[PHOTO OMITTED]
1998 Sotheby's Holdings, Inc. Annual Report
[PHOTO OMITTED]
Building upon a solid base
Building Our Future
FINANCIAL HIGHLIGHTS 2 SHAREHOLDER'S LETTER 5 FINANCIALS 31
Nineteen ninety-eight FINANCIAL PERFORMANCE
[The following table was depicted as a bar graph in the printed material.]
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
($ in million)
REVENUES 259.7 312.9 336.5 381.8 447.1
EXPENSES* 226.6 256.0 268.3 302.3 351.1
NET INCOME** 20.3 32.6 40.9 48.0 54.3
* Excludes non-recurring charges of $11.7 million in 1997 and $15.2 million
in 1998.
** Excludes non-recurring charges of $7.4 million in 1997 and $9.3 million in
1998 after tax.
2 SOTHEBY'S HOLDINGS, INC.
YEAR ENDED DECEMBER 31
(Thousands of dollars, except per share data) 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA
AUCTION SALES(1) ..................... $ 1,939,743 $ 1,843,335 $ 1,599,595 $ 1,665,378 $ 1,330,001
----------- ----------- ----------- ----------- -----------
AUCTION AND RELATED REVENUES ......... $ 367,204 $ 335,511 $ 302,196 $ 282,096 $ 233,557
OTHER REVENUES ....................... 79,848 46,281 34,300 30,784 26,106
----------- ----------- ----------- ----------- -----------
TOTAL REVENUES ....................... 447,052 381,792 336,496 312,880 259,663
OPERATING INCOME ..................... 95,978(2) 79,459(4) 68,208 56,841 33,033
NET INCOME ........................... $ 54,298(3) $ 47,979(5) $ 40,946 $ 32,582 $ 20,259
----------- ----------- ----------- ----------- -----------
DILUTED EARNINGS PER SHARE ........... $ 0.95(3) $ 0.85(5) $ 0.73 $ 0.58 $ 0.36
----------- ----------- ----------- ----------- -----------
BALANCE SHEET AT DECEMBER 31
NET CASH (DEBT)(6) ................... $ 69,140 $ (85,526) $ 63,675 $ (3,103) $ (1,416)
----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY ................. $ 314,087 $ 260,068 $ 253,972 $ 227,482 $ 211,052
=========== =========== =========== =========== ===========
(1) Auction sales represent sales at the hammer price plus buyer's premium.
(2) Excludes 1998 non-recurring charge of $15.2 million.
(3) Excludes 1998 non-recurring charge of $9.3 million after tax.
(4) Excludes 1997 non-recurring charges of $11.7 million.
(5) Excludes 1997 non-recurring charges of $7.4 million after tax.
(6) Short-term borrowings and commercial paper less cash and cash equivalents.
SHAREHOLDER COMMUNICATION SERVICE Sotheby's Financial Information and News
Releases are available by recording, fax or through the mail by calling our
shareholder direct toll free line at 800.700.6321, 24 hours a day. In addition
to providing financial information, our website, sothebys.com, includes on-line
auction catalogue text, a global events calendar, and sale results.
A WORLDWIDE BUSINESS Sotheby's conducts business in 41 countries with 20 auction
centers. In 1998 we held over 680 auctions worldwide in 80 collecting
categories. We sold approximately 175,000 lots with an average lot price of
$11,000. 78% of the total lots sold were below $5,000. Our expert staff numbers
approximately 400 and our expert department heads have an average of nearly 20
years experience with Sotheby's.
GEOGRAPHIC DISTRIBUTION DEPARTMENTAL DISTRIBUTION
OF 1998 AUCTION SALES OF 1998 AUCTION SALES
- ----------------------- -------------------------
10% Jewelry
22% Impressionist
56% North America and Modern Art
32% United Kingdom 7% Old Master Paintings
8% Contemporary Art
9% Continental Europe 12% Other Paintings
and Fine Arts
8% Furniture
3% Asia 6% 19th Century Paintings
21% Other Decorative Arts
6% Books and Other
three SOTHEBY'S HOLDINGS, INC.
[PHOTO OMITTED]
A. ALFRED TAUBMAN DIANA D. BROOKS
Chairman President and
Chief Executive Officer
To Our Shareholders
Sotheby's stands on the threshold of great change-possibly the greatest
change in our 255-year history. Our York Avenue expansion is proceeding on
schedule, rising six floors above our existing location, becoming a
state-of-the-art auction facility and cultural destination. New premises
in Amsterdam and Zurich will open this year, furthering our European
strategy of having salesrooms in key locations. We have just announced the
formation of sothebys.com, our Internet auction division, which we expect
will transform our business. As we write this letter in February 1999, it
is clear that the dynamism of our business and the opportunities for us
this year were made possible by initiatives, strategies and relationships
that were planned or strengthened in 1998, a pivotal year for our Company.
We are pleased to report that net income increased for the sixth consecutive
year, reaching $54.3 million, or $0.95 per diluted share, excluding a
non-recurring charge. Through modest growth in our worldwide auction sales,
Building a Dynamic Business Worldwide
which achieved $1.9 billion, a 5% increase over 1997, as well as record
contributions from our Financial Services and Real Estate operations for the
second consecutive year, total revenues increased to $447.1 million.
Building projects, development of several client service and business
initiatives, as well as our Internet auction strategy, predominated in 1998.
BUILDING PROJECTS Three new buildings-in New York, Amsterdam and Zurich-will
revolutionize the way we conduct business, improving efficiency while enhancing
the overall client experience with Sotheby's. This year we began construction on
six additional stories at our New York headquarters, and we will move into these
top floors in 1999, holding our first auctions in the autumn. We anticipate
completion of this building project in the year 2000, with the renovation of the
first four floors finished. In Amsterdam and Zurich we are building new and
larger middle-market sales centers to take advantage of opportunities within
these key European cities.
RETURN ON
SHAREHOLDERS'
EQUITY
[The following table was depicted as a bar graph in the printed material.]
94 95 96 97 98
---- ---- ---- ---- ----
10.4% 15.4% 18.0% 18.9% 20.9%
Excludes non-recurring charges of $7.4 million in 1997 and $9.3 million in 1998
after tax.
five SOTHEBY'S HOLDINGS, INC.
Nineteen ninety-eight BUILDING A DYNAMIC BUSINESS
CLIENT SERVICE Providing first-class client service will always be among our
highest priorities. This year we instituted a worldwide client management
system. We have reconfigured personnel to more productively manage key client
relationships, implemented a sophisticated client activity tracking system and
instituted an ongoing client service feedback process to support this important
function in the Company.
INTERNET AUCTIONS We believe that sothebys.com, and our innovative strategy for
conducting auctions on the Internet, will add to the dynamic of the global art
and antiques market, creating great potential for Sotheby's and our dealer
associates. We are committing significant resources to developing the highest
level of on-line technology. This, combined with Sotheby's world-renowned name,
our expertise and a guarantee of authenticity, has the possibility of creating
immense value for the Company.
Our auction sales achieved $1.9 billion, the highest total since 1990. This
increase was driven by growth in the United States market, while auction sales
in our European and Asian operations declined for the year. Overall market
strength in North America as well as several successful single-owner collections
led to an increase in auction sales of 17% over 1997. Our European auction sales
declined 3% over 1997, reflecting a lack of single-owner
IN THE FUTURE SOTHEBY'S WILL BECOME A MORE DYNAMIC BUSINESS BY LEVERAGING OUR
collections. In Asia, which represents 3% of our
total auction sales, economic difficulties led to
a decrease in auction sales of 36%.
The memorable auctions of the Collection of the
Duke and Duchess of Windsor and The Reader's
Digest Collection set the tone for 1998. We sold
over 160 lots for more than $1 million each,
including Claude Monet's Waterlily pond and path
by the water, which brought $33.0 million, and
Andy Warhol's Orange Marilyn, which achieved $17.3
million.
People remain at the heart of our business, and we
have made several important board and personnel
appointments that will enhance our current
management team. We were pleased to add two
members to our Board of Directors, Jeffrey Miro
and Sharon Percy Rockefeller. Jeffrey is Chairman
of the Michigan and New York based law firm of
Miro Weiner & Kramer and served as Corporate
Secretary of the Sotheby's Holdings, Inc. board
from 1983 until 1998. Sharon is President and
Chief Executive Officer of WETA
6 SOTHEBY'S HOLDINGS, INC.
TV/FM public stations in Washington, D.C. and is also a member of various
corporate, nonprofit, fine arts and educational boards. Sotheby's will benefit
greatly from their distinguished experiences.
In 1998 we appointed Robin Woodhead to the new position of Chief Executive of
Sotheby's Europe as part of an overall management restructuring. We are also
pleased to welcome Debbie Zoullas to the position of Executive Vice President of
Sotheby's Holdings, Inc. Following a 22-year career with Morgan Stanley, she
brings a wealth of knowledge and expertise in finance and management that will
be of great benefit to us. We are also delighted to have Susan Solomon join us
as Chief Executive Officer of sothebys.com and Executive Vice President of
Sotheby's Holdings, Inc. Her background in law and finance and experience as CEO
of Lancit Media and Sony Worldwide Networks make Susan ideally qualified for
this new business.
[The following table was depicted as a bar graph in the printed material.]
CLOSING
STOCK PRICE
As of December 31
93 94 95 96 97 98
----- ----- ----- ----- ----- -----
15.38 11.50 14.25 18.63 18.75 32.00
($ per share)
AUCTION EXPERTISE AS WE EXPLORE AND DEVELOP EXCITING NEW BUSINESS
OPPORTUNITIES.
The core auction business remains our major focus and we look forward to the
great promise that the 1999 auction season holds for us. It will include the
collection of the late John Hay and Betsey Cushing Whitney, estimated in excess
of $80 million; property from The Estate of an Italian Connoisseur, the largest
auction of furniture and decorations held in London this century and expected
to bring more than $15 million; and baseball memorabilia from the Collection of
Barry Halper, estimated in excess of $15 million and to be offered both live and
over the Internet. We will also be participating in the sale of the contents of
the Chateau de Groussay, which will take place outside Paris this June and
will, we hope, be a prelude to our holding auctions in Paris.
The success of the past year and the potential of 1999 would not be possible
without the commitment and dedication of our worldwide staff. We are very
grateful to them, to our clients and to you, our shareholders, for your ongoing
support of Sotheby's at this exciting time.
/s/ A. Alfred Taubman /s/ Diana D. Brooks
A. Alfred Taubman Diana D. Brooks
Chairman President and Chief Executive Officer
seven SOTHEBY'S HOLDINGS, INC.
Building and strengthening
[PHOTO OMITTED]
[PHOTO OMITTED]
to promote growth
Nineteen ninety-eight BUILDING A DYNAMIC BUSINESS
Visitors to Sotheby's often remark on the unusual and exciting
nature of what we do. Whether in Amsterdam, Hong Kong, London,
Zurich or New York, our buildings are filled with works of art
either on exhibition in our galleries or tucked away behind the
scenes, being researched and catalogued. Looking into the future, we
envision a Sotheby's that will be more open and accessible. You will
notice in this report that we have shown pictures of construction in
progress along with highlights of the year's successes in many
auction categories. The new buildings that we discuss in the
following sections of our report will house a company of many
diverse talents and activities. They will also open our firm to the
world in revolutionary new ways.
SOTHEBY'S NEW YORK Our largest and most exciting building project is our New
York headquarters, which when complete will be a 404,000 square foot, 10-story
com-
Building New Auction Centers STATE-OF-THE-ART FACILITIES IN KEY AMERICAN
[PHOTO OMITTED]
plex with a dramatic nine-story atrium flooded with
natural sunlight. This new building will house all of
our New York auction operations in one convenient
location. Open storage systems and dynamic exhibition
space will allow our clients and experts far greater
access to works of art. Within this open, energetic and
welcoming environment clients will have the opportunity
to view many more works of art from a larger number of
collecting categories than was ever before possible. Our
new building will also streamline the auction process,
allowing better property management and tighter cost
control.
An inviting restaurant and fine arts bookstore will attract clients and new
visitors, while a rooftop sculpture garden will showcase our clients' finest
sculpture. Five
10 SOTHEBY'S HOLDINGS, INC.
new salesrooms will allow us to hold many more auctions, and expanded exhibition
space-including a 25,000 square-foot tenth-floor gallery for works of the finest
quality-will allow clients to view more property in a gallery-like setting.
Another key feature, high-density storage, will provide experts with immediate
access to property, thus simplifying the cataloguing, marketing and storage
process, while reducing costs. The completed building will enable us to expand
business opportunities and to realize our vision for the future of Sotheby's.
SOTHEBY'S ZURICH Our strategy for the Continent
[PHOTO OMITTED]
AND EUROPEAN CITIES WILL STRENGTHEN AND DIVERSIFY OUR CORE AUCTION BUSINESS.
SOTHEBY'S ZURICH Our new selling center in the landmark Ober Building will be
completed in early 1999, providing our clients with a convenient location for
transacting business.
Opposite page:
SOTHEBY'S AMSTERDAM Currently under construction, this facility will enable us
to diversify our sales and house a bookstore and restaurant.
is to create middle-market selling centers in convenient European cities. Our
new offices and salesrooms in Zurich are located in the heart of the city's
cultural center in the landmark Ober Building. This new location, to be
completed in early 1999, will provide increased exhibition space and salesrooms,
expanding our Continental business and providing an alternative to those clients
wishing to sell outside the European Community.
SOTHEBY'S AMSTERDAM Located in the center of the emerging business district, our
Amsterdam selling center is close to the railroad and motorway leading to the
international airport. This building, opening in the fall of 1999 with four
salesrooms and twice our current exhibition space, will create growth
opportunities for Sotheby's in the European middle-market.
LONDON Sotheby's origins in 1744 as a book auctioneer are evoked in our newly
completed, purpose-built bookroom in our Bond Street headquarters. The Aeolian
Hall in the Grosvenor Gallery, one of the most elite gallery addresses in the
Victorian era, has been transformed into a space for exhibitions and auctions of
our collectibles departments.
eleven SOTHEBY'S HOLDINGS, INC.
Laying the foundation
[PHOTO OMITTED]
[PHOTO OMITTED]
for creative marketing
Nineteen ninety-eight BUILDING A DYNAMIC BUSINESS
REDESIGNING A GLOBAL MARKETPLACE In past years we have talked
in this report about a global marketplace based on traditional
auction methods. Now, however, new technology will profoundly
change the way Sotheby's does business.
SOTHEBYS.COM The emergence of the Internet has paved the way
for the development of an electronic marketplace of great
potential, and the auction business specifically has shown
itself to be well suited to this exciting medium. By providing
access to a marketplace operating across all geographic
borders, in every language, 24 hours a day, 365 days a year,
Internet commerce transcends the limitations of our current
auction methods. With this in mind, early in 1999 we announced
the formation of sothebys.com, a new Internet auction
business, which draws on financial and personnel resources of
the auction company.
Creating New Business Initiatives SOTHEBY'S WILL ENTER THE 21ST CENTURY POSIED
Beginning in the summer of 1999, sothebys.com will
be a marketplace for property in more than 80
collecting categories encompassing art, antiques,
jewelry and collectibles. This property will come
from our core auction business as well as from
Sotheby's Internet Associates, a worldwide group
of selected professionals in the arts community.
While Sotheby's alone would be a strong presence
on the Internet, our association with this group
makes a powerful combination, providing buyers and
sellers with a geographic reach and range of
property of an unparalleled scale. Our Internet
auction business enables us to bring Sotheby's, a
company recognized and trusted worldwide for its
experience and expertise, to this exciting new
marketplace.
14 SOTHEBY'S HOLDINGS, INC.
Currently, Sotheby's website offers complete on-line auction catalogue text for
the United States, London, Geneva and Hong Kong, a global events calendar,
advanced search capabilities for individual objects and sales results. The
content of this website will evolve, becoming an integral part of our Internet
business. This dynamic site has had almost 3,000 user sessions per day with an
average session time of more than 10 minutes, far above the web average.
