter applied to reduce the recorded investment in the loan.
Changes in the allowance for credit losses relating to notes receivable are
as follows:
YEAR ENDED DECEMBER 31
------------------------
2000 1999
---- ----
(THOUSANDS OF DOLLARS)
Allowance for credit losses at December 31, 1999 and 1998... $ 2,904 $2,874
Provisions.................................................. 9,000 50
Writeoffs and other......................................... (382) (20)
------- ------
Allowance for credit losses at December 31, 2000 and 1999... $11,522 $2,904
------- ------
------- ------
37
NOTE E -- INVENTORY
Inventory consists principally of objects obtained incidental to the auction
process primarily as a result of purchasers defaulting on accounts receivable
after the consignor has been paid, purchasing property at the minimum price
guaranteed by the Company, purchasing property for investment purposes and
honoring claims of purchasers.
The inventory and related allowances to adjust the cost of inventory to
management's estimated net realizable value are as follows:
AS OF DECEMBER 31
----------------------
2000 1999
---- ----
(THOUSANDS OF DOLLARS)
Inventory, at cost.......................................... $22,080 $29,983
Net realizable value allowances............................. (8,058) (9,140)
------- -------
Total................................................... $14,022 $20,843
------- -------
------- -------
NOTE F -- INVESTMENTS
On May 23, 1990, the Company purchased the common stock of the Pierre
Matisse Gallery Corporation ('Matisse') for approximately $153 million. The
assets of Matisse consisted of a collection of fine art (the 'Matisse
Inventory'). Upon consummation of the purchase, the Company entered into the AMA
partnership agreement with ACA and contributed the Matisse Inventory to AMA. The
purpose of AMA is to sell the Matisse Inventory. The term of the AMA partnership
agreement expires on March 31, 2002.
The Company uses the equity method to account for its investment in AMA and
accordingly records its share of AMA's operating earnings (losses) as auction
and related revenue in the Consolidated Statements of Income. The net assets of
the partnership consist principally of the inventory described above. At
December 31, 2000, the carrying value of this inventory was $86.4 million. The
Company's 50% interest in the net assets of AMA is included in investments in
the Consolidated Balance Sheets. The carrying value of the Company's investment
in AMA totaled $31.7 million and $33.0 million at December 31, 2000 and 1999,
respectively.
Pursuant to the AMA partnership agreement, upon the death of the majority
direct or indirect shareholder of ACA, the successors-in-interest to ACA have
the right, but not the obligation, to require the Company to purchase their
interest in AMA at a price equal to the fair market value of such interest. The
fair market value shall be determined by the partnership's independent auditors
pursuant to a process and a formula set forth in the partnership agreement that
includes an appraisal of the works of art held by the partnership at such time.
To the extent that AMA requires working capital, the Company has agreed to
lend the same to the partnership. As of December 31, 2000, no such amounts were
outstanding.
At December 31, 2000 and 1999, the carrying value of the Company's
investments in other affiliates totaled $2.1 million and $3.0 million,
respectively. During the fourth quarter of 2000, the Company wrote off its
investment in an affiliate as a result of the Company's restructuring plan (see
Note P).
38
NOTE G -- PROPERTIES
Properties consist of the following:
AS OF DECEMBER 31
----------------------
2000 1999
---- ----
(THOUSANDS OF DOLLARS)
Land........................................................ $ 18,904 $ 17,786
Building and building improvements.......................... 101,638 102,775
Leaseholds and leasehold improvements....................... 57,674 58,440
Furniture, fixtures and equipment........................... 113,012 110,284
Construction in progress.................................... 32,906 14,193
Other....................................................... 2,311 1,646
-------- --------
326,445 305,124
-------- --------
Less: accumulated depreciation.............................. (78,379) (72,463)
-------- --------
Total................................................... $248,066 $232,661
-------- --------
-------- --------
Construction in progress relates principally to the expenditures on the
construction of the York Property. These assets will be depreciated when they
are put into use, which will most likely occur in the second quarter of 2001.
NOTE H -- CREDIT ARRANGEMENTS
Short-term borrowings and long-term debt consist of the following:
AS OF DECEMBER 31
----------------------
2000 1999
---- ----
(THOUSANDS OF DOLLARS)
Short-term borrowings:
Borrowings under the Amended Credit Agreement........... $116,000 $ --
Other bank lines of credit.............................. -- 272
Long-term debt:
Long-term debt securities (net of unamortized discount
of $666 and $725)..................................... 99,334 99,275
-------- --------
$215,334 $ 99,547
-------- --------
-------- --------
BANK LINES OF CREDIT -- At December 31, 2000, there were no amounts
outstanding under domestic and foreign bank lines of credit. At December 31,
1999, $0.3 million was outstanding under domestic and foreign lines of credit at
a weighted average annual interest rate of 4.0%.
COMMERCIAL PAPER -- 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 Amended Credit Agreement discussed below. At December 31, 2000 and
1999, there were no outstanding commercial paper borrowings.
BANK CREDIT FACILITIES -- 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. The amount available for borrowings under the Credit Agreement is
reduced by the amount of outstanding commercial paper borrowings, 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, including a
mortgage on the York Property. In addition, borrowings 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
39
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.
In connection with the Company's settlements of certain civil antitrust and
shareholder class action litigation and its plea agreement with the DOJ, the
Company amended the Credit Agreement in November 2000 (the 'Amended Credit
Agreement'.) (See Note N and Part I, Item 3 'Legal Proceedings' for additional
information related to the settlements and the plea agreement.) The principal
purpose of the amendments contained in the Amended Credit Agreement is to adjust
the financial covenants contained in the Credit Agreement to reflect the terms
of the settlements and the plea agreement and the Company's obligations
thereunder. These amendments, among other things, adjust certain of the
financial covenants, including the covenants requiring the Company to maintain a
minimum net worth and to meet certain leverage ratio and interest coverage ratio
tests. The Amended Credit Agreement retains the covenant that requires the
Company to limit dividend payments. During the fourth quarter of 2000, the
Company paid $1.5 million of arrangement and amendment fees in connection
with adjusting the financial covenants contained in the Amended Credit
Agreement, which are being amortized over the remaining term of the commitment.
At December 31, 2000, the Company was in compliance with respect to all
financial and other covenants. At December 31, 2000, the Company had
outstanding short-term borrowings of $116.0 million under this facility
at a weighted average interest rate of 8.85%.
As discussed above, the Company's Amended Credit Agreement is available
through July 11, 2001. On this date the Amended Credit Agreement will expire and
any borrowings outstanding will be due and payable to the Company's existing
banking group. In order to fund the repayment of any such borrowings
outstanding, as well as to provide for the Company's continuing operating needs,
capital requirements, the remaining funding requirements related to the
Company's plea agreement with the DOJ (see Note N) and cash payments for the
retention of certain key employees (see Note O), an extension or refinancing of
the Amended Credit Agreement will be necessary to supplement operating cash
flows. Alternatively, the Company currently believes that it has other options
available for capital resources, including the issuance of additional equity, as
well as a mortgage on the York Property, and is currently evaluating such
options. The Company currently believes it is likely to be able to extend or
refinance the Amended Credit Agreement or to secure alternative funding.
However, there can be no guarantee that such funding will be available on terms
acceptable to the Company. Although unlikely, if the Company is unable to obtain
such funding on acceptable terms, this would have a material adverse effect on
the Company's business, results of operations and/or financial condition.
SENIOR UNSECURED DEBT -- In February 1999, the Company issued a tranche of
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% payable semi-annually in February and August. The Notes have
covenants that impose limitations on the Company from placing liens on property
and entering into certain sales-leaseback transactions. The Company was in
compliance with these covenants at December 31, 2000. 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 Amended Credit Agreement provide that the
obligations under the Notes shall be secured equally and ratably with that
portion of the obligations under the Amended Credit Agreement that exceed the
permitted exceptions contained in the Indenture.
During the first quarter of 2000, Moody's Investors Service, Standard &
Poor's Rating Group and other credit agencies downgraded the Company's long-term
and short-term credit ratings.
40
During the fourth quarter of 2000, Moody's further downgraded the Company's
long-term and short-term credit ratings. Both ratings remain on review.
INTEREST PAID -- Interest paid on borrowings, net of capitalized interest,
totaled $11.7 million, $3.9 million and $9.3 million during 2000, 1999 and 1998,
respectively.
