SOTHEBYS HOLDINGS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended June 30, 2003

Commission File Number 1-9750

Sotheby's Holdings, Inc.
(Exact name of registrant as specified in its charter)

Michigan (State or other jurisdiction of incorporation or organization)		38-2478409 (IRS Employer Identification No.)
38500 Woodward Avenue, Suite 100 Bloomfield Hills, Michigan (Address of principal executive offices)		48304 (Zip Code)
Registrant's telephone number, including area code: (248) 646-2400

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o.

As of August 1, 2003, there were outstanding 45,044,426 shares of Class A Limited Voting Common Stock, par value $0.10 per share, and 16,521,150 shares of Class B Common Stock, par value $0.10 per share, of the Registrant. Each share of Class B Common Stock is freely convertible into one share of Class A Limited Voting Common Stock.

TABLE OF CONTENTS

		Page
PART I:	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002	2
	Consolidated Balance Sheets at June 30, 2003, December 31, 2002 and June 30, 2002	3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
PART II:	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 6.	Exhibits and Reports on Form 8-K	35
SIGNATURE		36
EXHIBIT INDEX		37
Exhibit 31.1		38
Exhibit 31.2		39
Exhibit 32.1		40
Exhibit 32.2		41

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Sotheby's Holdings, Inc.

Consolidated Statements of Operations

(UNAUDITED)

			For the Three Months Ended June 30,						For the Six Months Ended June 30,
			2003			2002			2003			2002
			(Thousands of dollars, except per share data)
Revenues:
	Auction and related revenues		$	107,580		$	112,529		$	145,713		$	148,140
	Other revenues			11,454			14,519			20,942			24,339

		Total revenues		119,034			127,048			166,655			172,479

Expenses:
	Direct costs of services			16,164			19,213			24,088			28,497
	Salaries and related costs			38,647			38,592			74,712			74,052
	General and administrative expenses			24,712			24,429			48,530			47,300
	Depreciation and amortization expense			6,794			5,936			13,595			11,732
	Retention costs			2,865			6,299			6,344			12,550
	Net restructuring charges			(450	)		(890	)		5,341			(1,435	)
	Special charges			593			791			1,376			(1,719	)

		Total expenses		89,325			94,370			173,986			170,977

Operating income (loss)				29,709			32,678			(7,331	)		1,502
Interest income				1,056			790			1,629			1,910
Interest expense				(7,884	)		(5,931	)		(15,021	)		(11,700	)
Other (expense) income				(65	)		361			383			84

Income (loss) before taxes				22,816			27,898			(20,340	)		(8,204	)
Income tax provision (benefit)				8,620			10,043			(6,916	)		(2,954	)

Net income (loss)			$	14,196		$	17,855		$	(13,424	)	$	(5,250	)

Basic and diluted earnings (loss) per share			$	0.23		$	0.29		$	(0.22	)	$	(0.09	)

Basic weighted average shares outstanding (in millions)				61.6			61.5			61.5			61.4

Diluted weighted average shares outstanding (in millions)				61.6			61.7			61.5			61.4

See accompanying Notes to Consolidated Financial Statements

SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS

			June 30, 2003 (UNAUDITED)			December 31, 2002			June 30, 2002 (UNAUDITED)
			(Thousands of dollars)
ASSETS:
Current Assets:
	Cash and cash equivalents		$	48,462		$	48,719		$	57,381
	Restricted cash			13,541			13,968			8,847
	Accounts receivable, net of allowance for doubtful accounts of $7,019, $8,073 and $7,927			330,792			276,729			321,979
	Notes receivable and consignor advances, net of allowance for credit losses of $1,144, $1,573 and $1,312			57,477			51,264			38,428
	Inventory, net			12,111			13,690			7,175
	Deferred income taxes			11,536			11,980			32,759
	Prepaid expenses and other current assets			42,686			41,518			32,911