CLIENT SERVICE Among several global initiatives in the area of client service
during 1998 was the for-
[PHOTO OMITTED]
sothebys.com
We believe that as image technology develops and as e-commerce becomes
increasingly important, the volume and the value of art, antiques, jewelry and
collectibles offered on sothebys.com will also increase significantly.
TO TAKE FULL ADVANTAGE OF NEW OPPORTUNITIES IN AN EXPANDING ELECTRONIC
MARKETPLACE.
mation of our new Private Client Services Group, designed after the private
banking model. A Sotheby's representative now assumes administrative
responsibility for each key client, and a purpose-built system tracks all
aspects of a client's relationship with Sotheby's. Broader training programs for
our employees and ongoing surveys have also enhanced our client service.
SAP PROJECT 2000 AND FINANCIAL SYSTEMS UPGRADE We have taken the opportunity
with our Year 2000 Project to upgrade our financial systems and to create a
global infrastructure, servicing major sales sites and improving client service,
while streamlining and standardizing our financial processes worldwide. When
completed, this geographic systems integration will enhance client service,
increase efficiency and improve information quality by enabling our many sales
locations to share up-to-date information on a real-time basis. Sotheby's
significant financial commitment to this project will have a positive impact on
the future of our business by reducing costs and increasing revenues.
fifteen SOTHEBY'S HOLDINGS, INC.
Building upon a solid base
[PHOTO OMITTED]
[PHOTO OMITTED]
of expertise and market knowledge.
Nineteen ninety-eight BUILDING A DYNAMIC BUSINESS
THE GLOBAL FRANCHISE OF SOTHEBY'S While Sotheby's conducts
business in many different countries, each with its own
distinct culture and customs, we continually seek to unify and
streamline our operations in order to build the strongest
possible global franchise. In this section we have commented
on key developments in each region of the world and reviewed
auction highlights.
NORTH AND SOUTH AMERICA The United States continued to enjoy
great economic strength during the year, driving robust
auction sales in North America. Highlighted by several
outstanding single-owner collections and the active
participation of established as well as many new clients, our
New York sales increased 17% year-over-year, accounting for
56% of our total auction sales worldwide.
The Collection of the Duke and Duchess of Windsor, the longest
auction of its kind in
A Year of Successes IN 1998 SOTHEBY'S CONTINUED TO BROADEN AND STRENGTHEN ITS
American history, set the tone for the year's
successes. Preceded by a nine-day public
exhibition, this Collection of nearly 3,000 lots
was offered in 18 auction sessions that brought
$23.4 million.
Other exceptional auctions included property from
the Collection of Jaime Ortiz-Patino, comprising
silver, furniture, rare books and manuscripts.
Highlighted by the record-setting The Hours of
Saint-Lo and The Walpole Inkstand, the Patino
Collection brought $26.5 million. The John F.
Eulich Collection of American Western art was
another extraordinary success, totalling $25.0
million. New and established American private
collectors strongly supported the contemporary art
market during the year, helping to set many new
artist records. One
18 SOTHEBY'S HOLDINGS, INC.
of the highlights was Andy Warhol's Orange Marilyn, which sold for $17.3
million. An historic group of 38 Impressionist, Modern and Contemporary works
from the renowned Reader's Digest Collection brought a strong $90.5 million. In
another great success, the Santa Anita Collection of paintings by the British
sporting artist Sir Alfred J. Munnings sold for $12.6 million. An exquisite
collection of jewels from the Estate of Betsey Cushing Whitney, including
specially commissioned pieces by Cartier, Van Cleef & Arpels, Tiffany & Co. and
Verdura, brought $11.8 million.
[PHOTO OMITTED]
Few items were more emblematic of the historic auction of the Collection of The
Duke and Duchess of Windsor than the BOX CONTAINING A PIECE OF THEIR WEDDING
CAKE, estimated at $500/1,000, which sold for $29,900.
GLOBAL FRANCHISE WHILE PURSUING STRATEGIC INITIATIVES AND CONDUCTING MEMORABLE
AUCTIONS.
During 1998 we identified opportunities to strengthen our franchise in North
America. An important platform for growth and brand recognition at the local
level is our network of regional offices and locations, and during this year we
examined each to ensure the optimal allocation of resources. This year we held
three times the number of events and outreach programs in our regional network.
We bought a wine auctioneer in Chicago, Davis & Company, making Sotheby's the
only firm to hold wine auctions in New York, Chicago and Los Angeles. In jewelry
we are focusing on an expansion of our private sale business. Educational
studies will play an increasingly important role in the Company by leveraging
our expertise and enhancing our brand recognition throughout the world. In North
America, we will continue to strengthen and broaden our educational programs,
bringing them to a wider audience.
nineteen SOTHEBY'S HOLDINGS, INC.
Nineteen ninety-eight SOTHEBY'S HIGHLIGHTS
[PHOTOS OMITTED\
20 SOTHEBY'S HOLDINGS, INC.
[PHOTOS OMITTED\
twenty-one SOTHEBY'S HOLDINGS, INC.
Nineteen ninety-eight BUILDING A DYNAMIC BUSINESS
EUROPE Our European sales were down 3% as a result of a
decline in single-owner auctions and a lower average lot
value. However, a number of exceptional works achieved great
prices. The highlight of the year was Claude Monet's Waterlily
pond and path by the water, which brought $33.0 million,
making it the most expensive painting sold in Europe since
1990. Contemporary art also sold well in Europe throughout the
year. Our fall sale achieved $19.6 million, again the highest
total in Europe since 1990. Another highlight, The Bird of
Paradise Collection of superb jewels from a European estate,
which were designed by the renowned French jeweler Van Cleef &
Arpels, brought $9.5 million in our Geneva sale.
During 1998 we undertook an extensive reorganization of our
European management team and operating structure. Our goal is
to have a company that is unified in its prac-
THE YEAR WAS HIGHLIGHTED BY AUCTIONS OF A NUMBER OF MASTERPIECES AS WELL AS
SEVERAL
tices and standards, providing the same products
and services throughout the Continent, while at
the same time accommodating the needs of a region
with diverse languages and cultures. To further
our goal, we have appointed new Managing Directors
in France, Germany, Italy and Switzerland and have
reorganized the management structure in London. We
are confidant that our new management team,
combined with our new facilities in Zurich and
Amsterdam and enhanced salesrooms in London, will
strengthen our European network, enabling us to
better service our clients and grow our business.
Our French operation offers us significant
potential for growth in Europe. Following the
opening of our new
22 SOTHEBY'S HOLDINGS, INC.
premises in Paris at the historic Galerie Charpentier last year, legislation to
permit us to hold auctions in France was delayed. The legislation is now
expected to be reviewed in early summer 1999. In the meantime, we have built our
presence in France, increasing export volume to our other selling centers. We
have made interim plans to participate in auctions together with Maitre Herve
Poulain and Maitre Remi Le Fur. This relationship will enable us to be involved
in auctions of important collections such as the sale of the contents of Chateau
de Groussay, which will take place in June 1999 at a location outside of Paris.
[PHOTO OMITTED]
THE WARWICK TABLES, an extraordinary pair of giltwood and lacquer tables
presented by George IV to the 3rd Earl of Warwick, sold in London for $2.7
million and represented one of the most important lots of English furniture
offered at auction.
REMARKABLE SINGLE-OWNER COLLECTIONS SOLD AT SOTHEBY'S IN NEW YORK AND LONDON.
ASIA As companies around the world have carefully examined their Asian resources
and businesses so has Sotheby's, and our commitment to Asia remains long-term.
With the economic difficulties in the region, our 1998 sales decreased 36%.
Nonetheless, we were pleased by the sale of Eight Treasures from a Private
Collection, which featured a highly important fine and rare blue and white
Meiping vase, which brought $1.4 million.
In the short term, we continue to capitalize on opportunities in the region by
sourcing consignments from Asia for sales throughout the world and by conducting
private transactions. While we believe that we are prepared for any eventuality
in the region, we have taken additional steps to reorganize and streamline our
operations. We named Carlton Rochell, who has been at Sotheby's for 12 years,
Managing Director of Sotheby's China and Southeast Asian Operations and Asian
Art Worldwide. Carlton has run the Asian division in New York with great
effectiveness, and we know that he will make important contributions to our
Asian operations. We believe that our strategy in this region will leave us well
positioned for the future.
twenty-three SOTHEBY'S HOLDINGS, INC.
Balancing the demands
[PHOTO OMITTED]
[PHOTO OMITTED]
of a diverse business.
Nineteen ninety-eight BUILDING A DYNAMIC BUSINESS
We remain committed to exploring new areas where we can be of
greatest service while diversifying our revenue stream. In the
past 20 years we have created such innovative businesses as
financial services, ventures, real estate, restoration and
education. They now make significant financial contributions
to Sotheby's while strengthening client relationships through
the added service each provides.
SOTHEBY'S FINANCIAL SERVICES An important subsidiary of the
auction business for over two decades, Sotheby's Financial
Services provides art-related financing secured by works of
art to our clients throughout the world. Our capital structure
affords us the flexibility to approach new opportunities with
creative solutions that meet our stringent credit
requirements. Our loan portfolio increased to $442.6 million
at September 30, 1998, the highest level in history, as a
result of a loan extended
Complementing Our Core Business SOTHEBY'S IS COMMITTED TO DEVELOPING
in May 1998. This loan, which had an original
maturity of December 31, 2001, was repaid in the
fourth quarter of 1998 and was the major
contributor to Financial Services' record
performance. While we believe that current market
conditions will reduce the demand for loans in the
next year, we will continue to seek opportunities
in this business.
SOTHEBY'S INSURANCE BROKERAGE SERVICES As a
logical extension of our business, we formed
Sotheby's Insurance Brokerage Services, Inc. Under
an operating arrangement with J&H Marsh &
McLennan, the world leader in risk and insurance
services, clients can obtain a fine and decorative
arts policy through Sotheby's. Designed to protect
works of art, jewelry
26 SOTHEBY'S HOLDINGS, INC.
and antiques acquired privately or at auction, this coverage is also offered for
homes purchased through Sotheby's International Realty.
SOTHEBY'S VENTURES We formed Sotheby's Ventures to meet a demand for the private
sales of artwork. Sotheby's Ventures also purchases works of art for its own
account, or in partnership with dealers, in transactions designed to take
advantage of market opportunities. Our extensive international network, combined
with our team of art and finance experts, makes us ideally suited to create the
perfect match between seller and buyer.
[PHOTO OMITTED]
SOTHEBY'S INTERNATIONAL REALTY OFFICE IN LONDON An important addition to
Sotheby's International Realty's worldwide company-owned brokerage network was
opened on Sloan Street this year.
BUSINESSES THAT WILL EXPAND AND ENRICH THE SERVICES WE PROVIDE OUR CLIENTS.
SOTHEBY'S INTERNATIONAL REALTY Sotheby's International Realty is a worldwide
organization providing brokerage, marketing and consulting services for luxury
properties through its network of 15 company-owned brokerages, 6 regional
offices and more than 175 affiliates. In 1998, we enjoyed another year of record
growth. Sales increased 35%, based on an average selling price of $1.4 million.
We made key additions to our company-owned brokerage operations through
acquisitions and office openings in London, Santa Fe, Santa Barbara and downtown
Manhattan. We also launched our first newsstand magazine, Sotheby's
International Realty Domain. With a team of managers who have an average of 18
years of expertise in the industry and our extensive geographic reach, we have
positioned ourselves well for any eventualities in the market.
BUILDING A DYNAMIC BUSINESS As we build new facilities and forge new businesses
for a new century, we remain committed to the expertise and service that have
been the foundation of Sotheby's from the beginning.
twenty-seven SOTHEBY'S HOLDINGS, INC.
Creating the Sotheby's of tomorrow
[PHOTO OMITTED]
[PHOTO OMITTED]
while respecting tradition.
[PHOTO OMITTED]
Financial Section
SELECTED FINANCIAL DATA 32
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS
OF OPERATIONS & FINANCIAL CONDITION 33
CONSOLIDATED STATEMENTS OF INCOME 40
CONSOLIDATED BALANCE SHEETS 41
CONSOLIDATED STATEMENTS OF CASH FLOWS 42
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 44
REPORT OF INDEPENDENT AUDITORS, REPORT OF
MANAGEMENT AND AUDIT COMMITTEE CHAIRMAN'S LETTER 62
CORPORATE INFORMATION 63
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
(Thousands of dollars, except per share data) 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
AUCTION SALES (1) ............... $ 1,939,743 $ 1,843,335 $ 1,599,595 $ 1,665,378 $ 1,330,001
----------- ----------- ----------- ----------- -----------
AUCTION AND RELATED REVENUES .... $ 367,204 $ 335,511 $ 302,196 $ 282,096 $ 233,557
OTHER REVENUES .................. 79,848 46,281 34,300 30,784 26,106
----------- ----------- ----------- ----------- -----------
TOTAL REVENUES .................. $ 447,052 $ 381,792 $ 336,496 $ 312,880 $ 259,663
OPERATING INCOME ................ 80,778(2) 67,759(3) 68,208 56,841 33,033
INCOME BEFORE TAXES ............. 73,813(2) 64,457(3) 68,244 54,303 33,765
----------- ----------- ----------- ----------- -----------
NET INCOME ...................... $ 45,025(4) $ 40,608(5) $ 40,946 $ 32,582 $ 20,259
----------- ----------- ----------- ----------- -----------
BASIC EARNINGS PER SHARE ........ $ 0.79(4) $ 0.73(5) $ 0.73 $ 0.58 $ 0.36
----------- ----------- ----------- ----------- -----------
DILUTED EARNINGS PER SHARE ...... $ 0.79(4) $ 0.72(5) $ 0.73 $ 0.58 $ 0.36
----------- ----------- ----------- ----------- -----------
CASH DIVIDENDS DECLARED PER SHARE $ 0.40 $ 0.40 $ 0.32 $ 0.24 $ 0.24
----------- ----------- ----------- ----------- -----------
AS OF DECEMBER 31
(Thousands of dollars) 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
WORKING CAPITAL ................. $ 126,841 $ 123,522 $ 57,966 $ 101,394 $ 70,031
TOTAL ASSETS .................... 770,010 860,241 656,098 600,104 557,084
COMMERCIAL PAPER ................ -- 117,000 -- 38,000 27,500
NET CASH (DEBT) (6) ............. 69,140 (85,526) 63,675 (3,103) (1,416)
SHAREHOLDERS' EQUITY ............ 314,087 260,068 253,972 227,482 211,052
=========== =========== =========== =========== ===========
(1) Auction sales represent sales at the hammer price plus buyer's premium.
(2) Includes 1998 non-recurring charges of $15.2 million.
(3) Includes 1997 non-recurring charges of $11.7 million.
(4) Includes 1998 non-recurring charges of $9.3 million after tax.
(5) Includes 1997 non-recurring charges of $7.4 million after tax.
(6) Cash and cash equivalents less short-term borrowings and commercial paper.
32 SOTHEBY'S HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998 AND 1997
Note C ("Segment Reporting") of the Consolidated Financial Statements should be
read in conjunction with this discussion.
Auction sales for Sotheby's Holdings, Inc. (together with its subsidiaries, the
"Company") totaled $1,939.7 million during 1998, an increase of $96.4 million,
or 5%, compared to the prior year. The increase in worldwide sales was due to a
10% increase in the average selling price per lot sold in 1998 as compared to
1997, offset by a 4% decrease in the number of lots sold. Overall, worldwide
sales of Fine Art increased 11%, led by increases in Contemporary art, 19th
Century paintings and drawings, American paintings and drawings and
Impressionist and Modern art, offset by a slight decrease in Old Master
paintings. Other sales increases included Silver, English Furniture and French
and Continental Furniture. Auction sales recorded by the Company's foreign
operations were not materially affected by translation to United States ("U.S.")
dollars.