NOTE I -- INCOME TAXES
The significant components of income tax expense attributed to continuing
operations consist of the following:
YEAR ENDED DECEMBER 31
-----------------------------
2000 1999 1998
---- ---- ----
(THOUSANDS OF DOLLARS)
(Loss) Income Before Taxes:
Domestic........................................... $(253,609) $26,423 $65,963
Foreign............................................ 3,482 25,727 7,850
--------- ------- -------
Total.......................................... $(250,127) $52,150 $73,813
--------- ------- -------
--------- ------- -------
Income Taxes Current:
Federal............................................ $ (19,781) $ 1,546 $17,876
State and local.................................... -- 1,098 13,009
Foreign............................................ 2,862 8,282 7,872
--------- ------- -------
$ (16,919) $10,927 $38,757
--------- ------- -------
Income Taxes Deferred:
Federal and State.................................. $ (42,022) $ 7,478 $(6,887)
Foreign............................................ (1,492) 891 (3,082)
--------- ------- -------
(43,514) 8,369 (9,969)
--------- ------- -------
Total.......................................... $ (60,433) $19,296 $28,788
--------- ------- -------
--------- ------- -------
The components of deferred income tax assets and liabilities are disclosed
below:
YEAR ENDED
DECEMBER 31
------------------
2000 1999
---- ----
(THOUSANDS OF
DOLLARS)
Deferred Tax Assets:
Asset provisions and accrued liabilities................ $ 54,207 $15,622
Tax loss and credit carryforwards....................... 45,664 9,199
-------- -------
99,871 24,821
Valuation allowance..................................... (37,270) (4,068)
-------- -------
Total............................................... $ 62,601 $20,753
-------- -------
-------- -------
Deferred Tax Liabilities
Basis difference in partnership assets.................. $ 10,778 $11,998
Difference between book and tax basis of depreciable
amortizable assets.................................... 4,448 4,895
-------- -------
Total............................................... $ 15,226 $16,893
-------- -------
-------- -------
At December 31, 2000, the Company has U.S. federal tax loss carryovers of
$14.7 million and credit carryforwards of $9.2 million, having expiration dates
ranging from 2004 to 2020. The Company provided a valuation allowance for
certain state and foreign losses and tax credit carryforwards of $37.3 million
and $4.1 million at December 31, 2000 and 1999, respectively. The valuation
allowance increased by $33.2 million and $0.7 million at December 31, 2000 and
1999, respectively. The change in the valuation allowance in 2000 compared to
1999, resulted from management's evaluation of the utilization of state and
foreign operating losses and U.S. federal tax credit carryforwards.
41
The effective tax rate varied from the statutory rate as follows:
YEAR ENDED DECEMBER 31
-----------------------
2000 1999 1998
---- ---- ----
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit........... 9.3 5.4 5.7
Foreign taxes at rates different than U.S. rates............ 0.9 (7.6) (4.0)
Non deductible antitrust expenses........................... (7.4) -- --
Effect of operating losses and tax credits.................. (13.9) 3.1 2.0
Other....................................................... 0.3 1.1 0.3
----- ---- ----
Effective income tax rate................................... 24.2% 37.0% 39.0%
----- ---- ----
----- ---- ----
Undistributed earnings of foreign subsidiaries included in consolidated
retained earnings at December 31, 2000 and 1999 amounted to $53.7 million and
$41.2 million, respectively. Such amounts are considered to be reinvested
indefinitely or will be distributed from income that would not incur a
significant tax consequence and, therefore, no provision has been made for taxes
that would be payable upon distribution of these earnings.
Total income tax payments, net of refunds, during 2000, 1999 and 1998 were
($0.1) million $22.0 million and $25.4 million, respectively.
The related tax (benefit) expense for the years ended December 31, 2000,
1999 and 1998 related to the foreign currency translation adjustment included in
Other Comprehensive Income was approximately ($0.9) million, ($2.2) million and
$0.1 million, respectively.
NOTE J -- LEASE COMMITMENTS
The Company conducts its business on premises leased in various locations
under long-term operating leases expiring through 2060. Net rental expense under
operating leases amounted to $16.9 million, $16.8 million and $15.5 million,
respectively for the years ended December 31, 2000, 1999 and 1998.
Future minimum lease payments under noncancelable operating leases in effect
at December 31, 2000 are as follows:
(THOUSANDS OF DOLLARS)
2001............................................. $ 14,248
2002............................................. 13,092
2003............................................. 11,526
2004............................................. 10,047
2005............................................. 9,219
--------
Thereafter....................................... 75,556
--------
Total future minimum lease payments.......... $133,688
--------
--------
The future minimum lease payments have not been reduced by minimum sublease
rental receipts of $9.1 million due to the Company in the future under
noncancelable subleases.
In addition to the above rentals, under the terms of certain of the leases,
the Company pays real estate taxes, utility costs and other increases based on a
price-level index.
NOTE K -- SHAREHOLDERS' EQUITY
COMMON STOCK -- Each share of Class A Common Stock is entitled to one vote
and each share of Class B Common Stock is entitled to ten votes. Both classes of
common stock share equally in cash dividend distributions, if any. The Class A
Common Stock is traded on both the New York Stock Exchange and the London Stock
Exchange.
On July 23, 1999, Amazon purchased one million of newly issued shares of the
Company's Class A Common Stock at $35.44 per share, and purchased for
$10 million a three year warrant to purchase an additional one million shares at
$100 per share.
42
On September 24, 2000, the Company agreed to settle the shareholder class
action litigation related to the DOJ investigation. The Company received court
approval of the settlement on February 16, 2001. In connection with the
settlement, the Company currently expects to issue Sotheby's Class A Common
Stock with a value of $40 million in the first or second quarter of 2001. (See
Note N)
PREFERRED STOCK -- In addition to the Class A and Class B Common Stock
outstanding, the Company has the authority to issue 50,000,000 shares of no par
value Preferred Stock. No such shares were issued and outstanding at
December 31, 2000 and 1999.
STOCK OPTION PLANS -- At December 31, 2000, the Company has reserved
13,858,000 shares of Class B Common Stock for future issuance in connection with
the 1987 Stock Option Plan (the '1987 Plan') and the 1997 Stock Option Plan (the
'1997 Plan'). The 1997 Plan succeeded the 1987 Plan.
Pursuant to both stock option plans, options are granted with an exercise
price equal to or greater than fair market value at the date of grant. Options
granted through September 1992 pursuant to the 1987 Plan, vest and become
exercisable ratably during each of the fourth, fifth and sixth years after the
date of grant. Options granted subsequent to September 1992 and through
December 1996 pursuant to the 1987 Plan, and options granted subsequent to
December 1996 pursuant to the 1997 Plan, primarily vest and become exercisable
ratably in each of the second, third, fourth, fifth and sixth years after the
date of grant (except in the U.K. where certain options vest three-fifths in the
fourth year and one-fifth in each of the fifth and sixth years after the date of
grant). The options are exercisable into shares of Class B Common Stock, which
are authorized but unissued shares. The shares of Class B Common Stock issued
upon exercise are freely convertible into an equivalent number of shares of
Class A Common Stock. Pursuant to both stock option plans, options expire ten
years after the date of grant.
At December 31, 2000, there were outstanding options under the 1997 Plan and
the 1987 Plan for the purchase of 13,227,787 shares, at prices ranging from
$10.87 to $42.63 per share. Stock option transactions during 2000, 1999 and 1998
are summarized as follows (shares in thousands):
SHARES OPTIONS OUTSTANDING
RESERVED FOR ----------------------------
ISSUANCE UNDER WEIGHTED
THE PLANS SHARES PRICES AVERAGE PRICE
--------- ------ ------ -------------
Balance at January 1, 1998................. 11,107 6,696 $ 3.50-22.62 $14.92
Options granted........................ 3,037 $20.06-24.25 $22.67
Options canceled....................... (508) $10.87-22.62 $16.61
Options exercised...................... (1,329) (1,329) $ 3.50-18.69 $13.19
------ ------ ------------ ------
Balance at December 31, 1998............... 9,778 7,896 $10.87-24.25 $17.84
Options issued......................... 4,900
Options granted........................ 2,033 $25.63-42.63 $36.76
Options canceled....................... (77) $10.87-37.94 $23.72
Options exercised...................... (653) (653) $10.87-24.25 $14.45
------ ------ ------------ ------
Balance at December 31, 1999............... 14,025 9,199 $10.87-42.63 $21.94
Options granted........................ 6,750 $16.63-29.06 $21.34
Options canceled....................... (2,554) $10.87-42.38 $19.35
Options exercised...................... (167) (167) $10.87-24.25 $14.22
------ ------ ------------ ------
Balance at December 31, 2000............... 13,858 13,228 $10.87-42.63 $22.13
------ ------ ------------ ------
------ ------ ------------ ------
During 2000, the Company's former Chief Executive Officer relinquished
1,930,000 options issued pursuant to the 1997 Plan and the 1987 Plan (with
exercise prices ranging from $10.87 to $24.25) pursuant to an agreement between
the Company and the former Chief Executive Officer related to the DOJ
investigation and other related matters.
