Published: November 21, 2000
‘Significant Losses’ for the First Nine Months Reported
NEW YORK CITY – Sotheby’s Holdings, Inc. (NYSE: BID; LSE), the parent company of Sotheby’s worldwide live and online auction businesses, art-related financial services and real estate activities, has announced results for the nine months and third quarter ended September 30.
For the first nine months of 2000 the company reported total revenues of $254.7 million, compared to $254.5 million for the corresponding period of 1999. New loss for the first nine months of 2000 was $183.2 million or $3.11 per diluted share, compared to a net loss of $1.6 million or $0.03 per diluted share for the corresponding period of 1999.
During the first nine months of 2000, the company recorded pre-tax special charges of $188.6 million or $2.72 per diluted share. Excluding special charges, the company recorded a diluted loss per share of $0.30 for the first nine months of 2000.
For the quarter ended September 30, the company reported total revenues of $42.6 million, compared to $45.3 million in the corresponding period of 1999. The company’s net loss for the third quarter of 2000 was $184.2 million or $3.13 per diluted share, compared to a net loss for the third quarter of 1999 or $23.8 million or $0.41 per diluted share. During the third quarter of 2000, the company recorded pre-tax special charges of $184.8 million or $2.68 per diluted share. Excluding special charges, the company recorded a diluted loss per share of $0.45 for the third quarter of 2000.
The third quarter is a period of minimal sales activity in the art auction market (six percent of total 1999 auction sales for Sotheby’s) and, therefore, the company historically reports a loss in the period.
“The significant loss we are reporting for the first nine months of 2000 was primarily affected by the special charges associated with the Department of Justice investigation and related civil antitrust and shareholder litigation settlements,” said William Ruprecht, president and chief executive officer of Sotheby’s Holdings, Inc. “In addition, the continued investment in our Internet initiative impacted our results, as did a decline in major single-owner auction sales, which in the first nine months of the year totaled $107.0 million, compared to $239.3 million in 1999.”
Ruprecht commented, “It is worth noting that in this very difficult year, our auction sales were up slightly – a remarkable achievement under the circumstances and a great tribute to our staff.” Total revenues of $254.7 million were essentially flat compared to the first nine months of 1999. Revenues from non-auction operations increased 23 percent principally due to the company’s realty business. Excluding special charges of $188.6 million, total operating expenses increased $25.8 million to $281.9 million, largely due to Internet related costs.
Internet auction sales for the first nine months of 2000 totaled $39.9 million on sothebys.com and sothebys.amazon.com and for the third quarter totaled $8.9 million. As announced, sothebys.com and sothebys.amazon.com have recently combined to form one online auction Web site – sothebys.com.
“At the close of the third quarter, sothebys.com announced the opening of bidding to nine additional countries,” Ruprecht commented.
He continued, “Our original business model was for dealers to list most of the property on our site and we are gratified to see that our dealer associates are now listing most of the lots on sothebys.com. Sales for property listed by Sotheby’s dealer associates in the third quarter were up 11 percent over the second quarter to $5.2 million. At the end of the third quarter, there were 11,000 lots posted on our site, of which dealer property accounted for 75 percent. During the quarter, dealer auctions increased 28 percent to more than 50,000 lots and we expect that percentage to increase even further.”
Internet related expenses for the first nine months of 2000 were $43.9 million, driven by heavy first quarter marketing costs associated with the launch of sothebys.com and sothebys.amazon.com. The impact of the Internet related operating loss for the first nine months of 2000 was $0.41 per diluted share. Internet related expenses for the third quarter of 2000 were $10.7 million, reflecting a significant decrease of $3.2 million, or 23 percent, from the second quarter of 2000. The impact of the Internet related operating loss for the third quarter of 2000 was $0.10 per diluted share.
“We remain committed to our Internet initiative and are equally committed to controlling costs,” said Ruprecht. “We anticipate a continuing decline in Internet expenditures and are also focusing our marketing resources to drive sales and revenue growth.”
The special charges of $188.6 million in the first nine months of the year principally consist of the settlement of the civil antitrust class action lawsuit related to auctions in the United States and the shareholder class action lawsuit, both announced in September, as well as the plea agreement with the Department of Justice announced in October, all of which are subject to court approval.
The settlement of the civil antitrust class action lawsuit provides for a payment to the class by Sotheby’s of $256 million. A. Alfred Taubman has agreed to pay Sotheby’s $156 million towards the settlement. Sotheby’s will pay $50 million in cash and will be issuing discount coupons to the class with a value of $50 million, which the class members can use as a credit against future vendors’ commissions and certain other vendors’ charges. The settlement of the shareholder class action lawsuit provides for a cash payment to the class of $30 million. Taubman has agreed to pay Sotheby’s $30 million in cash towards this settlement. Additionally, the class will be issued $40 million in Sotheby’s Class A Common Stock.
Sotheby’s net cash outlay as a result of these settlements will be $50 million, and the company will include $140 million in respect of these settlements in special charges for the nine months and third quarter ended September 30.
The company has also agreed to plead guilty to a violation of the US antitrust laws relating to auction commissions charged to sellers and has agreed to pay a fine of $45 million over a period of five years. Include in special charges for the three and nine months ended September 30, 2000, is a charge of $34.1 million, representing the present value of this fine.
The company has successfully amended its credit facility to accommodate the antitrust settlements and has up to $300 million of committed financing from an international banking syndicate.
Management is nearing completion of the comprehensive strategic and operational review previously announced in August. The company currently intends to implement a restructuring plan in its Auction segment, which includes Sotheby’s Internet operations, subject to completion of the plan and final approval by Sotheby’s Board of Directors. The plan would focus on strengthening both the company’s live and online auction operations to make the company more competitive in key markets and would be designed ultimately to enhance profitability primarily by the realization of significant cost savings.
To achieve this goal, management expects to devote additional resources to high-end markets, which are more profitable, and reduce operating costs in lower-end markets, which are costly to operate and contribute a much lower percentage of revenues. Management also believes that leverage can be achieved by managing certain markets globally rather than on a regional basis.
“As our current planned strategy to consolidate and integrate our live and Internet operations in our flagship York Avenue location evolves and as we continue to redefine our sales strategy, we expect significant cost savings,” said Ruprecht. “As a result of the planned restructuring, we expect there will be some staff reductions, a significant percentage of which would be realized by absorbing unfilled vacancies, early retirements, and consolidation of roles.”
It is currently expected that the plan will be finalized an approved by the Board of Directors in late 2000. As a result, management currently believes that it is likely that the company will record a material restructuring charge in the fourth quarter of 2000.
“In light of the anticipated restructuring charges, the rescheduling of the Impressionist and Modern and Contemporary sales in London from December 2000 to February 2001, and the continuing lack of major single-owner sales, we expect the fourth quarter and full year 2000 earnings will be down significantly on a year to year basis,” said Ruprecht.
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