The following is a geographical breakdown of the Company's auction sales for
1998 and 1997:
(Thousands of Dollars) 1998 1997
---------- ----------
NORTH AMERICA ........................ $1,074,428 $ 919,028
EUROPE ............................... 803,931 828,192
ASIA ................................. 61,384 96,115
---------- ----------
TOTAL ................................ $1,939,743 $1,843,335
========== ==========
The sales increase in North America of $155.4 million, or 17%, during 1998 was
primarily a result of broad-based growth in virtually every collecting category.
The growth was due to increases in American paintings and drawings, 19th Century
paintings and drawings, Impressionist and Modern art and Contemporary art. The
growth was also due to the result of several outstanding single owner sales,
most notably the Reader's Digest Corporate Collection, the Collection of Jamie
Ortiz-Patino comprised of silver, furniture, rare books and manuscripts, the
John F. Eulich Collection of American Western art and the Collection of H.R.H.
the Duke and Duchess of Windsor. Sales in Europe, which for purposes of this
discussion consists of the United Kingdom ("U.K.") and continental Europe ("the
Continent"), decreased $24.3 million, or 3%. The decrease was primarily due to
1997 single owner sales, most notably the sale of Illuminated Manuscripts from
the Beck Collection for which there were no comparable sales in the current year
and, to a lesser extent, a decrease in a number of collecting categories. Asian
sales decreased $34.7 million, or 36% primarily due to the slow down of the
economies within Asia. The Company continues to maintain a presence in the Asian
markets but is unable to predict the effect, if any, of the unstable Asian
economies on the Company's operating results. Historically, Asia has accounted
for approximately five percent of annual sales. Asia accounted for three percent
of sales in 1998.
Worldwide revenues from auction and related operations increased $31.7 million,
or 9%, in 1998 compared to 1997. This increase is primarily due to a significant
increase in principal activities and higher commission revenue (which consists
of buyer's premium, seller's commission and expense recoveries) that resulted
from the increased auction sales discussed above and expense recoveries
associated with the sale of the Collection of H.R.H. the Duke and Duchess of
Windsor. Principal activities include: net gains (losses) on sales of inventory
(including inventory obtained as a result of the auction process as well as
inventory acquired for investment purposes); the Company's share of operating
results from its investments in Acquavella Modern Art ("AMA") and other equity
investments; net income (loss) earned from guarantees and the net gains (losses)
related to sales of secured loan collateral where the Company shares in the gain
(loss) if the property sells either above or below its investment. The increase
in principal activities was primarily due to an increase in net income earned on
guarantees, an increase in net gains related to sales of secured loan collateral
that exceeded investment and an increase in the Company's share of operating
results of AMA.
Other revenues consist primarily of revenues from the Company's Real Estate and
Finance operating segments. Other revenues increased $33.6 million, or 73%, in
1998 compared to 1997. This growth was primarily due to increases in both real
estate and financing activities. The increase in real estate revenue was due
primarily to increased real estate unit sales from both mature and new Company
owned brokerage and regional offices in the U.S. The increase in financing
revenue was due to an increase in the average loan portfolio balance to $301.2
million in 1998 from $215.8 in 1997 and the recognition of $21.0 million in
origination fee revenue. The increase in the average loan portfolio balance was
due to a loan extended in May 1998 to a group of affiliated corporate borrowers.
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 relating to the origination fee that would have been amortized through
2001. The Company does not anticipate that it will recognize a comparable amount
of revenue from loan origination fees in 1999. (See statement on Forward Looking
Statements.)
thirty-three SOTHEBY'S HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Direct costs of services (consisting largely of catalogue production and
distribution costs as well as corporate marketing and sale marketing expenses)
totaled $76.3 million in 1998, an increase of $5.9 million, or 8%, compared to
1997. This increase was primarily a result of increased auction sales in 1998
and 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. The increase was also due, to a lesser extent, to
an increase in direct costs in the Real Estate segment related to an increase in
units sold in 1998. Direct costs as a percentage of sales was consistent in 1998
and 1997.
Excluding non-recurring charges of $15.2 and $11.7 million in 1998 and 1997,
respectively, all other operating expenses (which consist of salaries and
related costs, general and administrative expenses and depreciation and
amortization) increased $42.8 million, or 18%, in 1998 compared to 1997. This
increase was primarily due to a $22.0 million, or 17%, increase in salaries and
related costs and a $19.2 million, or 22%, increase in general and
administrative expenses. These increases were primarily a result of new
initiatives; long term incentive plans, primarily the Performance Share Purchase
Plan, for which the related expense increased approximately $7.7 million in 1998
due to the appreciation of the Company's stock price and an increase in
Performance Share Plan shares granted; costs incurred by the Auction segment
relating to the startup of the Paris office and initial internet related
expenses; write-offs and provisions of uncollectible auction receivable
accounts; and expenses for authenticity claims and settlements.
During 1998, the Company recorded a non-recurring charge of $15.2 million
relating to the construction of the York Property, as defined in Liquidity and
Capital Resources, which was a direct result of the Company's decision to
consolidate its operations in New York City. Approximately $14.1 million of this
amount is a non-cash charge resulting from the impairment of existing leasehold
improvements and related furniture and fixtures which were deemed to have no
future use, as they have been or are currently being destroyed or replaced
during the construction of the York Property. The remaining amount of
approximately $1.1 million is a provision resulting from the cost of future
rental obligations on rental space in New York City that will be abandoned as
part of the plan. As of December 31, 1998, the Company has recorded in other
liabilities on the Consolidated Balance Sheets approximately $1.1 million
related to these future rental obligations, which will be paid out starting
approximately in October, 2000 through September, 2003. The impact on future
earnings related to the write-off of leasehold improvements and related
furniture and fixtures will be immaterial as the assets written off are being
replaced by depreciable assets of the York Property.
In early 1997, a television program aired in the U.K. and a related book was
published both of which contain certain allegations of improper or illegal
conduct by current and former employees of the Company. In response to these
allegations, the Board of Directors in February 1997 established a committee of
independent directors to review the issues raised by the book and related
matters. The Independent Review Committee retained outside independent counsel
in the U.S. and the U.K. to assist and advise the Committee in its review. The
Company's management also conducted its own internal review. Both reviews were
completed in 1997. In 1997, the Company incurred $11.7 million of non-recurring
charges that consisted primarily of legal and other professional fees associated
with the Board of Directors' Independent Review Committee. These charges were
paid in full as of December 31, 1998.
Interest income increased $0.5 million in 1998 compared to 1997 due to higher
average cash balances throughout the year. Interest expense increased $4.5
million in 1998 as compared to 1997 as a result of additional commercial paper
borrowings to fund the higher average loan portfolio.
The consolidated effective tax rate was 39% in 1998 compared to 37% in 1997.
This increase was primarily a result of higher earnings during 1998 in higher
tax rate jurisdictions.
Net income increased $4.4 million, or 11%, in 1998 compared to 1997. Diluted
earnings per share for 1998 increased to $0.79 from $0.72 in 1997. Excluding
non-recurring charges, net income increased 13% to $54.3 million. The impact of
the non-recurring charges on diluted earnings per share was ($0.16) and ($0.13)
in 1998 and 1997, respectively. Movements in foreign currencies did not have a
material impact on 1998 revenues or expenses.
On January 19, 1999 the Company announced its intention to launch sothebys.com,
a new Internet auction business for art, antiques, jewelry and collectibles. The
Company expects to invest up to and perhaps in excess of $25 million in the
initial development phase of the new venture, including personnel, marketing and
capital costs. A majority of this amount will be incurred in 1999. Although
these investments are likely to have some dilutive effect on the Company's
results in the near term, the Company believes that these expenditures are
appropriate in light of the potential of the business. (See statement on Forward
Looking Statements.)
34 SOTHEBY'S HOLDINGS, INC.
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 AND 1996
Auction sales totaled $1,843.3 million during 1997, an increase of $243.7
million, or 15%, compared to the prior year. The increase in worldwide sales was
primarily a result of broad-based growth in virtually every collecting category.
Sales of Fine Art increased 25%, led by increases in Impressionist and Modern
art, Old Master paintings and Contemporary art. Other sales increases included
Books, Asian Works of Art and Wine. Auction sales recorded by the Company's
foreign operations were not materially affected by translation to United States
("U.S.") dollars.
The following is a geographical breakdown of the Company's auction sales for
1997 and 1996:
(Thousands of dollars) 1997 1996
---------- ----------
NORTH AMERICA ........................ $ 919,028 $ 770,438
EUROPE ............................... 828,192 751,154
ASIA ................................. 96,115 78,003
---------- ----------
TOTAL ................................ $1,843,335 $1,599,595
========== ==========
The sales increase in North America of $148.6 million, or 19%, during 1997 was
primarily a result of increases in Impressionist and Modern art, Old Master
paintings and Contemporary art. Sales in Europe, which for purposes of this
discussion consists of the United Kingdom ("U.K.") and continental Europe ("the
Continent"), increased $77.0 million, or 10%, primarily due to Old Master
paintings, Books, Impressionist and Modern art and Wine. Asian sales increased
$18.1 million, or 23% due primarily to increased sales of Asian Works of Art.
The Company continues to focus on growth in the Asian markets but is unable to
predict the effect, if any, of the unstable Asian economies on the Company's
operating results.
Worldwide revenues from auction and related operations increased $33.3 million,
or 11%, in 1997 compared to 1996. This increase is primarily due to higher
commission revenue (which consists of buyer's premium, seller's commission and
expense recoveries) which resulted from the increased auction sales discussed
above and to an increase in commissions from private treaty sales. These
increases were offset, in small part, by a decrease in principal activities.
Principal activities include: net gains (losses) on sales of inventory
(including inventory obtained as a result of the auction process as well as
inventory acquired for investment purposes); the Company's share of operating
results from its investments in Acquavella Modern Art ("AMA") and other equity
investments; net income (loss) earned from guarantees and the net gains (losses)
related to sales of secured loan collateral where the Company shares in the gain
(loss) if the property sells either above or below its investment. The decrease
in revenues from principal activities was primarily due to lower income earned
from guarantees.
Other revenues consist primarily of revenues from the Company's Real Estate and
Finance operating segments. Other revenues increased $12.0 million, or 35%, in
1997 compared to 1996. This growth was due to increases in both real estate and
financing activities. The increase in real estate revenue was driven by an
increase in real estate sales. Financing activity growth was primarily due to an
increase in the average loan portfolio. The average loan portfolio increased to
$215.8 million in 1997 from $148.0 million in 1996.
Direct costs of services (consisting largely of catalogue production and
distribution costs as well as corporate marketing and sale marketing expenses)
totaled $70.4 million in 1997, an increase of $7.3 million, or 12%, compared to
1996. This increase is primarily a result of increased sales in 1997 offset by a
decline in expenses associated with the sale of Property from the Estate of
Jacqueline Kennedy Onassis which were fully recovered and reflected in auction
and related revenues in 1996. Excluding these costs, direct costs as a
percentage of sales totaled 3.8% in 1997 compared to 3.7% in 1996.
thirty-five SOTHEBY'S HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Excluding non-recurring charges of $11.7 million in 1997, all other operating
expenses (which consist of salaries and related costs, general and
administrative expenses and depreciation and amortization) increased $26.8
million, or 13%, compared to 1996. This increase was primarily due to a $17.5
million, or 15%, increase in salaries and related costs and a $7.7 million, or
9%, increase in general and administrative expenses. These increases were
primarily a result of new initiatives.
In early 1997, a television program aired in the U.K. and a related book was
published both of which contain certain allegations of improper or illegal
conduct by current and former employees of the Company. In response to these
allegations, the Board of Directors in February 1997 established a committee of
independent directors to review the issues raised by the book and related
matters. The Independent Review Committee retained outside independent counsel
in the U.S. and the U.K. to assist and advise the Committee in its review. The
Company's management also conducted its own internal review. Both reviews were
completed in 1997. In 1997, the Company incurred $11.7 million of non-recurring
charges which consisted primarily of legal and other professional fees
associated with the Board of Directors' Independent Review Committee.
Interest income decreased $1.2 million in 1997 compared to 1996 reflecting lower
cash balances largely due to the increase in the Company's average loan
portfolio. Interest expense increased $2.4 million primarily as a result of
additional overnight and commercial paper borrowings to fund the higher average
loan portfolio.
The consolidated effective tax rate was 37% in 1997 compared to 40% in 1996.
This decrease is primarily a result of higher earnings during 1997 in lower tax
rate jurisdictions.
Net income for 1997 was flat compared to 1996. Diluted earnings per share
decreased $0.01 to $0.72 in 1997 from $0.73 in 1996. Excluding non-recurring
charges, net income increased 17% to $48.0 million. The impact of the
non-recurring charges on diluted earnings per share was ($0.13). Movements in
foreign currencies did not have a material impact on 1997 revenues or expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash position (cash and cash equivalents less short-term
borrowings and commercial paper) totaled $69.1 million at December 31, 1998,
compared to a net debt position of $85.5 million at December 31, 1997 and net
cash of $63.7 million at December 31, 1996. Working capital (current assets less
current liabilities) at December 31, 1998 was $126.8 million, compared to $123.5
million and $58.0 million at December 31, 1997 and 1996, respectively.
The Company's client loan portfolio decreased to $155.6 million at December 31,
1998, from $276.4 million at December 31, 1997. The client loan portfolio at
December 31, 1996 was $153.1 million. These amounts include $17.1 million,
$112.0 million and $69.4 million of loans which have a maturity of more than one
year at December 31, 1998, 1997 and 1996, respectively. During the fourth
quarter of 1998, a significant loan to a group of affiliated corporate borrowers
was repaid in full. The loan to this group was to mature on December 31, 2001.
The Company relies on internally generated funds and borrowings to meet its
financing requirements. The Company may issue up to $300 million of short-term
notes pursuant to its U.S. commercial paper program. The U.S. commercial paper
program was increased to $300 million from $200 million in July 1998. At
December 31, 1998, there was no commercial paper outstanding. The Company
supports any short-term notes issued under its U.S. commercial paper program
with a committed credit facility. The Company maintains $300 million of
committed and available financing pursuant to a Bank Credit Agreement (the
"Credit Agreement"). The Credit Agreement provides the Company $300 million of
committed financing to July 11, 2001. Additionally, the Company has a $200
million shelf registration with the Securities and Exchange Commission for
issuing senior unsecured debt securities that may be offered and sold from time
to time. Subsequent to year end, in February 1999, the Company sold a tranche of
these debt securities for an aggregate offering price of $100 million. The net
proceeds from this sale will be used for general corporate purposes, including
the financing of capital expenditures in connection with the York Property and
the launch of sothebys.com. (See Note H to the Consolidated Financial
Statements.)
36 SOTHEBY'S HOLDINGS, INC.
During 1998, the Company's primary sources of liquidity were derived from
collections of notes receivable, operations and available cash balances. The
most significant cash uses during 1998 were the funding of the client loan
portfolio, repayment of commercial paper borrowings, capital expenditures and
payment of shareholder dividends. In the first quarter of 1999, the Company
declared its regular quarterly dividend of $0.10 per share for the holders of
record on March 12, 1999.
During 1998, the Company incurred a significant non-cash expense of $14.1
million related to the impairment of existing leasehold improvements and related
furniture and fixtures, as noted previously. Such item did not have an impact on
the Company's liquidity.
During 1997, the Company's primary sources of liquidity were derived from
commercial paper borrowings supplemented by available cash balances and
operations. The most significant cash uses during 1997 were the net funding of
the client loan portfolio of $124.4 million, payment of shareholder dividends
and repurchases of common stock. The Company paid dividends to shareholders of
$22.4 million in 1997 and repurchased $20.0 million of common stock.
During 1996, the Company's primary sources of liquidity were derived from
operations supplemented by available cash balances. The most significant cash
uses during 1996 were the repayment of commercial paper borrowings, payment of
shareholder dividends, repurchases of common stock and the net funding of the
client loan portfolio.
Capital expenditures, consisting primarily of office and facility refurbishment,
acquisition of computer equipment and software and costs associated with the
construction of the York Property, as defined below, totaled $53.7 million for
1998, $17.5 million for 1997 and $9.8 million for 1996. The increase in
expenditures in 1998 as compared to 1997 is due to the York Property
construction and increased computer and software costs.