43
The following table summarizes information about options outstanding at
December 31, 2000 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ---------------------------
WEIGHTED AVERAGE
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
RANGE OF PRICES AT 12/31/00 CONTRACTUAL LIFE AVERAGE PRICE AT 12/31/00 AVERAGE PRICE
- --------------- ----------- ---------------- ------------- ----------- -------------
$10.8700 - 12.7875.......... 381 4.1 years $10.92 381 $10.92
$12.7876 - 17.0500.......... 1,078 3.3 years $14.66 984 $14.60
$17.0501 - 21.3125.......... 6,371 8.2 years $18.89 1,098 $18.73
$21.3126 - 25.5750.......... 1,549 8.0 years $23.52 514 $23.84
$25.5751 - 29.8375.......... 2,488 9.6 years $26.48 75 $27.07
$29.8376 - 34.1000.......... 27 5.3 years $32.02 14 $32.10
$34.1001 - 38.3625.......... 1,329 8.2 years $36.95 364 $37.24
$38.3626 - 42.6250.......... 5 0.7 years $42.48 3 $42.40
------ --------- ------ ----- ------
13,228 7.9 years $22.13 3,433 $19.67
------ -----
------ -----
The weighted average fair value per share of options granted during the
years ended December 31, 2000, 1999 and 1998 was $10.77, $5.05 and $7.36,
respectively. At December 31, 1999 and 1998, 3,336,183 and 2,422,700 options
were exercisable at a weighted average exercise price of $17.05 and $14.31,
respectively.
During the first and fourth quarters of 2000, the Compensation Committee of
the Board of Directors (the 'Compensation Committee') awarded special grants of
3 million and 2 million stock options, respectively, pursuant to the 1997 Plan
in addition to the normal annual grant. The options granted in the fourth
quarter vest and become exercisable ratably in each of the second, third and
fourth years after the date of grant.
In the first quarter of 2001, the Compensation Committee approved an
additional grant of 1,463,000 options pursuant to the 1997 Plan.
PERFORMANCE SHARE PURCHASE PLAN -- At December 31, 2000, the Company had
reserved 2,000,000 shares of Class B Common Stock for issuance in connection
with the Performance Share Purchase Plan (the 'Performance Plan'). At
December 31, 2000, 428,500 options were outstanding under the Performance Plan.
The following table summarizes information about options outstanding at
December 31, 2000 under the Performance Plan:
WEIGHTED
OPTIONS OUTSTANDING SHARES PRICES AVERAGE PRICE
- ------------------- ------ -------------- -------------
Balance at January 1, 1998........................ 430,500 $ 3.69 - 4.29 $4.03
Options granted............................... 315,000 $ 5.03 $5.03
Options forfeited............................. (50,000) $ 3.69 - 4.29 $3.99
-------- -------------- -----
Balance at December 31, 1998...................... 695,500 $ 3.69 - 5.03 $4.48
-------- -------------- -----
Options forfeited............................. (12,500) $ 4.29 - 5.03 $4.59
Options exercised............................. (25,000) $ 3.69 $3.69
-------- -------------- -----
Balance at December 31, 1999...................... 658,000 $ 3.69 - 5.03 $4.52
-------- -------------- -----
Options forfeited............................. (212,500) $ 3.69 - 5.03 $4.54
Options exercised............................. (17,000) $ 3.69 $3.69
-------- -------------- -----
Balance at December 31, 2000...................... 428,500 $ 3.69 - 5.03 $4.53
-------- -------------- -----
-------- -------------- -----
Options granted under the Performance Plan will be exercisable upon the
fulfillment of certain performance criteria, based on the Company's earnings per
share or return on equity, or both, as determined by the Compensation Committee
or the Section 162(m) Subcommittee thereof, as applicable, as well as
fulfillment of time vesting requirements. The options, which generally have a
three-year performance period, time vest regardless of achieving the performance
goal, in one third increments on each of the third, fourth and fifth
anniversaries of the date of grant. If the
44
performance goal has been achieved at the time these options begin time vesting,
the options will become exercisable when the time vesting requirement is met. If
the performance goal has not been achieved by the end of the performance period,
the options will not become exercisable upon time vesting. Rather, the
designated performance goal will automatically be adjusted and the performance
period will be extended one year. Upon achievement of the adjusted performance
goal, the options will be exercisable to the extent they have time vested. If
the adjusted performance goal is not achieved by the end of the fifth year after
the date of grant, the options will expire. During the term of each Performance
Plan option, the option accrues dividend equivalents (if dividends are declared
by the Board of Directors of the Company) which are payable to the option holder
when the option becomes exercisable. During 1997, the Audit and Compensation
Committee approved an acceleration of the time vesting for options granted
during 1996 and 1997. These options time vest on the third anniversary of the
date of the grant, provided that the performance goal is achieved. The
performance goal for the 1996 grant was achieved and the options became
exercisable on January 31, 1999.
Pursuant to the Performance Plan, options are granted with an exercise price
equal to at least 25% of the fair market value of the Class B Common Stock at
the date of grant.
During the fourth quarter of 2000, 50,000 options issued pursuant to the
1996 Performance Plan (with a price of $3.69) were relinquished by the Company's
former Chief Executive Officer pursuant to an agreement between the Company and
the former Chief Executive Officer related to the DOJ investigation and other
related matters. Accordingly, the Company recorded in special charges (see Note
N) a reduction of accrued compensation cost of approximately $1.4 million
previously expensed for these options.
During 1999, the Company determined that fulfillment of the financial
performance criteria for the 1997 and 1998 grants (necessary for these options
to ultimately become exercisable under the terms of the Performance Plan) were
not likely to be achieved, even on an adjusted basis as described above.
Accordingly, the Company recorded a reduction of accrued compensation cost of
approximately $5.9 million previously expensed for its 1997 and 1998 Performance
Plan option grants. The Company recognized compensation expense of $9.0 million
in 1998 relating to the Performance Plan.
The weighted average fair value per share of options granted during 1998 was
$14.02.
PRO FORMA DISCLOSURE OF THE COMPENSATION COST FOR STOCK OPTION PLANS -- As
permitted under SFAS No. 123, 'Accounting for Stock-Based Compensation,' the
Company has elected to continue to measure stock-based compensation using the
intrinsic value approach under APB Opinion No. 25, the former standard. If the
former standard for measurement is elected, SFAS No. 123 requires supplemental
disclosure to show the effects of using the new measurement criteria.
Had compensation cost for the 1997 Plan and the Performance Plan been
determined based on the fair value at the grant date for awards in 2000, 1999
and 1998 consistent with the provisions of SFAS No. 123, the Company's net
(loss) income and (loss) earnings per share would have been equal to the pro
forma amounts indicated below:
YEAR ENDED DECEMBER 31
-----------------------------
2000 1999 1998
---- ---- ----
Net (loss) income -- as reported....................... $(189,694) $32,854 $45,025
Net (loss) income -- pro forma......................... $(211,005) $19,410 $42,704
Basic (loss) earnings per share -- as reported......... $ (3.22) $ 0.57 $ 0.79
Basic (loss) earnings per share -- pro forma........... $ (3.58) $ 0.33 $ 0.75
Diluted (loss) earnings per share -- as reported....... $ (3.22) $ 0.56 $ 0.79
Diluted (loss) earnings per share -- pro forma......... $ (3.58) $ 0.33 $ 0.75
The pro forma information reflected above may not be representative of the
amounts to be expected in future years as the fair value method of accounting
contained in SFAS No. 123 has not been applied to options granted prior to
January 1995.
45
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for all grants prior to 2000: dividend yield of 1.0%; expected
volatility of 35.0%; risk-free rate of return of 5.4%; and expected life of 7.5
years. For 2000, the following weighted average assumptions used were: dividend
yield of 0.0%; expected volatility of 35.0%; risk-free rate of return of 6.0%
and expected life of 7.5 years. The compensation cost generated by the
Black-Scholes model may not be indicative of the future benefit received by the
option holder.
STOCK COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS -- Effective April 30,
1998, the Company amended the Director Stock Ownership Plan. At December 31,
2000, the Company has reserved 123,875 shares of Class A Common Stock for
issuance in connection with the Stock Compensation Plan for Non-employee
Directors (the 'Amended Plan'). During 2000, 22,035 shares were issued to
non-employee directors under the Amended Plan. During both 1999 and 1998, 15,255
shares were issued to non-employee directors under the Amended Plan. During
1998, 3,690 shares were issued to non-employee directors under the Director
Stock Ownership Plan.
STOCK REPURCHASE PROGRAMS -- In June 1996, the Company authorized an
increase in the number of shares of its outstanding Class A Common Stock to be
acquired under the November 30, 1995 stock repurchase program from one million
shares to four million shares. As of December 31, 2000, 2.5 million shares had
been repurchased under this program. There were no repurchases of stock during
2000 and 1999. Due to the current liquidity situation of the Company, management
does not currently expect to make any stock repurchases.