		Total Current Assets		516,605			457,868			499,480

Non-Current Assets:
	Notes receivable			24,058			44,016			47,350
	Properties, less allowance for depreciation and amortization of $93,193, $91,259 and $99,810			263,471			240,796			245,038
	Goodwill			16,711			16,553			17,340
	Investments			30,751			31,217			31,242
	Deferred income taxes			92,491			83,954			52,116
	Other assets			1,963			1,301			1,744

		Total Assets	$	946,050		$	875,705		$	894,310

LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Current Liabilities:
	Due to consignors		$	311,539		$	274,327		$	270,973
	Credit facility borrowings			20,000			—			130,000
	Accounts payable and accrued liabilities			84,787			106,640			94,361
	Deferred revenues			5,472			5,961			5,147
	Accrued income taxes			5,822			5,459			9,317
	York Property capital lease obligation			107			—			—
	Deferred gain on sale of York Property			1,129			—			—
	Settlement liabilities			16,795			55,542			3,498

		Total Current Liabilities		445,651			447,929			513,296

Long-Term Liabilities:
	Credit facility borrowings			—			100,000			—
	Long-term debt, net of unamortized discount of $498, $534 and $569			99,502			99,466			99,431
	Settlement liabilities			61,642			70,804			78,438
	York Property capital lease obligation			172,227			—			—
	Deferred gain on sale of York Property			21,087			—			—
	Other liabilities			17,091			17,138			15,635

		Total Liabilities		817,200			735,337			706,800

Shareholders' Equity:
	Common Stock, $0.10 par value Authorized shares—125,000,000 of Class A and 75,000,000 of Class B; Issued and outstanding shares — 45,014,513, 44,981,703 and 44,930,877 of Class A and 16,549,650 of Class B, at June 30, 2003, December 31, 2002 and June 30, 2002, respectively			6,154			6,153			6,148
	Additional paid-in capital			202,521			202,406			202,102
	Accumulated deficit			(71,309	)		(57,884	)		(8,380	)
	Accumulated other comprehensive loss			(8,516	)		(10,307	)		(12,360	)

		Total Shareholders' Equity		128,850			140,368			187,510

		Total Liabilities and Shareholders' Equity	$	946,050		$	875,705		$	894,310

See accompanying Notes to Consolidated Financial Statements

Sotheby's Holdings, Inc.

Consolidated Statements of Cash Flows

(UNAUDITED)

			For the Six Months Ended June 30,
			2003			2002
			(Thousands of dollars)
Operating Activities:
Net loss			$	(13,424	)	$	(5,250	)
Adjustments to reconcile net loss to net cash used by operating activities:
	Depreciation and amortization expense			13,595			11,732
	Deferred income taxes			(8,082	)		2,375
	Tax benefit of stock option exercises			—			70
	Asset provisions			(976	)		(854	)
	Asset write-offs			603			—
	Other			1,334			991
Changes in assets and liabilities:
	Decrease (increase) in restricted cash			427			(3,948	)
	Increase in accounts receivable			(48,155	)		(88,698	)
	Decrease in inventory			1,314			4,354
	(Increase) decrease in prepaid expenses and other current assets			(2,391	)		581
	(Increase) decrease in goodwill and other long-term assets			(589	)		514
	Decrease in short-term and long-term settlement liabilities			(49,733	)		(3,000	)
	Increase in due to consignors			36,460			62,738
	Increase (decrease) in accrued income taxes			131			(4,435	)
	Decrease in accounts payable and accrued liabilities and other liabilities			(28,258	)		(37,265	)

		Net cash used by operating activities		(97,744	)		(60,095	)

Investing Activities:
	Funding of notes receivable and consignor advances			(38,840	)		(61,951	)
	Collections of notes receivable and consignor advances			53,489			78,452
	Capital expenditures			(4,399	)		(6,605	)
	Proceeds from York Property sale-leaseback			167,054			—
	Decrease in investments			475			1,268