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 N to the Consolidated Financial Statements). The Company does
not believe that material liquidity risk exists related to these commitments.
(See statement on Foward Looking Statements.)
The Company evaluated the adequacy of its principal auction premises for the
requirements of the present and future conduct of its business. In September
1998, the Company received final approval from the City of New York to proceed
with its plan to construct a six story addition and to renovate its current
facility on York Avenue ("the York Property").
This construction will expand auction, warehouse and office space in New York
City and will enable the Company to consolidate its operations in New York City.
The capital expenditures relating to the new building construction is currently
estimated to be in the range of $125-130 million. As of February 23, 1999, the
Company has financial commitments in relation to this project of approximately
$52.1 million. York Avenue Development, Inc. ("York"), a wholly owned subsidiary
of Sotheby's Inc. (itself a wholly owned subsidiary of the Company), under its
operating lease, holds a purchase option on the York Property that can be
exercised on defined dates in 1999, 2004 and 2009 for ten times the annual rent
at the date the option is exercised, subject to limitations. York expects to
exercise the option in August 1999. The Company believes that it has sufficient
capital resources to carry out planned capital spending relating to this
project.
The Company believes that operating cash flows will be adequate to meet normal
working capital requirements and that the commercial paper program, credit
facilities, senior unsecured debt and the shelf registration will continue to be
adequate to fund the Company's client loan program, peak working capital
requirements, other short-term commitments to consignors, the project on the
York Property and sothebys.com, the Company's internet initiative discussed
previously. (See statement on Foward Looking Statements.)
YEAR 2000
The Year 2000 issue is a result of date sensitive devices, systems and computer
programs that were deployed using two digits rather than four to define the
applicable year. Any such technologies may recognize a year containing "00" as
the year 1900 rather than the year 2000.
The Company has completed its assessment of its worldwide financial and
information systems and is in the process of modifying or replacing such systems
as required. The Company has developed contingency plans for those locations
where the replacing or modification of systems will not be completed by the end
of 1999. These contingency plans consist of fixing or upgrading software that
will soon be replaced. The Company's modification, replacement and execution of
contingency plans of its worldwide financial and information systems is
proceeding on schedule and should be completed by the end of 1999.
thirty-seven SOTHEBY'S HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The Company has assessed its material non-information technology systems. The
Company does not anticipate any material disruption to its operations due to
Year 2000 issues with its non-information technology systems.
The Company is currently assessing the status of its material suppliers and
other third party vendors. The Company intends to distribute information
requests during the first quarter of 1999 and evaluate responses shortly
thereafter. The Company intends to develop a contingency plan in the event that
it is not satisfied with the response of its key suppliers and vendors.
In connection with assessing its information systems, the Company determined to
replace a significant majority of its existing financial and accounting systems,
which the Company believes will not only address many of its year 2000 issues,
but will also increase its operational efficiencies. The Company currently
believes that the cost of replacing such systems, retaining consultants and
employees in connection with the integration and implementation of such systems,
testing and rolling-out the new systems on a world-wide basis, training its
personnel to operate its new systems, continuing its assessment of existing
information technology and non-information technology systems to determine the
need for modification or replacement, and implementing additional modifications
or remediation as may be necessary, will be in the range of $15 million. To
date, the Company's expenditures for this project have been approximately $10.3
million, with the balance of such expenses expected to be incurred during 1999
and 2000.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party vendors, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The modification or replacement of worldwide financial and
information systems is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and therefore the possibility of
significant interruptions of normal operations should be reduced.
With respect to all statements made herein regarding Year 2000, see statement on
Foward Looking Statements.
EUROPEAN MONETARY UNION
The European Monetary Unit ("the euro") was introduced on January 1, 1999 as a
wholesale currency. The eleven participating European Monetary Union member
countries established fixed conversion rates between their existing currencies
and the euro. The existing currencies will continue to be used as legal tender
through January 1, 2002; thereafter, on July 1, 2002, the existing currencies
will be cancelled and euro bills and coins will be used for cash transactions in
the participating countries.
The Company's European financial and cash management operations affected by the
euro conversion have adequately prepared for its introduction. For the
transition period and the period after January 1, 2002, the Company has
established an internal group of employees to analyze the potential business
implications of converting to a common currency. The Company is unable to
determine the ultimate financial impact of the euro conversion on its
operations, if any, given that the impact will be dependent upon the competitive
situations which exist in the various regional markets in which the Company
participates.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company continuously evaluates its market risk associated with its financial
instruments and forward exchange contracts during the course of its business.
The Company's financial instruments include cash and cash equivalents, notes
receivable, and short term borrowings. 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 Foward 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 risk from exchange rate movements because gains and losses on such
contracts 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, 1998, the Company's outstanding foreign currency
forward contracts were not material. 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 Foward Looking Statements.)
38 SOTHEBY'S HOLDINGS, INC.
FOWARD LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements, as such term is
defined in Section 21E of the Securities Exchange Act of 1934, as amended,
relating to future events and the financial performance of the Company,
particularly with respect to the adequacy of working capital as well as
additional capital necessary for the expansion of the Company's New York auction
facility. Such statements are only predictions and involve risks and
uncertainties, resulting in the possibility that the actual events or
performance will differ materially from such predictions. Major factors which
the Company believes could cause the actual results to differ materially from
the predicted results in the forward-looking statements include, but are not
limited to, the following, which are not listed in any particular rank order:
1 The Company's business is seasonal, with peak revenues and operating
income occurring in the second and fourth quarters of each year as a
result of the traditional spring and fall art auction season.
2 The overall strength of the international economy and financial
markets and, in particular, the economies of the United States, the
United Kingdom and the major countries of continental Europe and
Asia (principally Japan and Hong Kong).
3 Competition with other auctioneers and art dealers.
4 The volume of consigned property and the marketability at auction of
such property.
5 The expansion of the New York auction facility and global
headquarters.
6 The effects of Year 2000 issues.
7 The effects of the Euro conversion.
8 Competition in the Internet auction business and the Company's
success in developing and implementing its Internet auction
strategy.
9 The demand for loans.
10 The effects of market risk.
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 approximately 80% of the Company's auction sales are
derived from the second and fourth quarters of the year (see Note Q to the
Consolidated Financial Statements.)
PERCENTAGE OF ANNUAL AUCTION SALES
1998 1997 1996
----------- ----------- -----------
JANUARY-MARCH ........................ 13% 11% 10%
APRIL-JUNE ........................... 37 35 39
JULY-SEPTEMBER ....................... 8 8 9
OCTOBER-DECEMBER ..................... 42 46 42
----------- ----------- -----------
100% 100% 100%
=========== =========== ===========
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted for fiscal
quarters of fiscal years beginning after June 15, 1999. The Company expects to
adopt SFAS No. 133 effective January 1, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The Company is currently evaluating the impact that the adoption of this
statement will have on its financial position and results of operations.
thirty-nine SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
(Thousands of dollars, except per share data) 1998 1997 1996
--------- --------- ---------
REVENUES (NOTE B):
AUCTION AND RELATED ......................... $ 367,204 $ 335,511 $ 302,196
OTHER ....................................... 79,848 46,281 34,300
--------- --------- ---------
TOTAL REVENUES .............................. 447,052 381,792 336,496
EXPENSES:
DIRECT COSTS OF SERVICES (NOTE B) ........... 76,313 70,364 63,090
SALARIES AND RELATED COSTS (NOTES K AND L) .. 153,869 131,874 114,360
GENERAL AND ADMINISTRATIVE (NOTE J) ......... 108,240 89,038 81,368
DEPRECIATION AND AMORTIZATION (NOTES B AND G) 12,652 11,057 9,470
NON-RECURRING CHARGES (NOTE O) .............. 15,200 11,700 --
--------- --------- ---------
TOTAL EXPENSES .............................. 366,274 314,033 268,288
--------- --------- ---------
OPERATING INCOME ............................ 80,778 67,759 68,208
--------- --------- ---------
INTEREST INCOME ............................. 3,560 3,047 4,266
INTEREST EXPENSE (NOTE H) ................... (10,545) (6,018) (3,643)
OTHER INCOME (EXPENSE) ...................... 20 (331) (587)
--------- --------- ---------
INCOME BEFORE TAXES ......................... 73,813 64,457 68,244
INCOME TAXES (NOTE I) ....................... 28,788 23,849 27,298
--------- --------- ---------
NET INCOME .................................. $ 45,025 $ 40,608 $ 40,946
--------- --------- ---------
BASIC EARNINGS PER SHARE (NOTE B) ........... $ 0.79 $ 0.73 $ 0.73
========= ========= =========
DILUTED EARNINGS PER SHARE (NOTE B) ......... $ 0.79 $ 0.72 $ 0.73
========= ========= =========
DIVIDENDS PER SHARE ......................... $ 0.40 $ 0.40 $ 0.32
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
40 SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars) AS OF DECEMBER 31
Assets 1998 1997
--------- ---------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS ................................ $ 71,238 $ 33,642
ACCOUNTS AND NOTES RECEIVABLE, NET OF ALLOWANCE
FOR DOUBTFUL ACCOUNTS OF $14,585 AND $10,419 (NOTE D)
ACCOUNTS RECEIVABLE ................................... 286,922 315,274
NOTES RECEIVABLE ...................................... 135,592 160,807
OTHER ................................................. 18,368 35,448
--------- ---------
TOTAL ACCOUNTS AND NOTES RECEIVABLE, NET ................. 440,882 511,529
--------- ---------
INVENTORY, NET (NOTE E) .................................. 16,915 23,574
DEFERRED INCOME TAXES (NOTE I) ........................... 16,251 6,401
PREPAID EXPENSES AND OTHER CURRENT ASSETS (NOTE L) ....... 23,756 18,511
--------- ---------
TOTAL CURRENT ASSETS ..................................... 569,042 593,657
--------- ---------
NON-CURRENT ASSETS:
NOTES RECEIVABLE (NOTE D) ................................ 17,115 111,974
PROPERTIES, LESS ALLOWANCE FOR DEPRECIATION
AND AMORTIZATION OF $60,154 AND $70,342 (NOTES G AND J) 108,914 78,542
INTANGIBLE ASSETS, LESS ALLOWANCE FOR AMORTIZATION
OF $17,753 AND $16,671 ................................ 32,588 32,618
INVESTMENTS (NOTE F) ..................................... 36,737 37,466
OTHER ASSETS ............................................. 5,614 5,984
--------- ---------
TOTAL ASSETS ............................................. $ 770,010 $ 860,241
========= =========
Liabilities and Shareholders' Equity
CURRENT LIABILITIES:
DUE TO CONSIGNORS (NOTES D AND M) ........................ $ 289,987 $ 352,437
SHORT-TERM BORROWINGS (NOTE H) ........................... 2,098 2,168
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ................. 104,251 79,746
DEFERRED REVENUES ........................................ 6,921 12,216
ACCRUED INCOME TAXES (NOTE I) ............................ 38,944 23,568
--------- ---------
TOTAL CURRENT LIABILITIES ................................ 442,201 470,135
--------- ---------
LONG-TERM LIABILITIES:
COMMERCIAL PAPER (NOTE H) ................................ -- 117,000
DEFERRED INCOME TAXES (NOTE I) ........................... 11,789 11,908
OTHER LIABILITIES ........................................ 1,933 1,130
--------- ---------
TOTAL LIABILITIES ........................................ 455,923 600,173
--------- ---------
SHAREHOLDERS' EQUITY (NOTE K):
COMMON STOCK, $.10 PAR VALUE
AUTHORIZED SHARES - 125,000,000 OF CLASS A AND
75,000,000 OF CLASS B ISSUED AND OUTSTANDING
SHARES 40,164,388 AND 38,762,656 OF CLASS A,
AND 16,995,299 AND 17,058,400 OF CLASS B AT
DECEMBER 31, 1998 AND 1997, RESPECTIVELY .............. 5,716 5,582
ADDITIONAL PAID-IN CAPITAL ............................... 104,092 72,932
RETAINED EARNINGS ........................................ 219,383 197,027
ACCUMULATED OTHER COMPREHENSIVE INCOME ................... (15,104) (15,473)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................... 314,087 260,068
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $ 770,010 $ 860,241
========= =========
See accompanying Notes to Consolidated Financial Statements
forty-one SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars) YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
Operating Activities:
NET INCOME ............................................... $ 45,025 $ 40,608 $ 40,946
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION ....................... 12,652 11,057 9,470
STOCK COMPENSATION EXPENSE .......................... 9,025 1,300 500
DEFERRED INCOME TAXES ............................... (9,969) (2,699) 471
TAX BENEFIT OF STOCK OPTION EXERCISES ............... 2,965 1,766 2,341
WRITE-OFF OF LEASEHOLD IMPROVEMENTS
AND FURNITURE AND FIXTURES ....................... 14,100 -- --
ASSET PROVISIONS .................................... 8,253 4,390 4,641
OTHER ............................................... 402 307 (993)
CHANGE IN ASSETS AND LIABILITIES:
INCREASE IN PREPAID EXPENSES AND OTHER CURRENT ASSETS (5,612) (3,830) (3,005)
DECREASE (INCREASE) IN ACCOUNTS AND OTHER RECEIVABLES 35,666 (96,924) (30,360)
DECREASE (INCREASE) IN INVENTORY .................... 4,960 (10,773) 8,919
DECREASE (INCREASE) IN INTANGIBLE AND OTHER ASSETS .. 507 633 (638)
(DECREASE) INCREASE IN DUE TO CONSIGNORS ............ (59,766) 75,097 52,941
INCREASE (DECREASE) IN ACCRUED INCOME TAXES ......... 15,376 (2,197) 11,473
INCREASE IN ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES AND OTHER LIABILITIES ........ 18,660 7,371 10,274
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 92,244 26,106 106,980
Investing Activities:
INCREASE IN NOTES RECEIVABLE ............................. (268,098) (215,323) (119,727)
COLLECTIONS OF NOTES RECEIVABLE .......................... 387,363 90,920 112,360
CAPITAL EXPENDITURES ..................................... (53,735) (17,507) (9,835)
DECREASE (INCREASE) IN INVESTMENTS ....................... 728 (1,632) 2,967
ACQUISITIONS ............................................. (1,875) (6,900) --
--------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ......... 64,383 (150,442) (14,235)
Financing Activities:
(DECREASE) INCREASE IN COMMERCIAL PAPER .................. (117,000) 117,000 (38,000)
INCREASE (DECREASE) IN SHORT-TERM BORROWINGS ............. 18 (2,260) (2,605)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS .................. 19,608 11,473 9,115
REPURCHASE OF COMMON STOCK ............................... -- (19,999) (14,178)
DIVIDENDS PAID ........................................... (22,669) (22,386) (17,829)
--------- --------- ---------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES ......... (120,043) 83,828 (63,497)
EFFECT OF EXCHANGE RATE CHANGES ON CASH .................. 1,012 7,264 (3,075)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......... 37,596 (33,244) 26,173
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........... 33,642 66,886 40,713
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................. $ 71,238 $ 33,642 $ 66,886
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
42 SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE
(Thousands of dollars) INCOME STOCK CAPITAL EARNINGS INCOME
------------- --------- ---------- --------- ------------
Balance at December 31, 1995 ....... $ 5,575 $ 81,051 $ 155,688 $ (14,832)
--------- --------- --------- ---------
COMPREHENSIVE INCOME:
NET INCOME ...................... $ 40,946 40,946
OTHER COMPREHENSIVE INCOME,
NET OF TAX
FOREIGN CURRENCY TRANSLATION 5,528 5,528
---------
OTHER COMPREHENSIVE INCOME ...... $ 5,528
---------
COMPREHENSIVE INCOME ............... $ 46,474
=========
STOCK OPTIONS EXERCISED ............ 109 9,006
TAX BENEFIT ASSOCIATED WITH EXERCISE
OF STOCK OPTIONS ................ 2,341
SHARES ISSUED TO DIRECTORS ......... 1 66
REPURCHASE OF COMMON STOCK ......... (96) (14,082)
STOCK COMPENSATION EXPENSE ......... 500
DIVIDENDS .......................... (17,829)
--------- --------- --------- ---------
Balance at December 31, 1996 ....... $ 5,589 $ 78,882 $ 178,805 $ (9,304)
--------- --------- --------- ---------
COMPREHENSIVE INCOME:
NET INCOME ...................... $ 40,608 40,608
OTHER COMPREHENSIVE INCOME,
NET OF TAX
FOREIGN CURRENCY TRANSLATION . (6,169) (6,169)
---------
OTHER COMPREHENSIVE INCOME ...... $ (6,169)
---------
COMPREHENSIVE INCOME ............... $ 34,439
=========
STOCK OPTIONS EXERCISED ............ 112 11,361
TAX BENEFIT ASSOCIATED WITH EXERCISE
OF STOCK OPTIONS ................ 1,766
SHARES ISSUED TO DIRECTORS ......... 1 242
REPURCHASE OF COMMON STOCK ......... (120) (20,619)
STOCK COMPENSATION EXPENSE ......... 1,300
DIVIDENDS .......................... (22,386)
--------- --------- --------- ---------
Balance at December 31, 1997 ....... $ 5,582 $ 72,932 $ 197,027 $ (15,473)
--------- --------- --------- ---------
COMPREHENSIVE INCOME:
NET INCOME ...................... $ 45,025 45,025
OTHER COMPREHENSIVE INCOME,
NET OF TAX
FOREIGN CURRENCY TRANSLATION . 369 369
---------
OTHER COMPREHENSIVE INCOME ...... $ 369
---------
COMPREHENSIVE INCOME ............... $ 45,394
=========
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 $ (15,104)
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements
forth-three SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: ORGANIZATION AND BUSINESS
Sotheby's Holdings, Inc. (together with its subsidiaries, the "Company")
conducts 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, 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 Holding's, Inc. and its wholly-owned subsidiaries. The
Company's investments in Acquavella Modern Art ("AMA") (see Note F) and other
investments in 20% to 50% owned affiliates are accounted for under the equity
method.