NOTE L -- PENSION ARRANGEMENTS
The Company has a defined contribution plan for U.S. employees who have
completed 90 consecutive days of employment (the 'Retirement Savings Plan'). The
Company contributes an amount equal to 2% of each participant's compensation to
the plan. Additionally, participants may elect to contribute between 2% and 12%
of their compensation, up to the maximum amount allowable under Internal Revenue
Service ('IRS') regulations, on a pre-tax basis. Employee savings are matched by
a Company contribution of up to an additional 6% of the participant's
compensation. The Company's pension expense related to the Retirement Savings
Plan totaled $3.4 million, $3.7 million and $2.7 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
The Company has an unfunded Benefits Equalization Plan (the 'BEP'). The BEP
provides for certain officers of the Company whose contributions to the
Retirement Savings Plan are limited by IRS regulations. Such officers may enter
into agreements pursuant to which their salaries will be reduced and the Company
will maintain accounts on their behalf in the amount of the difference between
the aggregate amount of contributions that would have been made to the
Retirement Savings Plan in the absence of the limitations, and the aggregate
amount of contributions actually made to the Retirement Savings Plan. Employee
savings are matched by a Company contribution of up to an additional 6% of the
participant's compensation. The participant deferrals earn interest at a rate
equal to 3.3% above the 10-year U.S. Treasury Bond rate. The total unfunded
liability of the BEP was $12.5 million and $9.4 million as of December 31, 2000
and 1999, respectively, and is included in the Consolidated Balance Sheets as
other liabilities. The Company's pension expense related to the BEP totaled $0.9
million for the years ended December 31, 2000 and 1999, respectively, and $0.6
million for the year ended December 31, 1998.
The Company also makes annual contributions to a defined benefit pension
plan covering substantially all U.K. employees.
46
The change in the projected benefit obligation ('PBO') is as follows:
AS OF DECEMBER 31
-----------------------
2000 1999
---- ----
(THOUSANDS OF DOLLARS)
PBO at beginning of year................................ $110,258 $104,259
Service cost............................................ 5,231 5,118
Interest cost........................................... 6,670 6,554
Employee contributions.................................. 922 794
Actuarial gain.......................................... (2,409) (1,825)
Benefits paid........................................... (2,644) (2,231)
Foreign currency exchange rate changes.................. (8,388) (2,411)
-------- --------
PBO at end of year...................................... $109,640 $110,258
-------- --------
-------- --------
The change in the fair value of plan assets, the funded status and the
amounts recognized in the Consolidated Balance Sheets are as follows:
AS OF DECEMBER 31,
-----------------------
2000 1999
---- ----
(THOUSANDS OF DOLLARS)
Fair value of plan assets at beginning of year.......... $160,209 $137,436
Actual return on plan assets............................ 19,091 25,950
Employer contributions.................................. 1,054 1,456
Employee contributions.................................. 922 794
Benefits paid........................................... (2,644) (2,231)
Foreign currency exchange rate changes.................. (12,307) (3,196)
-------- --------
Fair value of plan assets at end of year................ $166,325 $160,209
-------- --------
Funded status........................................... $ 56,684 $ 49,951
Unrecognized transitional asset......................... (898) (1,451)
Unrecognized prior service cost......................... 1,810 2,222
Unrecognized actuarial gain............................. (42,886) (38,835)
-------- --------
Prepaid pension cost recorded in the Consolidated
Balance Sheets........................................ $ 14,710 $ 11,887
-------- --------
-------- --------
The components of net pension benefit are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
---- ---- ----
(THOUSANDS OF DOLLARS)
Service cost................................... $ 5,231 $ 5,118 $ 4,891
Interest cost.................................. 6,670 6,554 6,767
Expected return on plan assets................. (12,731) (11,985) (11,129)
Amortization of prior service cost............. 279 297 304
Amortization of actuarial gain................. (1,720) (812) (2,007)
Amortization of transition asset............... (452) (481) (493)
-------- -------- --------
Net pension benefit............................ $ (2,723) $ (1,309) $ (1,667)
-------- -------- --------
-------- -------- --------
The following actuarial assumptions were used in determining the funded
status of the defined benefit pension plan:
2000 1999
---- ----
Weighted average discount rate.............................. 6.5% 6.5%
Weighted average rate of compensation increase.............. 5.0% 5.0%
Weighted average expected long-term rate of return on plan
assets.................................................... 8.0% 9.0%
47
NOTE M -- RELATED PARTY TRANSACTIONS
Prior to December 1995, the Company had a loan program whereby the Company
would directly lend money to certain officers and staff for a term of 15 years
to purchase a residence under notes bearing interest at an annual rate equal to
1 to 2 percentage points below the prime rate. In December 1995, the majority of
the loans under this program were refinanced and replaced by a bank loan program
providing comparable loan terms and interest rates. The Company guarantees all
repayment obligations under this bank loan program, which is available to
employees at the Chief Executive Officer's discretion. For loans under this
program exceeding $0.4 million, the approval of either the Compensation
Committee or Executive Committee of the Board of Directors is required. All
loans are repayable when an employee leaves the Company. The amount of
guarantees outstanding under this program was $3.7 million at
December 31, 2000.
The Company has another bank loan guarantee program available to certain
employees at the Chief Executive Officer's discretion whereby the employee
borrows directly from a bank on a demand note basis and pays an annual interest
rate equal to the prime rate. All of the repayment obligations of the employee
are guaranteed by the Company and repayable when an employee leaves the Company.
These obligations totaled $0.3 million at December 31, 2000.
For the year ended December 31, 2000, the Company recognized approximately
$2.0 million of revenue related to the sale of property consigned by a related
party.
In December 1999, the Company loaned a total of $1.6 million to two
employees on an unsecured, short-term basis bearing interest at approximately
the prime rate. As of December 31, 2000 these loans had been repaid.
Payment of approximately $28 million of the cash retention awards described
in Note O is guaranteed by A. Alfred Taubman, a principal shareholder of the
Company.
(See Notes D and N for additional related party disclosures.)
NOTE N -- SPECIAL CHARGES
During 2000, the Company recorded pre-tax special charges of $203.1 million.
See discussion below for details on the composition of such charges.
In April 1997, the DOJ 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 reviewed whether Sotheby's
and Christie's had any agreement regarding the amounts charged for commissions
in connection with auctions.
A number of private civil complaints, styled as class action complaints,
were also 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 were filed against the Company and certain directors and officers,
alleging failure to disclose the alleged agreements and their impact on the
Company's financial condition and results of operations. A number of shareholder
derivative suits were also filed against the directors of the Company based on
allegations related to the foregoing lawsuits and investigations.
On September 24, 2000, the Company agreed to settle the civil litigation
relating to auctions conducted in the United States (the 'U.S. Antitrust
Litigation') and the shareholder class action litigation (the 'Shareholder
Litigation'). The Company entered into the settlement agreements for the
aforementioned litigation without any admission of liability.
According to the terms of the U.S. Antitrust Litigation settlement, the
Company is required to deposit in an escrow account: (a) $100 million in cash
within 30 days of preliminary court approval of the settlement, (b) an
additional $106 million in cash within 30 days of final court approval of the
settlement and (c) vendor's commission discount certificates (the 'Discount
Certificates') with a fair market value of $50 million within 30 days of final
court approval of the settlement. A. Alfred Taubman, holder of approximately
13.2 million shares of the Company's Class B Common Stock, the Company's former
chairman and a co-defendant in the U.S. Antitrust Litigation, agreed to fund
$156 million of the cash payments due under the terms of the U.S. Antitrust
Litigation settlement. The amount to be funded by A. Alfred Taubman is to be
paid to the Company as
48
follows: (a) $50 million within 29 days of preliminary court approval of the
settlement and (b) $106 million within 29 days of final court approval of the
settlement. During the fourth quarter of 2000, the Company received preliminary
court approval of the U.S. Antitrust Litigation settlement and deposited
$100 million in an escrow account in accordance with the terms of the settlement
agreement. A. Alfred Taubman funded $50 million of this cash payment. On
February 22, 2001, the court conditionally approved the settlement agreement
with respect to the U.S. Antitrust Litigation, subject to agreement by the
parties as to certain issues. Prior to such approval, in order to satisfy the
requirement in the settlement agreement that the certificates have a fair market
value of not less than $50 million, the parties had agreed that the amount of
vendor's commission discount certificates to be included as part of the
settlement would be $62.5 million in face value and that unused certificates
would be redeemable for cash after four years. On March 8, 2001, the Company,
Christie's and lead counsel for the class submitted documentation to the court
which the Company believes satisfies the conditions stated by the court in its
conditional order. If approved by the court, the proposal that has been
submitted would not change any of the economic terms of the settlement described
above. The court has issued an order requiring interested parties to submit any
responses to this proposal no later than March 22, 2001.
The Discount Certificates to be issued as part of the U.S. Antitrust
Litigation settlement will be fully redeemable in connection with any
non-Internet auction that is conducted by the Company in the United States or
the United Kingdom. The Discount Certificates may be used to satisfy consignment
charges involving vendor's commission, risk of loss and/or illustration charges.