		Net cash provided by investing activities		177,779			11,164

Financing Activities:
	Proceeds from credit facility borrowings			107,000			20,000
	Repayments of credit facility borrowings			(187,000	)		(20,000	)
	Decrease in York Property capital lease obligation			(1,532	)		—
	Proceeds from exercise of stock options			—			2,192

		Net cash (used) provided by financing activities		(81,532	)		2,192

Effect of exchange rate changes on cash				1,240			1,433

Decrease in cash and cash equivalents				(257	)		(45,306	)
Cash and cash equivalents at beginning of period				48,719			102,687

Cash and cash equivalents at end of period			$	48,462		$	57,381

Supplemental Cash Flow Information:
Income tax payments (refunds)			$	2,007		$	(278	)

Interest paid			$	13,500		$	7,110

Non-Cash Activities:
York Property capital lease asset and obligation			$	173,866		$	—

See accompanying Notes to Consolidated Financial Statements

SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

The Consolidated Financial Statements included herein have been prepared by Sotheby's Holdings, Inc. (together with its subsidiaries, the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto on Form 10-K for the year ended December 31, 2002.

Certain amounts in the 2002 Consolidated Financial Statements in Cash, Notes Receivable and Settlement Liabilities have been reclassified to conform to the current year presentation.

In the opinion of the management of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial statements included herein, have been made.

2. Seasonality of Business

The worldwide art auction market has two principal selling seasons, spring and fall. Consequently, during the summer and winter, Auction Sales (as defined in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations") are considerably lower. The table below demonstrates that approximately 77% to 84% of the Company's Auction Sales are derived from the second and fourth quarters of the year.

	Percentage of Annual Auction Sales
	2002		2001		2000
January—March	11	%	13	%	9	%
April—June	38	%	45	%	45	%
July—September	12	%	7	%	7	%
October—December	39	%	35	%	39	%

	100	%	100	%	100	%

3. Segment Reporting

For the three and six months ended June 30, 2003 and 2002, revenues for the Company's reportable operating segments are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
			(Thousands of dollars)
Auction	$	107,580	$	112,529	$	145,713	$	148,140
Real Estate		9,081		11,371		15,860		18,807
Finance		1,290		1,419		2,777		2,864
Other		1,083		1,729		2,305		2,668

Total	$	119,034	$	127,048	$	166,655	$	172,479

For the three and six months ended June 30, 2003 and 2002, profit or (loss) for the Company's reportable operating segments is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
				(Thousands of dollars)
Auction	$	25,974		$	31,162		$	(5,362	)	$	(633	)
Real Estate		1,242			3,562			478			3,533
Finance		(561	)		(99	)		(815	)		(190	)
Other		(247	)		129			(389	)		(204	)

Total	$	26,408		$	34,754		$	(6,088	)	$	2,506

The following is a reconciliation of profit or (loss) before taxes for the Company's reportable operating segments to the applicable line items in the Consolidated Statements of Operations:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
				(Thousands of dollars)
Total income (loss) before taxes for reportable segments	$	26,655		$	34,625		$	(5,699	)	$	2,710
Other (loss) income		(247	)		129			(389	)		(204	)
Unallocated amounts:
Special Charges (see Note 10)		(593	)		(791	)		(1,376	)		1,719
Retention Costs (see Note 14)		(2,865	)		(6,299	)		(6,344	)		(12,550	)
Net Restructuring Charges (see Note 15)		450			890			(5,341	)		1,435
Amortization of discount related to DOJ antitrust fine		(584	)		(656	)		(1,191	)		(1,314	)

Consolidated income (loss) before taxes	$	22,816		$	27,898		$	(20,340	)	$	(8,204	)

Total assets for the Company's reportable operating segments are as follows:

		As of June 30, 2003			As of December 31, 2002			As of June 30, 2002
		(Thousands of dollars)