Revenue Recognition Auction and related revenues are generally recognized
at the date of sale less estimates for allowances. Subscription revenue from
auction catalogues is recognized over the twelve-month period of the
subscription from the date of receipt of the proceeds. Auction and related
revenues also include principal activities and revenues from Emmerich
Galleries. Principal activities consist of net gains (losses) on sales of
inventories, the Company's share of operating results from its investment in
AMA and other equity investments, net income (loss) earned from guarantees
and the net gains (losses) related to sales of secured loan collateral where
the Company shares in the gain (loss) if the property sells either above or
below its investment. Other revenues consist principally of revenues from
art-related financing activities, real estate operations and educational
activities. 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 net of brokerage 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 market
value.
Properties Properties, consisting primarily of buildings and improvements,
leaseholds and leasehold improvements, furniture and fixtures and equipment,
are stated on the cost basis. Depreciation is computed principally on the
straight-line method over the assets estimated useful lives. Leaseholds and
leasehold improvements are amortized over the lesser of the life of the lease
or the estimated useful life of the improvement. Equipment includes
capitalized software which reflects costs related to purchased software.
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 and amortized over the life of the
related assets. Capitalized interest totaled approximately $0.5 million in
1998.
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.
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 risk from exchange rate movements because gains
and losses on such contracts 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. 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.
Premium or discount on forward contracts is amortized to interest expense
over the life of the contract. At December 31, 1998, the Company's
outstanding foreign currency forward contracts were not material.
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.
44 SOTHEBY'S HOLDINGS, INC.
Allowance for Loan Losses The Company regularly reviews its loan portfolio.
Each loan is analyzed based on the current estimated realizable value of the
collateral securing the loan. The Company establishes reserves for specific
loans that the Company believes are under-collateralized and with respect to
which the under-collateralized amount may not be collectible from the
borrower. Reserves are established for probable losses inherent in the
remainder of the loan portfolio based on historical data and current market
conditions.
Intangible Assets Intangible assets include goodwill, lease rights and
subscriber lists. Goodwill is being amortized over fifteen to forty years.
The amounts assigned to other intangible assets are amortized on a
straight-line basis over estimated useful lives not to exceed twenty-five
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.
Earnings Per Share Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share." Basic earnings per share is based on the weighted average number of
outstanding shares of common stock. Diluted earnings per share is based on
the weighted average number of shares of common stock and common stock
equivalents (stock options). The basic and diluted weighted average number of
shares used for the earnings per share calculations were as follows:
(In millions) 1998 1997 1996
---- ---- ----
BASIC ................................... 56.7 56.0 55.7
DILUTIVE EFFECT OF OPTIONS .............. 0.6 0.3 0.7
---- ---- ----
DILUTED ................................. 57.3 56.3 56.4
There were no reconciling items between net income for basic and diluted
earnings per share.
Foreign Currency Translation Assets and liabilities of foreign subsidiaries
are translated at year-end exchange rates. Income statement amounts are
translated using average monthly exchange rates during the year. Gains and
losses resulting from translating foreign currency financial statements are
accumulated in a separate component of shareholders' equity until the
subsidiary is sold or substantially liquidated.
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 has been presented in Note K as required
under SFAS No. 123, "Accounting for Stock-Based Compensation."
Reclassifications Certain amounts in the 1997 and 1996 financial statements
have been reclassified to conform with the 1998 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 On January 1, 1998, the Company adopted SFAS No. 130
"Reporting Comprehensive Income" which requires certain transactions to be
included as adjustments to net income in order to report comprehensive
income. These transactions referred to as other comprehensive income
represent items that, under previous accounting standards, bypassed the
statement of income and were reported directly as adjustments to the equity
section of the balance sheet. The Company's other comprehensive income
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
previously reported as a separate component of shareholders' equity is now
included in accumulated other comprehensive income in the Consolidated
Balance Sheets.
forty-five SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pension Arrangements In February 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 132, "Employer's Disclosures about Pensions
and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 132 standardizes the disclosure
requirements for pension and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair values
of plan assets that will facilitate financial analysis, and eliminates
certain disclosures. SFAS No. 132 does not change the measurement or
recognition of pension or other postretirement benefits. See Note L for the
Company's disclosure of pension arrangements.
New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted for fiscal quarters of fiscal years beginning after
June 15, 1999. The Company expects to adopt SFAS No. 133 effective January 1,
2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company is currently
evaluating the impact that the adoption of this statement will have on its
financial position and results of operations.
NOTE C: SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", during the fourth quarter of 1998. SFAS
No. 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information
about operating segments in interim financial statements. It also establishes
standards for related disclosures about products and services, major
customers and geographic areas. Operating segments are defined as components
of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision making group is comprised
of the Chief Executive Officer and the senior executives of the Company and
the Company's operating segments.
The Company has three reportable operating segments consisting of Auction,
Real Estate and Finance. 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 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 markets and brokers luxury real estate.
The Finance segment provides art-related financing generally secured by works
of art and other personal property owned by its clients. The Other segment
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, not including nonrecurring 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 (Note B). Revenues are
attributed to geographic areas based on the location of the actual sale.
AS OF AND 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
SEGMENT ASSETS ................ 556,933 10,661 176,782 3,128 747,504
EXPENDITURES FOR SEGMENT ASSETS 51,473 2,219 -- 43 53,735
46 SOTHEBY'S HOLDINGS, INC.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
AUCTION REAL ESTATE FINANCE OTHER TOTAL
-------- ----------- -------- -------- --------
REVENUES ...................... $335,511 $ 19,359 $ 20,235 $ 6,687 $381,792
INTEREST INCOME ............... 14,931 10 -- 35 14,976
INTEREST EXPENSE .............. 5,960 13 39 6 6,018
DEPRECIATION AND AMORTIZATION . 9,978 774 -- 305 11,057
SEGMENT PROFIT/(LOSS) ......... 67,992 3,938 5,337 (1,110) 76,157
SEGMENT ASSETS ................ 551,310 10,166 276,190 1,403 839,069
EXPENDITURES FOR SEGMENT ASSETS 15,440 1,968 -- 99 17,507
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996
AUCTION REAL ESTATE FINANCE OTHER TOTAL
-------- ----------- -------- -------- --------
REVENUES ...................... $302,196 $ 13,752 $ 14,015 $ 6,533 $336,496
INTEREST INCOME ............... 12,033 3 -- 35 12,071
INTEREST EXPENSE .............. 3,603 5 32 3 3,643
DEPRECIATION AND AMORTIZATION . 8,939 342 -- 189 9,470
SEGMENT PROFIT/(LOSS) ......... 62,672 2,881 3,281 (590) 68,244
SEGMENT ASSETS ................ 480,688 4,824 151,116 4,656 641,284
EXPENDITURES FOR SEGMENT ASSETS 9,335 447 -- 53 9,835
forty-seven SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the totals reported for the reportable operating segments
to the applicable line items in the consolidated financial statements is as
follows:
AS OF AND FOR THE YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
REVENUES:
TOTAL REVENUES FOR
REPORTABLE SEGMENTS ................ $ 440,177 $ 375,105 $ 329,963
OTHER REVENUES ..................... 6,875 6,687 6,533
--------- --------- ---------
TOTAL CONSOLIDATED REVENUES ..... $ 447,052 $ 381,792 $ 336,496
========= ========= =========
PROFIT:
TOTAL PROFIT FOR
REPORTABLE SEGMENTS ................ $ 89,710 $ 77,267 $ 68,834
OTHER PROFIT (LOSS) ................ (697) (1,110) (590)
UNALLOCATED AMOUNTS:
NON-RECURRING CHARGES ........... (15,200) (11,700) --
--------- --------- ---------
CONSOLIDATED INCOME BEFORE TAX .. $ 73,813 $ 64,457 $ 68,244
========= ========= =========
ASSETS:
TOTAL ASSETS FOR REPORTABLE SEGMENTS $ 744,376 $ 837,666 $ 636,628
OTHER ASSETS ....................... 3,128 1,403 4,656
GOODWILL NOT ALLOCATED TO SEGMENTS . 10,529 10,789 11,052
OTHER UNALLOCATED AMOUNTS .......... 11,977 10,383 3,762
--------- --------- ---------
CONSOLIDATED TOTAL .............. $ 770,010 $ 860,241 $ 656,098
========= ========= =========
The other unallocated amounts consist primarily of deferred tax assets and
income tax receivable balances.
48 SOTHEBY'S HOLDINGS, INC.
Other Significant Items:
SEGMENT CONSOLIDATED
TOTALS ELIMINATIONS TOTAL
--------- ------------ ------------
1998
INTEREST INCOME ................................. $ 19,131 $ (15,571)(1) $ 3,560
INTEREST EXPENSE ................................ 10,545 -- 10,545
DEPRECIATION AND AMORTIZATION ................... 12,652 -- 12,652
EXPENDITURES FOR ASSETS ......................... 53,735 -- 53,735
1997
INTEREST INCOME ................................. $ 14,976 $ (11,929)(1) $ 3,047
INTEREST EXPENSE ................................ 6,018 -- 6,018
DEPRECIATION AND AMORTIZATION ................... 11,057 -- 11,057
EXPENDITURES FOR ASSETS ......................... 17,507 -- 17,507
1996
INTEREST INCOME ................................. $ 12,071 $ (7,805)(1) $ 4,266
INTEREST EXPENSE ................................ 3,643 -- 3,643
DEPRECIATION AND AMORTIZATION ................... 9,470 -- 9,470
EXPENDITURES FOR ASSETS ......................... 9,835 -- 9,835
(1) Represents the elimination of interest charged by Auction to Finance for
funding Finance's loan portfolio.
Information concerning geographical areas was as follows:
AS OF AND FOR THE YEAR ENDED DECEMBER 31
1998 1997 1996
--------- ------------ ------------
REVENUES
UNITED STATES ................................... $ 272,182 $ 175,899 $ 161,559
UNITED KINGDOM .................................. 132,325 138,509 111,116
OTHER INTERNATIONAL COUNTRIES ................... 42,545 67,384 63,821
--------- ------------ ------------
TOTAL ........................................... $ 447,052 $ 381,792 $ 336,496
========= ============ ============
LONG-LIVED ASSETS
UNITED STATES ................................... $ 56,832 $ 30,075 $ 21,018
UNITED KINGDOM .................................. 45,953 44,305 46,498
OTHER INTERNATIONAL COUNTRIES ................... 6,129 4,162 3,060
--------- ------------ ------------
TOTAL ........................................... $ 108,914 $ 78,542 $ 70,576
========= ============ ============
NOTE D: ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
AS OF DECEMBER 31
(Thousands of dollars) 1998 1997
------------ ------------
ACCOUNTS AND OTHER RECEIVABLES .................................... $ 317,001 $ 357,521
ALLOWANCE FOR DOUBTFUL ACCOUNTS ................................... (11,711) (6,799)
------------ ------------
305,290 350,722
------------ ------------
NOTES RECEIVABLE .................................................. 155,581 276,401
ALLOWANCE FOR DOUBTFUL ACCOUNTS ................................... (2,874) (3,620)
------------ ------------
152,707 272,781
------------ ------------
TOTAL ............................................................. $ 457,997 $ 623,503
============ ============
forty-nine SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable included $0.3 million and $2.1 million at December 31,
1998 and 1997, respectively, relating to the purchase of art objects at
auction by employees, officers, directors and other related parties.
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, 1998 and 1997, accounts receivable included
approximately $137.4 million and $179.6 million, respectively, of such sales.
As of February 23, 1999, $92.7 million of the amount outstanding at December
31, 1998 had been paid. Amounts outstanding at December 31, 1997 which
remained outstanding at December 31, 1998 totaled $4.9 million. Management
believes that adequate allowances have been established to provide for
potential losses on these amounts.
Notes receivable included $0.7 million at December 31, 1998, relating to
loans to employees. The average interest rate on these loans was 11.5% at
December 31, 1998.
The Company provides collectors, museums and dealers with financing generally
secured by works of art that the Company typically controls and other
personal property owned by its clients. The Company generally makes two types
of secured loans: (1) advances secured by consigned property to borrowers who
are contractually committed, in the near term, to sell the property at
auction or privately (a "consignor advance"); and (2) general purpose loans
to collectors, museums or dealers secured by property not presently intended
for sale. The consignor advance enables 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.
No individual loans amounted to more than 5% of total assets at December 31,
1998. 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, on certain occasions the Company will lend,
on a secured basis, at loan to value ratios higher than 50%. In addition, on
certain occasions, the Company will also lend amounts at loan to value ratios
higher than 50% where the Company participates in a share of the sale
proceeds if the property sells for more than its investment and the Company
shares in a portion of the loss if the property does not sell at or above its
investment.
The average interest rates charged on notes receivable were 8.7% and 9.1% at
December 31, 1998 and 1997, respectively. The estimated fair value of notes
receivable was $155.6 million and $275.6 million at December 31, 1998 and
1997, respectively.
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.
The following are the changes in the allowance for credit losses relating to
notes receivable for the twelve months ended December 31, 1998 and 1997.
YEAR ENDED DECEMBER 31
(Thousands of dollars) 1998 1997
------- -------
ALLOWANCE FOR CREDIT LOSSES AT DECEMBER 31, 1997 AND 1996 $ 3,620 $ 2,501
PROVISIONS .............................................. 250 1,251
WRITEOFFS AND OTHER ..................................... (996) (132)
------- -------
ALLOWANCE FOR CREDIT LOSSES AT DECEMBER 31, 1998 AND 1997 $ 2,874 $ 3,620
======= =======
50 SOTHEBY'S HOLDINGS, INC.
NOTE E: INVENTORY
Inventory consists principally of objects obtained incidental to the auction
process primarily as a result of honoring authenticity claims of purchasers,
purchasers defaulting on accounts receivable after the consignor has been
paid, purchasing property at the minimum price guaranteed by the Company and
purchases of property for investment purposes.