Each Discount Certificate will expire five years after the date it is first
issued. However, the face value of any unused Discount Certificates may be
redeemed for cash at the end of four years. The Court determined that the
$62.5 million face value of the Discount Certificates had a fair market value of
$50 million, which equals the value of the Discount Certificates that is
included in special charges. For the year ended December 31, 2000, the Company
recorded a special charge of $100 million (pre-tax) relating to the settlement
of the U.S. Antitrust Litigation.
According to the terms of the Shareholder Litigation settlement, the Company
is required to deposit in an escrow account: (a) $30 million in cash within 30
days of the court's approval of the notice to potential class members and the
court's setting a date for the hearing to consider final approval of the
settlement and (b) Sotheby's Class A Common Stock with a value of $40 million
or, at the Company's option, $40 million in cash, after a pricing period
beginning 30 days after final court approval of the settlement. A. Alfred
Taubman, holder of approximately 13.2 million shares of the Company's Class B
Common Stock, the Company's former chairman and a co-defendant in the
Shareholder Litigation, funded the $30 million of cash due under the terms of
the Shareholder Litigation settlement in December 2000, following court approval
of the notice to potential class members, which amount was deposited in an
escrow account in accordance with the terms of the Shareholder Litigation
settlement agreement. On February 16, 2001, the Company received final court
approval of the Shareholder Litigation settlement. As a result, the Company
currently expects to issue Sotheby's Class A Common Stock with a value of
$40 million in the first or second quarter of 2001. For the year ended
December 31, 2000, the Company recorded a special charge of $40 million
(pre-tax) relating to the settlement of the Shareholder Litigation.
Reflected in the Company's Consolidated Balance Sheet at December 31, 2000
is a $106.0 million settlement recovery due from A. Alfred Taubman, holder of
approximately 13.2 million shares of the Company's Class B Common Stock, the
Company's former chairman and a co-defendant in the U.S. Antitrust Litigation
and the Shareholder Litigation.
On October 5, 2000, the Company entered into a plea agreement with the DOJ
related to its investigation. Pursuant to the plea agreement, the Company pled
guilty to a one-count violation of United States antitrust laws in connection
with a conspiracy to fix auction commission rates charged to sellers in the
United States and elsewhere. On February 2, 2001, the court accepted the
Company's plea and imposed on the Company the $45 million fine provided for in
the plea agreement. The $45 million fine is payable without interest over a
period of five years as follows: (a) $3 million due June 6, 2001, (b) $3 million
due February 6, 2002, (c) $6 million due February 6, 2003, (d) $6 million due
February 6, 2004, (e) $12 million due February 6, 2005 and
49
(f) $15 million due February 6, 2006. For the year ended December 31, 2000, the
Company recorded a special charge of $34.1 million (pre-tax) relating to the
plea agreement with the DOJ. This amount represents the present value of the
amount due to the DOJ discounted at the Company's approximate cost of borrowing.
The $10.9 million discount on the amount payable will be amortized to interest
expense over the payment period.
In November 2000, pursuant to an agreement with Amazon, the activities of
sothebys.amazon.com, the auction website for the sale of authenticated and
guaranteed art and antiques that had been operated by the Company and Amazon
pursuant to a previous co-branded site agreement, were combined with those of
sothebys.com, the Company's own auction website. The agreement provides for
Amazon to promote the sothebys.com website and otherwise provide marketing
services relating to sothebys.com. Under the agreement, Amazon will be entitled
to share in the revenues earned on sothebys.com and to receive additional
performance-based payments, subject to annual minimums. The minimum payments
will be paid ratably over the four-year term of the agreement. The agreement
also provides for releases from any potential claims relating to the operation
of sothebys.amazon.com and the purchase by Amazon in July 1999 of the Company's
Class A Common Stock and warrants to purchase additional shares of the Company's
Class A Common Stock. The Company has determined that $9.5 million of the
minimum payments required under the agreement constitutes consideration for the
release of these claims. For the year ended December 31, 2000, the Company
recorded a special charge of $8.1 million (pre-tax) related to the Company's
agreement with Amazon. This amount represents the present value of the amount
due to Amazon in respect of certain releases discussed above, discounted at the
Company's approximate cost of borrowing. The $1.4 million discount on the amount
payable is being amortized to interest expense over the payment period.
For the year ended December 31, 2000, the Company recorded pre-tax special
charges of $11.6 million consisting primarily of legal and other professional
fees related to the investigation by the DOJ, other governmental inquiries and
investigations, and the related U.S. Antitrust Litigation and Shareholder
Litigation, as discussed above and in Note O. Also included in this amount are
$2.0 million of costs related to the notification of the members of the class of
plaintiffs in the U.S. Antitrust Litigation. In addition, the Company expects to
incur costs in 2001 for printing, issuing and redeeming the Discount
Certificates related to the U.S. Antitrust Litigation settlement. These costs
have not been expensed since they are currently not estimatable. The Discount
Certificates are currently expected to be printed and issued during the second
half of 2001.
During the fourth quarter of 2000, as a result of the DOJ investigation and
other related matters as discussed above, the Compensation Committee approved
special recognition bonuses of up to $9.8 million for certain key employees.
Such special recognition bonuses were in addition to the recipients' regular
compensation. For the year ended December 31, 2000, the Company recorded pre-tax
special charges of $10.2 million, which included approximately $0.4 million in
payroll taxes and were paid during the fourth quarter of 2000.
(See Note K for additional information on special charges.)
NOTE O -- COMMITMENTS AND CONTINGENCIES
COMMITMENTS -- The capital expenditures relating to the construction of the
York Property are currently estimated to be in the range of $151.0 million. As
of February 19, 2001, the Company had financial commitments in relation to this
project of approximately $2.6 million.
As of December 31, 2000, the Company had outstanding letters of credit of
approximately $21.5 million primarily relating to bank guarantees on U.K.
Temporary Import VAT and rental obligations primarily in Europe.
RETENTION PROGRAMS -- During the first and fourth quarter of 2000, the
Compensation Committee approved cash awards for the retention of certain key
employees. In the first quarter of 2001, the Compensation Committee approved a
plan providing for further cash awards for the retention of certain key
employees. Employees granted such cash awards will receive cash payments upon
fulfillment of full-time employment through certain dates in 2001, 2002 and
2003. An employee granted a cash award under any of the foregoing arrangements
who leaves the Company prior to such date will, generally,
50
forfeit his or her right to payment. Under all of the foregoing arrangements,
up to $5.7 million is payable in the third quarter of 2001, up to $20.9 million
is payable in February 2002, up to $6.6 million is payable in September 2002
and up to $9.6 million is payable in January 2003.
All amounts related to the above retention programs are being amortized over
the contractual service period and are included in salaries and related costs.
The Company has recognized approximately $3.4 million related to such programs
for the year ended December 31, 2000.
LEGAL ACTIONS -- The European Commission is conducting an investigation
regarding commissions charged by the Company and Christie's for auction
services. Although the outcome of this investigation cannot presently be
determined, any loss resulting from this investigation could have a material
impact on the Company's financial condition, liquidity and/or results of
operations. The amount of any such loss is not currently estimatable.
As discussed previously in Note N, the Company's settlement of the U.S.
Antitrust Litigation is subject to final court approval. (See Note N above and
Part I, Item 3 'Legal Proceedings' for further discussion related to the U.S.
Antitrust Litigation and the Shareholder Litigation.)
The Company also becomes involved, from time to time, in various claims and
lawsuits incidental to the ordinary course of its business. The Company does not
believe that the outcome of any such pending claims or proceedings will have a
material effect upon its business or financial condition.
LENDING AND OTHER CONTINGENCIES -- The Company enters into legal binding
arrangements to lend, primarily on a collateralized basis, to potential
consignors and other individuals who have collections of fine art or other
objects. Unfunded commitments to extend additional credit were approximately
$18.7 million and $20.0 million at December 31, 2000 and 1999, respectively.
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 (or if the property doesn't sell, the amount of the guarantee must be
paid). At December 31, 2000, the Company had outstanding guarantees totaling
approximately $13.8 million, which covers auction property having a mid-estimate
sales price of approximately $23.1 million. At February 19, 2001, the Company
had outstanding guarantees totaling approximately $7.0 million, which covers
auction property having a mid-estimate sales price of approximately
$7.5 million. Under certain guarantees, the Company participates in a share of
the proceeds if the property under guarantee sells above a minimum price. In
addition, the Company is obligated under the terms of certain guarantees to fund
a portion of the guarantee prior to the auction. At December 31, 2000,
$6.0 million had been funded under outstanding guarantees. At February 19, 2001,
no amounts had been funded.
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 financial condition, liquidity and/or results of operations, with the
possible exception of the investigation by the European Commission regarding
commissions charged by the Company and Christie's for auction services.
(See Notes F, M and N for other contingencies.)
NOTE P -- RESTRUCTURING CHARGES
During the fourth quarter of 2000, management completed the comprehensive
strategic and operational review of the Company's businesses. Based on the
results of this review, the Board of Directors approved a restructuring plan
(the 'Restructuring Plan') in the Company's Auction segment in December 2000.
Management believes that the Restructuring Plan will make the Company more
competitive both in key high-end markets worldwide and in the middle market in
London and will also enhance profitability through the realization of cost
savings. To achieve this goal, the Company expects to focus resources on
high-end markets, including the paintings and jewelry categories. Through the
consolidation of certain departmental resources and sales, the Company will be
reducing operating costs in lower-end markets, which contribute a much lower
51
percentage of revenues. The Company plans to achieve operating efficiencies by
managing certain markets globally rather than regionally, including the
principal fine arts categories of Impressionist, Contemporary, Old Masters and
19th Century Paintings as well as Jewelry and Asian works of art. As part of the
Company's strategy to become more competitive in the middle market in London, a
specially dedicated middle market salesroom will be opened at Olympia in West
London in the second half of 2001. The Olympia facility will incorporate certain
departments from the Company's existing New Bond Street, London salesroom, as
well as certain departments from the Company's auction center in Sussex.
Additionally, the Company expects to focus its Internet activities on generating
sales growth through its dealer network and will achieve cost savings by the
elimination of employees, reducing marketing programs and limiting its consigned
property handling activities. The consolidation and integration of the Company's
live and Internet operations in the flagship York Avenue location, which is
expected to take place by the end of the first quarter of 2001, will also
contribute to cost savings.
The Restructuring Plan includes the termination of approximately 175
employees worldwide in the Company's Auction segment. These terminations will
primarily impact the administrative and support functions of the Auction
segment.
As part of the Restructuring Plan, the Company also wrote-off certain
investments as a result of the curtailment of certain activities.
In connection with the implementation of the Restructuring Plan, the Company
recorded pre-tax charges of approximately $12.6 million in the fourth quarter of
2000. The restructuring charges and the amounts charged to the liability through
December 31, 2000 were as follows:
SEVERANCE LEASE AND
AND CONTRACT
TERMINATION ASSET TERMINATION OTHER
BENEFITS WRITE-OFFS COSTS COSTS TOTAL
-------- ---------- ----- ----- -----
(THOUSANDS OF DOLLARS)
2000 Provision...................... $7,127 $ 3,844 $1,117 $546 $12,634
2000 Activity....................... -- (3,844) -- -- (3,844)
------ ------- ------ ---- -------
Provision at December 31, 2000...... $7,127 $ -- $1,117 $546 $ 8,790
------ ------- ------ ---- -------
------ ------- ------ ---- -------
Total cash expenditures related to the Restructuring Plan are expected to be
approximately $8.8 million, of which approximately 20% will be paid in the first
quarter of 2001. The remaining cash expenditures related to the Restructuring
Plan are expected to be made throughout the remainder of 2001.
In 1998, the Company recorded restructuring charges of $15.2 million
relating to the construction of the York Property. Approximately $14.1 million
of this amount was a non-cash charge resulting from the impairment of existing
leasehold improvements and related furniture and fixtures. The remaining amount
of approximately $1.1 million was a provision resulting from the cost of future
rental obligations and certain lease termination costs on rental space in New
York City that are being abandoned as part of the Company's plan to consolidate
its auction operations within the York Property. During 2000, the Company paid
$0.2 million in settlement of a portion of these obligations. As of
December 31, 2000 and 1999, the Company has recorded in other liabilities in the
Consolidated Balance Sheet, approximately $0.9 million and $1.1 million,
respectively, related to the remaining future obligations. The remaining amounts
will be paid out starting approximately March 2001 through September 2003.
NOTE Q -- ACQUISITIONS
In January 1999, the Company's Real Estate segment (see Note C) acquired
Teton Shadows Realty, Inc., a real estate brokerage firm in Jackson Hole,
Wyoming. This acquisition has been accounted for as a purchase and did not have
a material effect on the Company's financial statements, thus pro-forma results
of operations have not been included herein.
In June, 1998, the Company's Real Estate segment acquired Christopher
Webster Real Estate of Sante Fe, Inc., a real estate brokerage firm in Sante Fe,
New Mexico. In October, 1998, the Company's Auction segment acquired Davis and
Co., a wine auctioneer in Chicago, Illinois. Both
52
of these acquisitions have been accounted for as a purchase. These acquisitions
did not have a material effect on the Company's financial statements, thus
pro-forma results of operations have not been included herein.
NOTE R -- QUARTERLY RESULTS (UNAUDITED)
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
2000
Auction sales................................. $176,056 $864,079 $ 131,864 $ 764,317
-------- -------- --------- ----------
Auction and related revenues.................. $ 40,389 $139,203 $ 27,946 $ 128,489
Other revenues................................ 14,381 18,158 14,606 14,616
-------- -------- --------- ----------
Total revenues............................ $ 54,770 157,361 42,552 $ 143,105
-------- -------- --------- ----------
-------- -------- --------- ----------
Operating (loss) income before special charges
and restructuring charges................... $(41,672) $ 51,989 $ (37,522) $ 5,825
Operating (loss) income after special charges
and restructuring charges................... (43,480) 49,979 (222,288) (21,294)
-------- -------- --------- ----------
Net (loss) income............................. $(29,088) $ 30,037 $(184,179) $ (6,464)
-------- -------- --------- ----------
-------- -------- --------- ----------
Basic (loss) earnings per share............... $ (0.49) $ 0.51 $ (3.13) $ (0.11)
-------- -------- --------- ----------
-------- -------- --------- ----------
Diluted (loss) earnings per share............. $ (0.49) $ 0.51 $ (3.13) $ (0.11)
-------- -------- --------- ----------
-------- -------- --------- ----------
1999
Auction sales................................. $235,673 $799,647 $ 129,492 $1,093,940
-------- -------- --------- ----------
Auction and related revenues.................. $ 51,665 $131,694 $ 32,677 $ 174,065
Other revenues................................ 11,537 14,315 12,598 14,034
-------- -------- --------- ----------
Total revenues............................ $ 63,202 $146,009 $ 45,275 $ 188,099
-------- -------- --------- ----------
-------- -------- --------- ----------
Operating (loss) income....................... $(14,611) $ 50,999 $ (37,953) $ 55,738
-------- -------- --------- ----------
-------- -------- --------- ----------
Net (loss) income............................. $ (9,526) $ 31,697 $ (23,757) $ 34,440
-------- -------- --------- ----------
-------- -------- --------- ----------
Basic (loss) earnings per share............... $ (0.17) $ 0.55 $ (0.41) $ 0.59
-------- -------- --------- ----------
-------- -------- --------- ----------
Diluted (loss) earnings per share............. $ (0.17) $ 0.53 $ (0.41) $ 0.57
-------- -------- --------- ----------
-------- -------- --------- ----------
53
REPORT OF MANAGEMENT
The Company's consolidated financial statements were prepared by management,
which is responsible for their integrity and objectivity. The financial
statements have been prepared in accordance with generally accepted accounting
principles and, as such, include amounts based on management's best estimates
and judgments.
Management is further responsible for maintaining systems of internal
control and related policies and procedures designed to provide reasonable
assurance that assets are adequately safeguarded and that the accounting records
reflect transactions executed in accordance with management's authorization.
/s/ WILLIAM F. RUPRECHT /s/ WILLIAM S. SHERIDAN /s/ MICHAEL L. GILLIS
William F. Ruprecht William S. Sheridan Michael L. Gillis
President and Executive Vice President and Vice President, Controller
Chief Executive Officer Chief Financial Officer and Chief Accounting Officer
AUDIT COMMITTEE CHAIRMAN'S LETTER
The Audit Committee (the 'Committee') of the Board of Directors consisted of
four independent directors. Information as to these persons, as well as the
scope of duties of the Committee, is provided in the Proxy Statement. During
2000, the Committee met ten times and reviewed with Deloitte & Touche LLP, the
Director of the Internal Audit Department and management the various audit
activities and plans, together with the results of selected internal audits. The
Committee also reviewed the reporting of consolidated financial results and the
adequacy of internal controls. The Committee recommended the appointment of
Deloitte & Touche LLP to the Board of Directors. The Director of the Internal
Audit Department and Deloitte & Touche LLP met privately with the Committee on
occasion to encourage confidential discussion as to any auditing matters.
/s/ MICHAEL BLAKENHAM
Michael Blakenham
Chairman, Audit Committee
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item is incorporated by reference to the
Company's definitive proxy statement for the annual meeting of shareholders to
be held in 2001 (the 'Proxy Statement') under the captions 'Election of
Directors' and 'Management-Executive Officers.'