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
(Thousands of dollars) 1998 1997
-------- --------
INVENTORY, AT COST ........................... $ 26,337 $ 39,300
NET REALIZABLE VALUE ALLOWANCES .............. (9,422) (15,726)
-------- --------
TOTAL ........................................ $ 16,915 $ 23,574
======== ========
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 contributed the Matisse inventory
to AMA and entered into the AMA partnership agreement with Acquavella
Contemporary Art, Inc. to sell the Matisse inventory. The Company accounts
for its investment in AMA under the equity method of accounting in the
Consolidated Financial Statements, including its share of AMA's operating
results in auction and related revenue. The total net assets of the
partnership consist principally of the inventory described above. The Company
reflects its 50% interest in the net assets of the partnership in investments
in the Consolidated Balance Sheets. This investment totaled $34.3 million and
$35.2 million at December 31, 1998 and 1997, respectively, and is included in
Auction segment assets for segment reporting purposes. (See Note C.)
To the extent that the partnership requires working capital, the Company has
agreed to lend the same to the partnership. As of December 31, 1998, no such
amounts were outstanding.
In 1998 and 1997 the Company's investments in other affiliates totaled $2.4
and $2.3 million, respectively.
NOTE G: PROPERTIES
Properties consist of the following:
AS OF DECEMBER 31
(Thousands of dollars) 1998 1997
--------- ---------
LAND ........................................... $ 276 $ 276
BUILDING AND BUILDING IMPROVEMENTS ............. 49,793 43,792
LEASEHOLDS AND LEASEHOLD IMPROVEMENTS .......... 13,489 40,784
FURNITURE, FIXTURES AND EQUIPMENT .............. 66,638 57,613
CONSTRUCTION IN PROGRESS ....................... 34,551 --
OTHER .......................................... 4,321 6,419
--------- ---------
169,068 148,884
--------- ---------
LESS: ACCUMULATED DEPRECIATION ................. (60,154) (70,342)
--------- ---------
TOTAL .......................................... $ 108,914 $ 78,542
========= =========
Construction in progress relates to the expenditures on the construction of
the York Property, as defined in Note J, and expenditures related to the
Company's new financial and accounting system. These assets will be
depreciated when they are put into use.
fifty-one SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H: CREDIT ARRANGEMENTS
Short-term borrowings consist of the following:
AS OF DECEMBER 31
(Thousands of dollars) 1998 1997
------ ------
BANK LINES OF CREDIT ........................... $2,076 $2,152
OTHER SHORT-TERM OBLIGATIONS ................... 22 16
------ ------
$2,098 $2,168
====== ======
Bank Lines of Credit At December 31, 1998 and 1997, $2.1 million and $2.2
million, respectively, were outstanding under domestic and foreign lines of
credit at weighted average annual interest rates of 3.97% and 5.44%,
respectively.
Commercial Paper The Company may issue up to $300 million in notes under
its U.S. commercial paper program. The U.S. commercial paper program was
increased to $300 million from $200 million in July 1998. At December 31,
1998 there were no outstanding commercial paper borrowings. At December 31,
1997, $117.0 million of commercial paper borrowings was outstanding. These
borrowings were classified on the Consolidated Balance Sheets as a long-term
liability based on the Company's ability and intent to maintain or refinance
these obligations on a long-term basis. The notes do not bear interest but
are issued at a discount, which is negotiated by the Company and purchaser
prior to each issuance. The weighted average annual interest rate on the
commercial paper borrowings outstanding at December 31, 1997 was 6.05% with
an average maturity of 19.5 days.
Bank Credit Facilities On July 11, 1996, the Company entered into a $300
million Bank Credit Agreement (the "Credit Agreement"). The Credit Agreement
represents an amendment and restatement of the Company's former $300 million
credit agreement which was executed in August 1994. Borrowings under the
Credit Agreement are permitted through July 11, 2001 in either U.S. dollars
or U.K. pounds sterling. Under the terms of the Credit Agreement, interest is
calculated based on the London Interbank Offering Rate ("LIBOR"). A facility
fee of 0.10% per annum is charged on the amount of the commitment. Commitment
fees totaled $0.3 million, $0.3 million and $0.4 million for the years ended
December 31, 1998, 1997 and 1996 respectively. The Credit Agreement contains
certain financial covenants. Under these covenants, the Company is permitted
to pay dividends, however, the Company is required to maintain consolidated
tangible net worth, as defined, of at least $150 million. At December 31,
1998, consolidated tangible net worth, as defined was $296.6 million. The
Company had no outstanding borrowings under these facilities during 1998 and
1997.
Senior Unsecured Debt In May 1998, the Company filed a registration
statement with the Securities and Exchange Commission relating to a shelf
registration of $200 million of senior unsecured debt securities that may be
offered and sold from time to time. Subsequent to year ended, in February
1999, the Company sold a tranche of these debt securities for an aggregate
offering price of $100 million at an interest rate of 6.875%.
Interest paid on borrowings totaled $9.8 million, $5.5 million and $2.7
million in the years ended December 31, 1998, 1997, and 1996, respectively.
52 SOTHEBY'S HOLDINGS, INC.
NOTE I: INCOME TAXES
The significant components of income tax expense consist of the following:
YEAR ENDED DECEMBER 31
(Thousands of dollars) 1998 1997 1996
-------- -------- --------
INCOME BEFORE TAXES:
DOMESTIC .................................. $ 65,963 $ 19,514 $ 31,595
FOREIGN ................................... 7,850 44,943 36,649
-------- -------- --------
TOTAL ..................................... $ 73,813 $ 64,457 $ 68,244
======== ======== ========
INCOME TAXES CURRENT:
FEDERAL ................................... $ 17,876 $ 7,136 $ 11,241
STATE AND LOCAL ........................... 13,009 3,824 5,067
FOREIGN ................................... 7,872 15,220 10,519
-------- -------- --------
38,757 26,180 26,827
-------- -------- --------
INCOME TAXES DEFERRED:
FEDERAL ................................... (6,887) (3,426) (2,299)
FOREIGN ................................... (3,082) 1,095 2,770
-------- -------- --------
(9,969) (2,331) 471
-------- -------- --------
TOTAL ..................................... $ 28,788 $ 23,849 $ 27,298
======== ======== ========
The components of deferred income tax assets and liabilities consist of the
following:
AS OF DECEMBER 31
(Thousands of dollars) 1998 1997
-------- --------
DEFERRED TAX ASSETS:
ASSET PROVISIONS AND ACCRUED LIABILITIES ............. $ 11,045 $ 6,401
TAX LOSS AND CREDIT CARRYFORWARDS .................... 8,595 6,458
-------- --------
19,640 12,859
VALUATION ALLOWANCE .................................. (3,389) (6,458)
-------- --------
TOTAL ................................................ $ 16,251 $ 6,401
======== ========
DEFERRED TAX LIABILITIES:
BASIS DIFFERENCE IN PARTNERSHIP ASSETS ............... $ 12,507 $ 12,772
DEPRECIATION ......................................... (718) (864)
-------- --------
TOTAL ................................................ $ 11,789 $ 11,908
======== ========
The Company provided a valuation allowance for certain foreign losses and tax
credit carryovers of $3.4 million and $6.5 million at December 31, 1998 and
1997 respectively. The valuation allowance (decreased) increased by ($3.1
million) and $5.9 million at December 31, 1998 and 1997, respectively. The
change in the valuation allowance in 1998 compared to 1997 resulted from
management's evaluation of the utilization of U.S. and certain foreign
operating loss and credit carryfowards.
The effective tax rate varied from the statutory rate as follows:
Year ended December 31
1998 1997 1996
-------- -------- --------
STATUTORY FEDERAL INCOME TAX RATE ............... 35.0% 35.0% 35.0%
STATE AND LOCAL TAXES, NET OF FEDERAL TAX BENEFIT 5.7 3.9 4.8
FOREIGN TAXES AT RATES GREATER THAN U.S. RATES .. 2.8 0.9 0.7
TAXABLE FOREIGN SOURCE INCOME ................... (4.8) (2.5) 0.0
OTHER ........................................... 0.3 (0.3) (0.5)
-------- -------- --------
EFFECTIVE INCOME TAX RATE ....................... 39.0% 37.0% 40.0%
======== ======== ========
fifty-three SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Undistributed earnings of foreign subsidiaries included in consolidated
retained earnings at December 31, 1998 and 1997 amounted to $38.0 million and
$35.0 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 1998, 1997 and 1996 were
$25.4 million, $24.2 million and $12.7 million respectively.
The related tax expense (benefit) for the years ended December 31, 1998, 1997
and 1996 related to the foreign currency translation adjustment included in
Other Comprehensive Income was approximately $0.24 million, ($3.6 million)
and $3.7 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 payments
under operating leases amounted to $15.5 million, $13.1 million and $11.9
million, respectively for the years ended December 31, 1998, 1997 and 1996.
Properties under capital leases, which relate primarily to computer and
office equipment, are not material. Future minimum lease payments under
noncancelable operating leases in effect at December 31, 1998 are as follows:
(Thousands of dollars)
1999 ....................................................... $ 16,554
2000 ....................................................... 12,442
2001 ....................................................... 10,382
2002 ....................................................... 9,350
2003 ....................................................... 9,016
THEREAFTER .................................................. 62,503
--------
TOTAL FUTURE MINIMUM LEASE PAYMENTS ......................... $120,247
========
The future minimum lease payments have not been reduced by minimum sublease
rentals of $9.9 million due 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.
Operating leases include a lease expiring in 2009 (which can be extended
until 2039) on the North American headquarters building in New York City (the
"York Property"). York Avenue Development, Inc., a wholly-owned subsidiary of
Sotheby's, Inc. (itself a wholly-owned subsidiary of the Company), holds a
purchase option on the York Property. The option can be exercised on defined
dates in 1999, 2004 and 2009 for ten times the annual rent at the date the
option is exercised, subject to certain limitations.
NOTE K: SHAREHOLDERS' EQUITY
Common Stock and Public Offering Effective May 13, 1988, 11,006,214 shares
of Class A Limited Voting Common Stock ("Class A Common Stock") were sold in
an initial public offering by the Company's shareholders. Effective June 30,
1992, an additional 11,000,000 shares of Class A Common Stock were sold in a
secondary public offering by certain shareholders of the Company. The Class A
Common Stock is traded on stock exchanges in both the U.S. and the U.K.
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.
Preferred Stock In addition to Class A and B Common Stock outstanding, the
Company has the authority to issue 50,000,000 shares of Preferred Stock, no
par value. No such shares were issued and outstanding at December 31, 1998
and 1997.
Stock Option Plans At December 31, 1998, the Company has reserved 9,778,000
shares of Class B Common Stock for issuance in connection with the 1987 Stock
Option Plan and the 1997 Stock Option Plan ("the Plan"). The Plan succeeded
the 1987 Stock Option Plan.
54 SOTHEBY'S HOLDINGS, INC.
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.
Pursuant to the 1987 Stock Option Plan, options granted through September
1992 vest and become exercisable ratably during each of the fourth, fifth and
sixth years after the date of grant. For options granted subsequent to
September 1992 and through December 31, 1996, pursuant to the 1987 Stock
Option Plan, and for options granted subsequent to January 1997, pursuant to
the Plan, options 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 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
convertible into an equivalent number of shares of Class A Common Stock.
At December 31, 1998, there were outstanding options under the Plan and the
1987 Stock Option Plan for the purchase of 7,895,935 shares at prices ranging
from $10.87 to $24.25 per share. Stock option transactions during 1998, 1997
and 1996 are summarized as follows (shares in thousands):
OPTIONS OUTSTANDING
-----------------------------------------------------------
SHARES RESERVED
FOR ISSUANCE WEIGHTED
UNDER THE PLAN SHARES PRICES AVERAGE PRICE
--------------- --------- ------------ -------------
INITIAL GRANT SEPTEMBER 1, 1987 ............... 12,507 7,628 $ 1.50 $ 1.50
--------------- --------- ------------ -------------
BALANCE AT DECEMBER 31, 1995 .................. 9,490 6,297 $ 1.50-22.62 $ 11.83
OPTIONS GRANTED ......................... 754 $14.00-17.00 $ 15.13
OPTIONS CANCELED ........................ (183) $10.87-20.87 $ 13.65
OPTIONS EXERCISED ....................... (1,093) (1,093) $ 1.50-16.50 $ 8.34
--------------- --------- ------------ -------------
BALANCE AT DECEMBER 31, 1996 .................. 8,397 5,775 $ 1.50-22.62 $ 12.86
OPTIONS EXPIRED-1987 OPTION PLAN .............. (2,169)
INITIAL GRANT JANUARY 1, 1997 FOR THE PLAN .... 6,000
OPTIONS GRANTED ......................... 2,279 $15.75-18.94 $ 17.72
OPTIONS CANCELED ........................ (237) $10.87-17.13 $ 13.64
OPTIONS EXERCISED ....................... (1,121) (1,121) $ 1.50-18.00 $ 10.23
--------------- --------- ------------ -------------
BALANCE AT DECEMBER 31, 1997 .................. 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
=============== ========= ============ =============
The following table summarizes information about options outstanding at
December 31, 1998 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED
AVERAGE
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
AT 12/31/98 CONTRACTUAL LIFE AVERAGE PRICE AT 12/31/98 AVERAGE PRICE
----------- ---------------- ------------- ----------- -------------
$ 9.70-12.12 721 6.1 years $ 10.88 341 $ 10.88
$12.13-14.55 1,134 3.5 years $ 13.13 1,116 $ 13.13
$14.56-16.97 1,376 6.6 years $ 15.81 628 $ 16.11
$16.98-19.40 1,614 8.4 years $ 18.12 308 $ 18.13
$19.41-21.82 1,495 9.0 years $ 20.31 30 $ 20.88
$21.83-24.25 1,556 9.9 years $ 24.15 -- $ --
----------- ----------- -------------
7,896 2,423 $ 14.31
=========== =========== =============
The weighted average fair value (using the Black-Scholes option-pricing
model) per share of options granted during the years ended December 31, 1998,
1997 and 1996 was $7.36, $6.47 and $5.52, respectively. At December 31, 1997
and 1996, 2,492,455 and 2,498,527 options were exercisable at a weighted
average exercise price of $13.57 and $11.96, respectively.
fifty-five SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Performance Share Purchase Plan At December 31, 1998, 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, 1998, 695,500 options were outstanding under the Performance
Plan.
The following table summarizes information about options outstanding at
December 31, 1998 under the Performance Plan:
WEIGHTED
Options Outstanding SHARES PRICES AVERAGE PRICE
------- ----------- -------------
INITIAL GRANT FEBRUARY 1996 AND BALANCE AT DECEMBER 31, 1996 215,000 $ 3.69 $ 3.69
OPTIONS GRANTED ...................................... 271,500 4.29 4.29
OPTIONS CANCELED ..................................... (56,000) 3.69-4.29 4.02
------- ----------- -------------
BALANCE AT DECEMBER 31, 1997 ............................... 430,500 $ 3.69-4.29 $ 4.03
OPTIONS GRANTED ...................................... 315,000 5.03 5.03
OPTIONS CANCELED ..................................... (50,000) 3.69-4.29 3.99
------- ----------- -------------
BALANCE AT DECEMBER 31, 1998 ............................... 695,500 $ 3.69-5.03 $ 4.48
======= =========== =============
The Company recognized compensation expense of $9.0 million, $1.3 million and
$0.5 million in 1998, 1997 and 1996, respectively, relating to the
Performance Plan.
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.
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 of the Board of Directors, 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 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
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 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 will 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.
The weighted average fair value (using the Black-Scholes option-pricing
model) per share of options granted during 1998, 1997 and 1996 was $14.02,
$11.99 and $10.33 respectively.
56 SOTHEBY'S HOLDINGS, INC.
Pro Forma Disclosure of the Compensation Cost for Stock Option Plans
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted under SFAS No. 123, the Company has
elected to continue to measure stock-based compensation using the intrinsic
value approach under APB Opinion No. 25.