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
material appearing in the Proxy Statement under the captions 'Management --
Compensation of Executive Officers' and 'Compensation of Directors.'
Notwithstanding anything to the contrary herein, the Compensation Committee
Report and the Performance Graph in the Proxy Statement are not incorporated
by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
table and related footnotes appearing in the Proxy Statement under the caption
'Class A and Class B Common Stock Ownership of Directors, Executive Officers and
5% Shareholders.'
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
material appearing in the Proxy Statement under the captions 'Certain Employment
and Compensation Arrangements', 'Certain Transactions' and 'Compensation
Committee Interlocks and Insider Participation.'
55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
14(a)(1) -- The following consolidated financial statements of Sotheby's
Holdings, Inc. and subsidiaries, are contained in Item 8:
Consolidated Statements of Income -- Years ended
December 31, 2000, 1999 and 1998; Consolidated Balance
Sheets -- December 31, 2000 and 1999; Consolidated
Statements of Cash Flows -- Years ended December 31, 2000,
1999 and 1998; Consolidated Statement of Changes in
Shareholders' Equity -- Years ended December 31, 2000, 1999
and 1998; Notes to Consolidated Financial Statements --
December 31, 2000.
14(a)(2) -- The following is a list of the consolidated financial
statement schedules of Sotheby's Holdings, Inc. and
subsidiaries and the Independent Auditors' Report required
by Item 14(d): Independent Auditors' Report on Financial
Statement Schedule II -- Valuation and Qualifying Accounts
14(a)(3)
1 -- Underwriting Agreement, dated as of February 2, 1999 among
Sotheby's Holdings, Inc., Morgan Stanley and Co.
Incorporated, Chase Securities Inc. and Merrill Lynch,
Pierce, Fenner and Smith Incorporated, incorporated by
reference to Exhibit 1 to the current report on Form 8-K,
filed on February 10, 1999 with the Securities and Exchange
Commission.
3(a) -- Amended and Restated Articles of Incorporation of Sotheby's
Holdings, Inc., as amended, incorporated by reference to
Exhibit 4(b) to Registration Statement No. 33-26008, SEC
File No. 1-9750, on file at the Washington, D.C. office of
the Securities and Exchange Commission.
3(b) -- Amended and Restated By-Laws of Sotheby's Holdings, Inc., as
amended, through August 3, 2000.
4(a) -- See Exhibits 3(a) and 3(b).
4(b) -- Indenture, dated as of February 5, 1999, between Sotheby's
Holdings, Inc. and The Chase Manhattan Bank as Trustee,
incorporated by reference to Exhibit 4(a) to the current
report on Form 8-K, filed on February 10, 1999 with the
Securities and Exchange Commission.
4(c) -- Fixed Rate Note, dated February 5, 1999, made by Sotheby's
Holdings, Inc. in favor of Cede & Co., incorporated by
reference to Exhibit 4(b) to the current report on
Form 8-K, filed on February 10, 1999 with the Securities and
Exchange Commission.
10(a) -- Issuing and Paying Agency Agreement, dated February 15,
1989, between Sotheby's, Inc. and The Chase Manhattan Bank,
N.A. relating to the issuance of short-term notes ('U.S.
Notes') in the U.S. Commercial Paper market, incorporated by
reference to Exhibit 10(g) to the 1988 Form 10-K, SEC File
No. 1-9750, on file at the Washington, D.C. office of the
Securities and Exchange Commission.
10(b) -- U.S. Commercial Paper Dealer Agreement, dated July 29, 1998,
between Sotheby's, Inc., Sotheby's Holdings, Inc. and Chase
Securities Inc. relating to the issuance of the U.S. Notes,
incorporated by reference to Exhibit 10(a) to the Third
Quarter Form 10-Q for 1998.
10(c) -- U.S. Commercial Paper Dealer Agreement, dated February 15,
1989, between Sotheby's, Inc. and Merrill Lynch Money
Markets, Inc. relating to the issuance of the U.S. Notes,
incorporated by reference to Exhibit 10(i) of the 1988
Form 10-K, SEC File No. 1-9750, on file at the Washington,
D.C. office of the Securities and Exchange Commission.
10(d) -- Amendment, dated July 13, 1998, to U.S. Commercial Paper
Dealer Agreement, dated February 15, 1989, between
Sotheby's, Inc., and Merrill Lynch Money Markets Inc.
relating to the issuance of the U.S. Notes, incorporated by
reference to Exhibit 10(b) to the Third Quarter Form 10-Q
for 1998.
10(e) -- Agreement of Sale and Purchase, dated as of September 9,
1999, between Benenson and York Avenue Development, Inc. for
the York Property incorporated by reference to Exhibit 10(l)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
56
10(f) -- Assignment and Assumption of Agreement of Sale and Purchase,
dated as of September 9, 1999, between York Avenue
Development, Inc. and Sotheby's Inc. incorporated by reference
to Exhibit 10(m) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
10(g) -- Guaranty, dated September 9, 1999, made by Sotheby's
Holdings, Inc. in favor of Benenson incorporated by reference to
Exhibit 10(n) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
10(h)* -- Sotheby's, Inc. 1988 Benefit Equalization Plan, incorporated
by reference to Exhibit 10(t) to Registration Statement
No. 33-17667.
10(i)* -- Sotheby's Holdings, Inc. 1987 Stock Option Plan as amended
and restated effective June 1, 1994 incorporated by
reference to Exhibit 10(o) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994 (the '1994
Form 10-K').
10(j)* -- Sotheby's Holdings, Inc. Performance Share Purchase Plan,
incorporated by reference to Exhibit 10(a) to the Second
Quarter Form 10-Q for 1996.
10(k)* -- Sotheby's Holdings, Inc. 1997 Stock Option Plan Composite
Plan Document, effective January 1, 2000.
10(l) -- Agreement of Partnership of Acquavella Modern Art, dated May
29, 1990, between Sotheby's Nevada, Inc. and Acquavella
Contemporary Art, Inc. incorporated herein by reference to
Exhibit 10(b) to the Form 8-K, filed on June 7, 1990, SEC
File No. 1-9750, on file at the Washington, D.C. office of
the Securities and Exchange Commission.
10(m) -- First Amendment to Agreement of Partnership dated
December 31, 2000, of Acquavella Modern Art, between
Sotheby's Nevada, Inc. and Acquavella Contemporary Art, Inc.
10(n)* -- Amended and Restated Sotheby's Holdings, Inc. Director Stock
Ownership Plan, incorporated herein by reference to Exhibit
10(v) to the 1996 Form 10-K.
10(o)* -- Sotheby's Holdings, Inc. 1998 Stock Compensation Plan for
Non-Employee Directors, dated as of March 3, 1998,
incorporated herein by reference to Exhibit 10(u) to the
1998 Form 10-K.
10(p) -- Amended and Restated Credit Agreement, dated as of March 10,
2000, among Sotheby's Holdings, Inc., Sotheby's Inc.,
Oatshare Limited, Sotheby's, the lender named therein, and
The Chase Manhattan Bank, incorporated by reference to
Exhibit 10(z) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
10(q) -- First Amendment to Amended and Restated Credit Agreement,
dated as of November 9, 2000, incorporated by reference to
Exhibit 10.1 to the current report on Form 8-K of the
Company, filed on December 29, 2000 with the Securities and
Exchange Commission.
(21) -- Subsidiaries of the Registrant
(23) -- Consent of Deloitte & Touche LLP
(24) -- Powers of Attorney
(14)(b) -- Current Reports on Form 8-K: The Company filed a current
report on Form 8-K with the Securities and Exchange
Commission on December 29, 2000.
(14)(c) -- The list of exhibits filed with this report is set forth in
response to Item 14(a)(3). The required exhibit index has
been filed with the exhibits.
(14)(d) -- The financial statement schedules of the Company listed in
response to Item 14(a)(2) are filed pursuant to this Item
14(d).
- ---------
* A compensatory agreement or plan required to be filed pursuant to Item 14(c)
of Form 10-K
57
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
SOTHEBY'S HOLDINGS, INC.:
We have audited the consolidated financial statements of Sotheby's Holdings,
Inc. and subsidiaries as of December 31, 2000 and 1999, and for each of the
three years in the period ended December 31, 2000 and have issued our report
thereon dated February 19, 2001; such consolidated financial statements and
report are included elsewhere in this Form 10-K. Our audits also included the
consolidated financial statement schedule of Sotheby's Holdings, Inc. and
subsidiaries listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
FEBRUARY 19, 2001
58
SCHEDULE II
SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- --------- -------- -------- ---------- ------
(THOUSANDS OF DOLLARS)
Valuation reserve deducted in the
balance sheet from the asset to which
it applies:
Accounts and notes receivable:
2000 Allowance for doubtful
accounts...................... $11,085 $14,646 $1,342 $4,138 $22,935
1999 Allowance for doubtful
accounts...................... $14,585 $ 3,476 $1,858 $8,834 $11,085
1998 Allowance for doubtful
accounts...................... $10,419 $ 6,598 $ 285 $2,717 $14,585
Inventory:
2000 Realizable value
allowance..................... $ 9,140 $ 1,734 $ -- $2,816 $ 8,058
1999 Realizable value
allowance..................... $ 9,422 $ 1,337 $ 186 $1,805 $ 9,140
1998 Realizable value
allowance..................... $15,726 $ 1,653 $ 855 $8,812 $ 9,422
During 2000, amounts charged to the allowance for doubtful accounts include
a $9.0 million provision for an unsecured loan. (See Note D of Notes to
Consolidated Financial Statements.)
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOTHEBY'S HOLDINGS, INC.
By /s/ WILLIAM F. RUPRECHT
.....................................
WILLIAM F. RUPRECHT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 14, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
*
......................................... Chairman of the Board March 14, 2001
MICHAEL I. SOVERN
*
......................................... Vice Chairman of the Board March 14, 2001
MAX M. FISHER
*
......................................... Deputy Chairman of the Board March 14, 2001
THE MARQUESS OF HARTINGTON
/S/ WILLIAM F. RUPRECHT
......................................... President, Chief Executive Officer March 14, 2001
WILLIAM F. RUPRECHT and Director
*
......................................... Executive Vice President and March 14, 2001
ROBIN WOODHEAD Director
*
......................................... Director March 14, 2001
CONRAD BLACK
*
......................................... Director March 14, 2001
MICHAEL BLAKENHAM
*
......................................... Director March 14, 2001
GEORGE S. BLUMENTHAL
*
......................................... Director March 14, 2001
STEVEN B. DODGE
*
......................................... Director March 14, 2001
DR. HENRY G. JARECKI
*
......................................... Director March 14, 2001
HENRY R. KRAVIS
*
......................................... Director March 14, 2001
JEFFREY H. MIRO
60
*
......................................... Director March 14, 2001
BRIAN S. POSNER
*
......................................... Director March 14, 2001
SHARON PERCY ROCKEFELLER
*
......................................... Director March 14, 2001
ROBERT S. TAUBMAN
/S/ WILLIAM S. SHERIDAN
......................................... Executive Vice President and March 14, 2001
WILLIAM S. SHERIDAN Chief Financial Officer
/S/ MICHAEL L. GILLIS
......................................... Vice President, Controller and March 14, 2001
MICHAEL L. GILLIS Chief Accounting Officer
/S/ WILLIAM S. SHERIDAN March 14, 2001
.........................................
*WILLIAM S. SHERIDAN
AS ATTORNEY-IN-FACT
61
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
1 -- Underwriting Agreement, dated as of February 2, 1999
among Sotheby's Holdings, Inc., Morgan Stanley and Co.
Incorporated, Chase Securities Inc. and Merrill Lynch,
Pierce, Fenner and Smith Incorporated, incorporated by
reference to Exhibit 1 to the current report on Form 8-K,
filed on February 10, 1999 with the Securities and
Exchange Commission.
3(a) -- Amended and Restated Articles of Incorporation of
Sotheby's Holdings, Inc., as amended, incorporated by
reference to Exhibit 4(b) to Registration Statement
No. 33-26008, SEC File No. 1-9750, on file at the
Washington, D.C. office of the Securities and Exchange
Commission.
3(b) -- Amended and Restated By-Laws of Sotheby's Holdings, Inc.,
as amended, through August 3, 2000.
4(a) -- See Exhibits 3(a) and 3(b).
4(b) -- Indenture, dated as of February 5, 1999, between
Sotheby's Holdings, Inc. and The Chase Manhattan Bank as
Trustee, incorporated by reference to Exhibit 4(a) to the
current report on Form 8-K, filed on February 10, 1999
with the Securities and Exchange Commission.
4(c) -- Fixed Rate Note, dated February 5, 1999, made by
Sotheby's Holdings, Inc. in favor of Cede & Co.,
incorporated by reference to Exhibit 4(b) to the current
report on Form 8-K, filed on February 10, 1999 with the
Securities and Exchange Commission.
10(a) -- Issuing and Paying Agency Agreement, dated February 15,
1989, between Sotheby's, Inc. and The Chase Manhattan
Bank, N.A. relating to the issuance of short-term notes
('U.S. Notes') in the U.S. Commercial Paper market,
incorporated by reference to Exhibit 10(g) to the 1988
Form 10-K, SEC File No. 1-9750, on file at the Washington,
D.C. office of the Securities and Exchange Commission.
10(b) -- U.S. Commercial Paper Dealer Agreement, dated July 29,
1998, between Sotheby's, Inc., Sotheby's Holdings, Inc.
and Chase Securities Inc. relating to the issuance of the
U.S. Notes, incorporated by reference to Exhibit 10(a) to
the Third Quarter Form 10-Q for 1998.
10(c) -- U.S. Commercial Paper Dealer Agreement, dated
February 15, 1989, between Sotheby's, Inc. and Merrill
Lynch Money Markets, Inc. relating to the issuance of the
U.S. Notes, incorporated by reference to Exhibit 10(i) of
the 1988 Form 10-K, SEC File No. 1-9750, on file at the
Washington, D.C. office of the Securities and Exchange
Commission.
10(d) -- Amendment, dated July 13, 1998, to U.S. Commercial Paper
Dealer Agreement, dated February 15, 1989, between
Sotheby's, Inc., and Merrill Lynch Money Markets Inc.
relating to the issuance of the U.S. Notes, incorporated
by reference to Exhibit 10(b) to the Third Quarter
Form 10-Q for 1998.
10(e) -- Agreement of Sale and Purchase, dated as of September 9,
1999, between Benenson and York Avenue Development, Inc.,
for the York Property incorporated by reference to Exhibit 10(l)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
10(f) -- Assignment and Assumption of Agreement of Sale and
Purchase, dated as of September 9, 1999, between York
Avenue Development, Inc. and Sotheby's, Inc. incorporated by
reference to Exhibit 10(m) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
10(g) -- Guaranty, dated September 9, 1999, made by Sotheby's
Holdings, Inc. in favor of Benenson incorporated by
reference to Exhibit 10(n) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
10(h)* -- Sotheby's, Inc. 1988 Benefit Equalization Plan,
incorporated by reference to Exhibit 10(t) to
Registration Statement No. 33-17667.
10(i)* -- Sotheby's Holdings, Inc. 1987 Stock Option Plan as
amended and restated effective June 1, 1994 incorporated
by reference to Exhibit 10(o) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994
(the '1994 Form 10-K').
62
10(j)* -- Sotheby's Holdings, Inc. Performance Share Purchase Plan,
incorporated by reference to Exhibit 10(a) to the Second
Quarter Form 10-Q for 1996.
10(k)* -- Sotheby's Holdings, Inc. 1997 Stock Option Plan Composite
Plan Document, effective January 1, 2000.
10(l) -- Agreement of Partnership of Acquavella Modern Art, dated
May 29, 1990, between Sotheby's Nevada, Inc. and
Acquavella Contemporary Art, Inc., incorporated herein by
reference to Exhibit 10(b) to the Form 8-K, filed on
June 7, 1990, SEC File No. 1-9750, on file at the
Washington, D.C. office of the Securities and Exchange
Commission.
10(m) -- First Amendment to Agreement of Partnership dated
December 31, 2000, of Acquavella Modern Art, between
Sotheby's Nevada, Inc. and Acquavella Contemporary Art,
Inc.
10(n)* -- Amended and Restated Sotheby's Holdings, Inc. Director
Stock Ownership Plan, incorporated herein by reference to
Exhibit 10(u) to the 1998 Form 10-K.
10(o)* -- Sotheby's Holdings, Inc. 1998 Stock Compensation Plan for
Non-Employee Directors, dated as of March 3, 1998
incorporated herein by reference to Exhibit 10(u) the 1998
Form 10-K.
10(p) -- Amended and Restated Credit Agreement, dated as of
March 10, 2000, among Sotheby's Holdings, Inc., Sotheby's
Inc., Oatshare Limited, Sotheby's, the lenders named
therein, and The Chase Manhattan Bank, incorporated by
reference to Exhibit 10(z) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
10(q) -- First Amendment to Amended and Restated Credit Agreement, dated
as of November 9, 2000, incorporated by reference to
Exhibit 10.1 to the current report on Form 8-K, filed on
December 29, 2000 with the Securities and Exchange
Commission.
(21) -- Subsidiaries of the Registrant
(23) -- Consent of Deloitte & Touche LLP
(24) -- Powers of Attorney
- ---------
* A compensatory agreement or plan required to be filed pursuant to Item 14(c)
of Form 10-K.
63
STATEMENT OF DIFFERENCES
The British pound sterling sign shall be expressed as........................'L'