Had compensation cost for the Plan and the Performance Plan been determined
based on the fair value at the grant date for awards in 1998, 1997 and 1996
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- ---------- ----------
NET INCOME--AS REPORTED ............... $ 45,025 $ 40,608 $ 40,946
NET INCOME--PRO FORMA ................. $ 42,704 $ 38,044 $ 39,345
BASIC EARNINGS PER SHARE--AS REPORTED . $ 0.79 $ 0.73 $ 0.73
DILUTED EARNINGS PER SHARE--AS REPORTED $ 0.79 $ 0.72 $ 0.73
BASIC EARNINGS PER SHARE--PRO FORMA ... $ 0.75 $ 0.68 $ 0.71
DILUTED EARNINGS PER SHARE--PRO FORMA . $ 0.75 $ 0.68 $ 0.70
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 had not been applied to options granted prior to
January 1995.
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: dividend yield of 2.1%; expected volatility
of 30%; risk-free rate of return of 6%; 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 and restated the Director Stock Ownership Plan. At
December 31, 1998, the Company had reserved 161,165 shares of Class A Common
Stock for issuance in connection with the Stock Compensation Plan for
Non-employee Directors ("the Plan"). During 1998, 15,255 shares were issued
to non-employee directors under the Plan. During 1998, 1997 and 1996, 3,690,
15,390 and 4,500 shares, respectively were issued to non-employee directors
under the Director Stock Ownership Plan.
Stock Repurchase Programs In June of 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 1
million shares to 4 million shares. As of December 31, 1998, 2.5 million
shares had been repurchased under this program. There were no repurchases of
stock in 1998.
NOTE L: PENSION ARRANGEMENTS
The Company has a U.S. defined contribution plan that covers employees after
90 days of service. The Company contributes 2% of each participant's
compensation to the plan. In addition, participants may elect to contribute
between 2% and 12% of their compensation, up to the maximum amount allowable
under IRS regulations, on a pre-tax basis. Effective May 1, 1996, employee
savings are matched by a Company contribution of up to an additional 6% of
the participant's compensation. Prior to May 1, 1996, the Company matched
employee savings up to an additional 3% of the participant's compensation.
The Company's contributions amounted to $2.7 million, $2.5 million and $2.0
million for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company also contributes to a defined benefit pension plan covering
substantially all employees in the U.K. on an annual basis.
The following disclosure related to the defined benefit pension plan is in
accordance with the provisions of SFAS No. 132 (see Note B), which the
Company adopted for the year ended December 31, 1998.
fifty-seven SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The change in the projected benefit obligation ("PBO") is as follows:
AS OF DECEMBER 31
1998 1997
--------- ---------
PBO AT BEGINNING OF YEAR ....................................... $ 97,400 $ 84,392
SERVICE COST ................................................... 4,891 3,656
INTEREST COST .................................................. 6,767 6,568
EMPLOYEE CONTRIBUTIONS ......................................... 818 638
BENEFIT IMPROVEMENTS ........................................... 0 217
ACTUARIAL (LOSS) GAIN .......................................... (3,746) 4,790
BENEFITS PAID .................................................. (2,161) (1,847)
FOREIGN CURRENCY EXCHANGE RATE CHANGES ......................... 290 (1,014)
--------- ---------
PBO AT END OF YEAR ............................................. $ 104,259 $ 97,400
========= =========
The change in the plan assets, the funded status and the amounts recognized
in the Consolidated Balance Sheets are as follows:
AS OF DECEMBER 31
1998 1997
--------- ---------
FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR ................. $ 142,023 $ 119,065
ACTUAL (LOSS) RETURN ON PLAN ASSETS ............................ (4,658) 24,703
EMPLOYER CONTRIBUTIONS ......................................... 983 893
EMPLOYEE CONTRIBUTIONS ......................................... 818 638
BENEFITS PAID .................................................. (2,161) (1,847)
FOREIGN CURRENCY EXCHANGE RATE CHANGES ......................... 431 (1,429)
--------- ---------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR ....................... $ 137,436 $ 142,023
--------- ---------
FUNDED STATUS .................................................. $ 33,178 $ 44,629
UNRECOGNIZED TRANSITIONAL ASSET ................................ (1,973) (2,461)
UNRECOGNIZED PRIOR SERVICE COST ................................ 2,571 2,871
UNRECOGNIZED ACTUARIAL GAIN .................................... (24,435) (38,368)
--------- ---------
PREPAID PENSION COST RECORDED IN THE CONSOLIDATED BALANCE SHEETS $ 9,341 $ 6,671
========= =========
The components of net pension benefit are as follows:
YEAR ENDED DECEMBER 31
1998 1997 1996
-------- -------- --------
SERVICE COST ............................. $ 4,891 $ 3,656 $ 3,229
INTEREST COST ............................ 6,767 6,568 5,854
EXPECTED RETURN ON PLAN ASSETS ........... (11,129) (9,510) (8,479)
AMORTIZATION OF PRIOR SERVICE COST ....... 304 285 290
AMORTIZATION OF ACTUARIAL LOSS ........... (2,007) (1,447) (1,112)
AMORTIZATION OF TRANSITION ASSET ......... (493) (493) (493)
-------- -------- --------
NET PENSION BENEFIT ...................... $ (1,667) $ (941) $ (711)
======== ======== ========
The weighted average discount rate used in determining actuarial values for
the U.K. pension plan was 6.5% in 1998 and 7.0% in 1997, the increase in
future compensation levels was 5.0% in 1998 and 6.0% in 1997, and the
expected weighted average long-term rate of return on plan assets was 9.0% in
1998 and 1997.
58 SOTHEBY'S HOLDINGS, INC.
NOTE M: RELATED PARTY TRANSACTIONS
Due to consignors included $0.7 million and $0.2 million at December 31, 1998
and 1997, respectively, relating to the sale of art objects at auction by
employees, officers, directors and other related parties. In addition, 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. Outstanding direct loans
amounted to $0.1 million at December 31, 1998 and 1997. 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. All
repayment obligations under this bank loan program are guaranteed by the
Company. This program 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 was $6.0 million at
December 31, 1998. See Notes D and N for additional related party disclosure.
NOTE N: COMMITMENTS AND CONTINGENCIES
Commitments The Company evaluated the adequacy of its principal auction
premises for the requirements of the present and future conduct of its
business. In September 1998, the Company received final approval from the
City of New York to proceed with its plan to construct a six story addition
and to renovate its current facility on York Avenue. This construction will
expand auction, warehouse and office space in New York City and will enable
the Company to consolidate its operations in New York City. The capital
expenditures relating to the new building construction is currently estimated
to be in the range of $125-130 million. As of February 23, 1999, the Company
has financial commitments in relation to this project of approximately $52.1
million.
Legal Actions The Company, in the normal course of business, is a defendant
in various legal actions.
Lending and Other Contingencies The Company enters into legal binding
arrangements to lend, 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 $84.0 million and
$27.7 million at December 31, 1998 and 1997, respectively.
The Company has a 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 $0.7 million at December 31, 1998.
On certain occasions, the Company will guarantee to the consignor a minimum
price in connection with the sale of property at auction. The Company must
perform under its guarantee only in the event that the property sells for
less than the minimum price or the property does not sell and, therefore, the
Company must pay the difference between the sale price at auction and the
amount of the guarantee. At December 31, 1998 and February 23, 1999, the
Company had no outstanding guarantees. Under certain guarantees, the Company
participates in a share of the proceeds if the property under guarantee sells
above a minimum price. In addition, the Company is obligated under the terms
of certain guarantees to fund a portion of the guarantee prior to the auction.
In the opinion of management, the commitments and contingencies described
above and in Note J currently are not expected to have a material adverse
effect on the Company's financial statements.
fifty-nine SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O: NON-RECURRING CHARGES
In 1998, the Company recorded a non-recurring charge within operating
expenses of $15.2 million relating to the construction of the York Property,
as defined in Note J, which was a direct result of the Company's decision to
consolidate its operations in New York City. 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 which were deemed
to have no future use, as they have been or are currently being destroyed or
replaced during the construction of the York Property. The remaining amount
of approximately $1.1 million was a provision resulting from the cost of
future rental obligations on rental space in New York City that will be
abandoned as part of the plan. As of December 31, 1998, the Company has
recorded in other liabilities on the Consolidated Balance Sheet,
approximately $1.1 million related to these future obligations, which will be
paid out starting approximately in October, 2000 through September, 2003.
In early 1997, a television program aired in the U.K. and a related book was
published both of which contain certain allegations of improper or illegal
conduct by current and former employees of the Company. In response to these
allegations, the Board of Directors in February 1997 established a committee
of independent directors to review the issues raised by the book and related
matters. The Independent Review Committee retained outside independent
counsel in the U.S. and the U.K. to assist and advise the Committee in its
review. The Company's management also conducted its own internal review. Both
reviews were completed in 1997. In 1997, the Company incurred $11.7 million
of non-recurring charges which consisted primarily of legal and other
professional fees associated with the Board of Directors' Independent Review
Committee. The Company does not expect to incur any additional material
expenses in relation to this matter. These charges were paid in full as of
December 31, 1998.
NOTE P: ACQUISITIONS
In June, 1998, the Company's Real Estate segment (Note C) 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 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.
In March 1997, the Company acquired Braverman, Newbold and Brennan, a real
estate brokerage firm in Southampton, New York. In July 1997, the Company
acquired Leslie Hindman Auctioneers, an auction house in Chicago, Illinois.
Both 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.
60 SOTHEBY'S HOLDINGS, INC.
NOTE Q: QUARTERLY RESULTS (UNAUDITED)
(Thousands of dollars, except per share data) FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
1998
AUCTION SALES ........................ $ 251,805 $ 715,770 $ 157,691 $ 814,477
--------- --------- --------- ---------
AUCTION AND RELATED REVENUES ......... $ 55,266 $ 129,916 $ 34,478 $ 147,544
OTHER REVENUES ....................... 13,057 16,900 16,810 33,081
--------- --------- --------- ---------
TOTAL REVENUES ....................... 68,323 146,816 51,288 180,625
--------- --------- --------- ---------
OPERATING INCOME (LOSS)
BEFORE NON-RECURRING CHARGES ....... (7,769) 55,009 (15,167) 63,905
OPERATING INCOME (LOSS)
AFTER NON-RECURRING CHARGES ........ (7,769) 55,009 (30,367) 63,905
NET INCOME (LOSS) .................... $ (6,283) $ 33,562 $ (20,792) $ 38,538
BASIC EARNINGS (LOSS) PER SHARE ...... $ (0.11) $ 0.59 $ (0.37) $ 0.68
DILUTED EARNINGS (LOSS) PER SHARE .... $ (0.11) $ 0.59 $ (0.37) $ 0.66
--------- --------- --------- ---------
(Thousands of dollars, except per share data) FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
1997
AUCTION SALES ........................ $ 207,262 $ 650,607 $ 137,778 $ 847,688
--------- --------- --------- ---------
AUCTION AND RELATED REVENUES ......... $ 45,116 $ 118,406 $ 39,903 $ 132,086
OTHER REVENUES ....................... 8,966 12,596 11,411 13,308
--------- --------- --------- ---------
TOTAL REVENUES ....................... 54,082 131,002 51,314 145,394
--------- --------- --------- ---------
OPERATING INCOME (LOSS)
BEFORE NON-RECURRING CHARGES ....... (8,854) 51,297 (13,765) 50,781
OPERATING INCOME (LOSS)
AFTER NON-RECURRING CHARGES ........ (11,354) 48,297 (17,265) 48,081
NET INCOME (LOSS) .................... $ (6,783) $ 29,340 $ (11,322) $ 29,373
BASIC EARNINGS (LOSS) PER SHARE ...... $ (0.12) $ 0.53 $ (0.20) $ 0.52
DILUTED EARNINGS (LOSS) PER SHARE .... $ (0.12) $ 0.52 $ (0.20) $ 0.52
--------- --------- --------- ---------
sixty-one SOTHEBY'S HOLDINGS, INC.
REPORT OF INDEPENDENT AUDITORS, REPORT OF MANAGEMENT AND AUDIT COMMITTEE
CHAIRMAN'S LETTER
INDEPENDENT AUDITORS' REPORT
To the Board of 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, 1998 and 1997, 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,
1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New York
February 23, 1999
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 a system of internal
control structure 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/ DIANA D. BROOKS /s/ WILLIAM S. SHERIDAN /s/ JOSEPH A. DOMONKOS
DIANA D. BROOKS WILLIAM S. SHERIDAN JOSEPH A. DOMONKOS
President and Chief Senior Vice President and Vice President, Controller and
Executive Officer Chief Financial Officer 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
1998, the Committee met three 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. Deloitte & Touche LLP and the Director
of the Internal Audit Department met privately with the Committee on occasion
to encourage confidential discussion as to any auditing matters.
/s/ MICHAEL BLAKENHAM
VISCOUNT MICHAEL BLAKENHAM
Chairman, Audit Committee
62 SOTHEBY'S HOLDINGS, INC.
SOTHEBY'S HOLDINGS, INC. BOARD OF DIRECTORS
A. ALFRED TAUBMAN
Chairman
[PHOTO OMITTED]
MAX M. FISHER
Vice Chairman
[PHOTO OMITTED]
THE MARQUESS OF HARTINGTON
Deputy Chairman
[PHOTO OMITTED]
DIANA D. BROOKS
President and
Chief Executive Officer
[PHOTO OMITTED]
HONORABLE
CONRAD M. BLACK
Chairman and
Chief Executive Officer,
Hollinger International, Inc.
[PHOTO OMITTED]
VISCOUNT
MICHAEL BLAKENHAM
Chairman,
RBG, Kew
[PHOTO OMITTED]
AMBASSADOR
WALTER J. P. CURLEY
Former Chairman,
The French American Foundation
[PHOTO OMITTED]
HENRY R. KRAVIS
Founding General Partner,
Kohlberg Kravis Roberts & Co.
[PHOTO OMITTED]
JEFFREY H. MIRO
Chairman,
Miro Weiner & Kramer
[PHOTO OMITTED]
SHARON PERCY ROCKEFELLER,
(Mrs. John D. Rockefeller, IV),
President and Chief
Executive Officer,
WETA TV/FM
sixty-three SOTHEBY'S HOLDINGS, INC.
SOTHEBY'S CORPORATE OFFICERS AND ADVISORY BOARD
Advisory Board
GIOVANNI AGNELLI
HER ROYAL HIGHNESS
THE INFANTA PILAR DE
BORBON, DUCHESS OF BADAJOZ
ANN GETTY
ALEXIS GREGORY
DR. QUO-WEI LEE
JOHN L. MARION
THE RT. HON. SIR ANGUS
OGILVY, K.C.V.O.
CARROLL PETRIE
MRS. CHARLES H. PRICE
PROF. DR. WERNER SCHMALENBACH
BARON HANS HEINRICH
THYSSEN-BORNEMISZA DE
KASZON
Corporate Officers
DIANA D. BROOKS
President and
Chief Executive Officer
DEBORAH DECOTIS ZOULLAS
Executive Vice President
SUSAN L. SOLOMON
Executive Vice President,
Chief Executive Officer,
sothebys.com
ROBIN WOODHEAD
Executive Vice President,
Chief Executive,
Sotheby's Europe
SUSAN ALEXANDER
Senior Vice President,
Worldwide Head of
Human Resources
JOHN S. BRITTAIN, JR.
Senior Vice President,
Treasurer
PATRICIA CARBERRY
Senior Vice President,
Director Year 2000
F. PAUL CUCCIA
Senior Vice President,
Chief Information Officer
PAUL DONAHER
Senior Vice President,
Worldwide Director of Marketing
RENA J. MOULOPOULOS
Senior Vice President,
Worldwide Compliance Director,
Business Practices Counsel
DIANA PHILLIPS
Senior Vice President,
Worldwide Head of
Corporate Affairs
DONALDSON C. PILLSBURY
Senior Vice President,
General Counsel and Secretary
WILLIAM S. SHERIDAN
Senior Vice President,
Chief Financial Officer
ROBERT C. WOLCOTT
Senior Vice President,
Director of Taxes
JOSEPH A. DOMONKOS
Vice President,
Controller and Chief
Accounting Officer
DARYL S. WICKSTROM
Vice President,
Associate General Counsel
64 SOTHEBY'S HOLDINGS, INC.
SOTHEBY'S WORLDWIDE MANAGEMENT
North and South America
Board of Directors
RICHARD E. OLDENBURG
Chairman
JOHN L. MARION
Honorary Chairman
WILLIAM F. RUPRECHT
Managing Director,
Executive Vice President
JOHN D. BLOCK
Vice Chairman,
Head of International Jewelry
WARREN P. WEITMAN, JR.
Vice Chairman,
Worldwide Head of Business
Development
C. HUGH HILDESLEY
Executive Vice President,
Client Development
CHARLES S. MOFFETT
Executive Vice President,
Co-Chairman, Impressionist and
Modern Art Worldwide
DAVID N. REDDEN
Executive Vice President,
Worldwide Head of Books,
Manuscripts and Collectibles
WILLIAM W. STAHL, JR.
Executive Vice President,
Head of Decorative Arts
GEORGE WACHTER
Executive Vice President,
Head of Fine Arts
SUSAN ALEXANDER
Senior Vice President,
Worldwide Head of
Human Resources
ALEXANDER APSIS
Senior Vice President,
Head of Impressionist and
Modern Art
WILLIAM S. COTTINGHAM
Senior Vice President,
Head of Regional Offices
HELYN GOLDENBERG
Senior Vice President,
Chairman, Sotheby's Midwest
TOBIAS MEYER
Senior Vice President,
Worldwide Head of
Contemporary Art
THIERRY MILLERAND
Worldwide Senior Expert,
European Furniture
JAMES G. NIVEN
Senior Vice President,
Head of Business Development
DIANA PHILLIPS
Senior Vice President,
Worldwide Head of
Corporate Affairs
DONALDSON C. PILLSBURY
Senior Vice President,
General Counsel and Secretary
CARLTON C. ROCHELL, JR.
Senior Vice President,
Managing Director, China and
Southeast Asia,
Worldwide Head of Asian Art
ANDREA VAN DE KAMP
Senior Vice President,
Chairman,
West Coast Operations
STUART N. SIEGEL
President and
Chief Executive Officer,
Sotheby's International Realty
MITCHELL ZUCKERMAN
President,
Sotheby's Financial Services, Inc.
and Sotheby's Ventures, LLC.
Sotheby's Europe
HENRY WYNDHAM
Chairman
ROBIN WOODHEAD
Chief Executive,
Executive Vice President,
Sotheby's Holdings, Inc.
GEORGE BAILEY
Managing Director
PRINCESS DE BEAUVAU CRAON
Deputy Chairman,
President, Sotheby's France
DAVID W. BENNETT, F.G.A.
Deputy Chairman,
Chairman, Sotheby's Switzerland,
Head of International Jewelry
MELANIE CLORE
Deputy Chairman
JAMES STOURTON
Deputy Chairman,
Head of European Business
Development
JAMES MILLER
Deputy Chairman,
Sotheby's United Kingdom
SIMON TAYLOR
Deputy Managing Director
PAUL J. MACK
Senior Director,
European Network Office
TOBIAS MEYER
Senior Vice President,
Worldwide Head of
Contemporary Art
MICHEL STRAUSS
Co-Chairman,
Impressionist and Modern Art
Worldwide
ALEXANDER BELL
Senior Director,
Head of Old Master Paintings
ELENA GUENA
Senior Director,
Head of Contemporary Art
PHILIP HOOK
Senior Director,
Impressionist and Modern Art
SERENA SUTCLIFFE
Senior Director,
Head of Wine
MARIO TAVELLA
Senior Director,
Head of French and Continental
Furniture
Sotheby's Financial
Services, Inc. and Sotheby's
Ventures, LLC.
MITCHELL ZUCKERMAN
President
Sotheby's International
Realty
STUART N. SIEGEL
President and
Chief Executive Officer
sixty-five SOTHEBY'S HOLDINGS, INC.
WORLDWIDE LOCATIONS
SOTHEBY'S NORTH AND SOUTH AMERICA>
UNITED STATES Atlanta, Baltimore, Bermuda, Beverly Hills(1), Boston,
Chicago(1), Dallas, Honolulu, Houston, Miami, Minneapolis, Monterey, New
York(1), North Carolina, Palm Beach, Philadelphia, Puerto Rico, Richmond, San
Francisco, Santa Barbara, Seattle, Tampa, Washington, D.C., Wilmington,
ARGENTINA Buenos Aires, BRAZIL Rio de Janeiro, Sao Paulo, CANADA Toronto(1),
Vancouver, Victoria, B.C., MEXICO Mexico City, Monterrey, VENEZUELA Caracas
SOTHEBY'S EUROPE>
UNITED KINGDOM Billingshurst(1), Cheltenham, Chester, Cornwall, Cumbria,
Derbyshire, Exeter, Harrogate, London(1), Newcastle-upon-Tyne, Newmarket,
Norfolk, Northamptonshire, Northern Ireland, North Wales & The Marches,
Nottinghamshire, Salisbury, Somerset, Stamford, Suffolk, Yorkshire, CHANNEL
ISLANDS Guernsey, C.I., REPUBLIC OF IRELAND Dublin, Co. Kildare, SCOTLAND
Edinburgh, Glasgow, AUSTRIA Vienna, BELGIUM Brussels, CYPRUS Nicosia, CZECH
REPUBLIC Prague, DENMARK Copenhagen, FINLAND Helsinki, FRANCE Bordeaux, Lyon,
Montpellier, Paris, Strasbourg, GERMANY Berlin, Cologne, Frankfurt, Hamburg,
Lower Saxony, Munich(1), Stuttgart, HUNGARY Budapest, ICELAND Reykjavik,
ISRAEL Tel Aviv(1), ITALY Florence, Milan(1), Rome, Turin, LUXEMBOURG,
MONACO(1), NETHERLANDS Amsterdam(1), NORWAY Oslo, PORTUGAL Lisbon, SOUTH
AFRICA Cape Town, Johannesburg, SPAIN Barcelona, Bilbao, Madrid(1), SWEDEN
Gothenburg, South Sweden, Stockholm(1), SWITZERLAND Geneva(1), Lugano,
Zurich(1)
SOTHEBY'S ASIA>
AUSTRALIA Melbourne(1), Sydney(1), CHINA Shanghai, HONG KONG(1), INDONESIA
Jakarta, JAPAN Tokyo, KOREA Seoul, MALAYSIA Kuala Lumpur, SINGAPORE(1),
TAIWAN Taipei, THAILAND Bangkok
(1) TWENTY Salesrooms FORTY-ONE Countries
66 SOTHEBY'S HOLDINGS, INC.
SOTHEBY'S SHAREHOLDERS' INFORMATION
COMMON STOCK PRICE
The quarterly price ranges and dividends per share of Class A Common Stock in
1998 and 1997 were as follows:
CASH DIVIDENDS
HIGH LOW PER SHARE
------------------- --------------------- ---------------
Quarter: 1998 1997 1998 1997 1998 1997
-------- -------- --------- --------- ------ ------
FIRST ... $ 23 1/4 $ 18 7/8 $ 17 3/16 $ 16 $ 0.10 $ 0.10
SECOND .. 24 1/2 17 1/4 21 7/16 14 7/8 0.10 0.10
THIRD ... 24 3/8 21 16 1/2 16 3/16 0.10 0.10
FOURTH .. 38 21 15 1/2 16 9/16 0.10 0.10
-------- -------- --------- --------- ------ ------
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. Cash dividends are payable equally on the Class A and B Common
Stock.
The number of holders of record of the Class A Common Stock as of March 1,
1999 was 1,288. The number of holders of record of the Class B Common Stock
as of March 1, 1999 was 30.
ADMINISTRATIVE OFFICES
c/o Sotheby's Service Corporation
1334 York Avenue
New York, New York 10021
TRANSFER AGENTS
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
Tel US Holders: 800.851.9677
Tel Non-US Holders: 201.329.8660
Tel Hearing Impaired: 800.231.5469
www.chasemellon.com
Computershare Services PLC
Registrar's Department
P.O. Box 82
Caxton House, Redcliffe Way
Bristol BS99 7NH England
Tel: 011.44.117.930.6666
COMMON STOCK INFORMATION
Sotheby's Holdings, Inc. Class A Common Stock is listed on the New York Stock
Exchange (symbol: BID) and the London Stock Exchange.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on Thursday, April 29, 1999
at 10:00 a.m. at:
Sotheby's
34-35 New Bond Street
London
FORM 10-K AND SHAREHOLDER INFORMATION
The 1998 Form 10-K filed with the Securities and Exchange Commission and
other investor information may be obtained by writing to:
Investor Relations
Sotheby's
1334 York Avenue
New York, New York 10021
Tel: 800.700.6321
U.K. Corporate Secretary's Office
Sotheby's
34-35 New Bond Street
London W1A 2AA
Tel: 011.44.171.293.5257
INFORMATION SERVICE FOR SHAREHOLDERS
Sotheby's latest financial information and news is now available by fax,
recording or mail by calling our Shareholder Direct toll-free line 24 hours a
day, 7 days a week at 1.800.700.6321 as well as at our website, sothebys.com.
CERTIFIED PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
sixty-seven SOTHEBY'S HOLDINGS, INC.
PHOTO LEGEND
COVER: CLAUDE MONET'S WATERLILY POND AND PATH BY THE WATER SOLD IN LONDON FOR
$33.0 MILLION, A RECORD FOR THE ARTIST AT AUCTION AND THE HIGHEST PRICE
ACHIEVED IN LONDON SINCE 1990. PAGE 9: THE AUCTION OF THE COLLECTION OF THE
DUKE AND DUCHESS OF WINDSOR BROUGHT $23.4 MILLION IN NEW YORK. SHOWN: THE RED
MOROCCO LEATHER DISPATCH BOX ($65,750), THE CEREMONIAL SWORD OF THE PRINCE OF
WALES ($25,000) AND THE ABDICATION DESK ($415,000) IN FRONT OF THE CYPHER OF
THE DUKE AND DUCHESS OF WINDSOR. PAGE 13: JEWELS FROM THE ESTATE OF BETSEY
CUSHING WHITNEY SOLD IN NEW YORK FOR $11.8 MILLION; SHOWN: AN IMPORTANT
EMERALD BEAD, SAPPHIRE & DIAMOND NECKLACE AND EARCLIPS WHICH BROUGHT $146,000
AND $46,000, RESPECTIVELY. PAGE 17: 38 WORKS FROM THE READER'S DIGEST
COLLECTION ACHIEVED $90.5 MILLION IN NEW YORK; SHOWN: AMEDEO MODIGLIANI'S
PORTRAIT DE JEANNE HEBUTERNE WHICH BROUGHT $15.1 MILLION, A RECORD FOR THE
ARTIST AT AUCTION. PAGE 20: PABLO PICASSO'S FEMME NUE FROM THE MORTON G.
NEUMANN FAMILY COLLECTION SOLD FOR $11.0 MILLION IN NEW YORK. PAGE 20:
RICHARD DIEBENKORN'S "HORIZON, OCEAN VIEW," (1959) FROM THE READER'S DIGEST
COLLECTION ACHIEVED $3.9 MILLION IN NEW YORK, A RECORD FOR THE ARTIST AT
AUCTION. COURTESY OF LAWRENCE RUBIN O GREENBERG VAN DOREN FINE ART, NEW YORK.
PAGE 20: A MAGNIFICENT PAIR OF GILT-BRONZE MOUNTED PIETRA DURA CABINETS,
FRENCH, LATE 17TH CENTURY BROUGHT $1.6 MILLION IN LONDON. PAGE 20: THE BIRD
OF PARADISE BROOCH FROM THE BIRD OF PARADISE COLLECTION SOLD IN GENEVA FOR
$354,000. PAGE 20: A HIGHLY IMPORTANT FINE AND RARE BLUE AND WHITE MEIPING
VASE INCLUDED IN THE AUCTION OF EIGHT TREASURES FROM A PRIVATE COLLECTION
AUCTION BROUGHT $1.4 MILLION IN HONG KONG. COURTESY OF ESKENAZI LTD. PAGE 20:
THE PSALTER AND BOOK OF HOURS, USE OF PARIS, IN LATIN FROM THE JAIME ORTIZ
PATINO COLLECTION SOLD IN LONDON FOR $819,000. COURTESY OF PIERRE BERES,
PARIS. PAGE 21: THE THYSSEN MEISSONIER TUREEN FROM THE COLLECTION OF BARON
THYSSEN-BORNEMISZA DE KASZON BROUGHT $5.7 MILLION IN NEW YORK. PAGE 21:
GERHARD RICHTER'S RECORD SETTING DOMPLATZ, MAILAND BROUGHT $3.6 MILLION IN
OUR LONDON CONTEMPORARY ART AUCTION. COURTESY OF GERHARD RICHTER. PAGE 21:
SIR ALFRED J. MUNNINGS' WHY WEREN'T YOU OUT YESTERDAY? FROM THE SANTA ANITA
COLLECTION SOLD IN NEW YORK FOR A RECORD $2.8 MILLION. PAGE 21: AN IMPORTANT
CHIPPENDALE CARVED AND FIGURED MAHOGANY BONNET-TOP HIGH CHEST, CARVING
ATTRIBUTED TO BERNARD & JUGIEZ, PHILADELPHIA, FROM THE STANLEY PAUL SAX
COLLECTION OF HIGHLY IMPORTANT AMERICANA BROUGHT $1.2 MILLION IN NEW YORK.
PAGE 21: A GUPTA RED SANDSTONE HEAD OF BUDDHA SOLD IN NEW YORK FOR $1.0
MILLION, A RECORD FOR INDIAN AND SOUTHEAST ASIAN ART. PAGE 21: FREDERIC
REMINGTON'S THE TROOPER BROUGHT $2.5 MILLION IN OUR SALE OF THE JOHN F.
EULICH COLLECTION OF AMERICAN WESTERN ART IN NEW YORK WHICH TOTALLED $25.0
MILLION. PAGE 25: ANDY WARHOL'S ORANGE MARILYN BROUGHT $17.3 MILLION IN OUR
NEW YORK CONTEMPORARY ART AUCTION, A RECORD FOR THE ARTIST AT AUCTION. TM
1999 ESTATE OF MARILYN MONROE BY CMG WORLDWIDE. ALL RIGHTS RESERVED. (C) 1999
ANDY WARHOL FOUNDATION FOR THE VISUAL ARTS/ ARS, NEW YORK. PAGE 29: PORTRAIT
OF A BEARDED MAN IN A RED COAT BY REMBRANDT HARMENSZ VAN RIJN SOLD IN OUR NEW
YORK AUCTION OF OLD MASTER PAINTINGS FOR $9.1 MILLION, THE SECOND HIGHEST
PRICE FOR THE ARTIST AT AUCTION. PAGE 30: OUR STATE-OF-THE-ART YORK AVENUE
FACILITY, NOW UNDER CONSTRUCTION, WILL HOUSE OUR NEW YORK AUCTION OPERATION
WHEN COMPLETE IN THE YEAR 2000. BEGINNING IN THE SUMMER OF 1999 WE WILL BEGIN
CONDUCTING INTERNET AUCTIONS AT SOTHEBYS.COM. THE BARRY HALPER COLLECTION OF
BASEBALL MEMORABILIA WILL BE OFFERED BOTH LIVE AND THROUGH THE INTERNET
THROUGHOUT 1999 AND HAS AN ESTIMATE OF MORE THAN $15 MILLION, (C)1998, BARRY
HALPER ENTERPRISES(SM).
DESIGN: SANDRA BURCH. EDITORIAL: SOTHEBY'S NEW YORK. PHOTOGRAPHY IFC, 4, 8,
12, 16, 24, 28, IBC: MARK JENKINSON; 9, 29: CYNTHIA MATTHEWS; 10: RONALD VAN
TEUNENBROEK; 11: RETO RODOLFO PEDRINI; 13: ROBERT MITRA.
68 SOTHEBY'S HOLDINGS, INC.
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