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<SEC-DOCUMENT>0000950117-04-000971.txt : 20040315
<SEC-HEADER>0000950117-04-000971.hdr.sgml : 20040315
<ACCEPTANCE-DATETIME>20040312200756
ACCESSION NUMBER: 0000950117-04-000971
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20031231
FILED AS OF DATE: 20040315
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SOTHEBYS HOLDINGS INC
CENTRAL INDEX KEY: 0000823094
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389]
IRS NUMBER: 382478409
STATE OF INCORPORATION: MI
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-09750
FILM NUMBER: 04667478
BUSINESS ADDRESS:
STREET 1: 500 NORTH WOODWARD AVENUE
STREET 2: SUITE 100
CITY: BLOOMFIELD HILLS
STATE: MI
ZIP: 48304
BUSINESS PHONE: 2486462400
MAIL ADDRESS:
STREET 1: 500 NORTH WOODWARD AVENUE
STREET 2: SUITE 100
CITY: BLOOMFIELD HILLS
STATE: MI
ZIP: 48304
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>a37226.txt
<DESCRIPTION>SOTHEBY'S HOLDINGS, INC.
<TEXT>
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________,
AND
COMMISSION FILE NUMBER 1-9750
----------
SOTHEBY'S HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
----------
<TABLE>
<S> <C>
Michigan 38-2478409
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
38500 Woodward Avenue, Suite 100 48303
Bloomfield Hills, Michigan (Zip Code)
(Address of principal executive offices)
</TABLE>
(248) 646-2400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- ---------------------
<S> <C>
Class A Limited Voting Common Stock, New York Stock Exchange
$0.10 Par Value London Stock Exchange
</TABLE>
----------
Securities registered pursuant to Section 12(g) of the Act: None
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of June 30, 2003, the aggregate market value of the 26,396,390 shares of
Class A Limited Voting Common Stock (the "Class A Common Stock") held by
non-affiliates of the registrant was $196,389,142 based upon the closing price
($7.44) on the New York Stock Exchange composite tape on such date. (For this
computation, the registrant has excluded the market value of all shares of its
Class A Common Stock reported as beneficially owned by the controlling
shareholder, directors and executive officers of the registrant; such exclusion
shall not be deemed to constitute an admission that any such person is an
"affiliate" of the registrant.)
As of March 1, 2004, there were outstanding 45,061,327 shares of Class A
Common Stock and 16,521,150 shares of Class B Common Stock, freely convertible
into 16,521,150 shares of Class A Common Stock. There is no public market for
the registrant's Class B Common Stock, which is held by affiliates and
non-affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 2004 annual meeting of
shareholders are incorporated by reference into Part III of this Form 10-K.
================================================================================
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
Sotheby's Holdings, Inc. (together with its subsidiaries, unless the
context otherwise requires, the "Company") is one of the world's two largest
auctioneers of fine arts, antiques and collectibles, offering property through
its worldwide Auction segment in approximately 70 collecting categories, among
them fine art, antiques and decorative art, jewelry and collectibles. 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 and collectible purchases and sales through private treaty
sales. The Company also conducts art-related financing activities through its
Finance segment and is engaged, to a lesser extent, in art education activities
and in real estate brokerage activities outside of the United States (the
"U.S.").
In the fourth quarter of 2003, the Company committed to a plan to sell its
domestic real estate brokerage business, Sotheby's International Realty, Inc.
("SIR"). On February 17, 2004, the Company consummated the sale of SIR to a
subsidiary of Cendant Corporation ("Cendant"). For additional information
related to this transaction, refer to the discussion under "Discontinued
Operations" below.
The Company was incorporated in Michigan in August 1983. In October 1983,
the Company acquired Sotheby Parke Bernet Group Limited, which was then a
publicly held company listed on the International Stock Exchange of the United
Kingdom and the Republic of Ireland Limited (the "London Stock Exchange") and
which, through its predecessors, had been engaged in the auction business since
1744. In 1988, the Company issued shares of Class A Common Stock to the public.
The Class A Common Stock is listed on the New York Stock Exchange (the "NYSE")
and the London Stock Exchange.
AUCTION SEGMENT
Description of Business
The purchase and sale of works of art in the international art market are
primarily effected through numerous dealers, the major auction houses, the
smaller auction houses and also directly between collectors. Although dealers
and smaller auction houses generally do not report sales figures publicly, the
Company believes that dealers account for the majority of the volume of
transactions in the international art market.
The Company and Christie's International, PLC ("Christie's"), a privately
held auction house based in the United Kingdom (the "U.K."), are the two largest
art auction houses in the world.
The Company auctions a wide variety of property, including fine art,
antiques and decorative art, jewelry and collectibles. Most of the objects
auctioned by the Company are unique items, and their value, therefore, can only
be estimated prior to sale. The Company's principal role as an auctioneer is to
identify, evaluate and appraise works of art through its international staff of
specialists; to stimulate purchaser interest through professional marketing
techniques; and to match sellers and buyers through the auction process.
In its role as auctioneer, the Company generally functions as an agent
accepting property on consignment from its selling clients. The Company sells
property as agent of the consignor, billing the buyer for property purchased,
receiving payment from the buyer and remitting to the consignor the consignor's
portion of the buyer's payment after deducting the Company's commissions,
expenses and applicable taxes. In certain situations, the Company releases
property sold at auction to buyers before the Company receives payment. In such
situations, the Company will pay the seller the net sale proceeds for the
released property at the time payment is due to the consignor, even if the
Company has not received payment from the buyer. (See Note E of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data.")
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 in the event that the property sells for less than
the minimum price and, therefore, the Company must pay the difference between
the sale price at auction and the amount of the guarantee. If the property does
not sell, the amount of the guarantee must be paid, but the
2
<PAGE>
Company has the right to recover such amount through the future sale of the
property. Generally, the Company participates in a share of the proceeds if the
property under the guarantee sells above an agreed minimum price. In addition,
the Company is obligated under the terms of certain guarantees to loan a portion
of the guaranteed amount prior to the auction. (See Note R of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data.")
Beginning in June 2002, the Company conducted Internet auctions through its
website, sothebys.com, pursuant to the terms of a strategic alliance with eBay,
Inc. ("eBay") whereby sothebys.com online auctions were incorporated into the
eBay marketplace. In February 2003, the Company and eBay entered into an
agreement to discontinue separate online auctions on sothebys.com, effective
April 30, 2003. Subsequent to that date, the Company's Internet activities have
focused on promoting its live auctions. (See Note U of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and Supplementary
Data.")
In addition to auctioneering, the Auction segment is engaged in a number of
related activities, including the brokering of art and collectible purchases and
sales through private treaty sales and the purchase and resale of art and other
collectibles. For example, the Company acts as a principal through its
investment in Acquavella Modern Art (the "Partnership" or "AMA"), a partnership
between a wholly-owned subsidiary of the Company and Acquavella Contemporary
Art, Inc. ("ACA"). The term of the AMA partnership agreement, which was extended
for one year in February 2004, expires on March 31, 2005. The assets of the
Partnership consist principally of art inventory. (See Notes B and G of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data.")
The Company's auction business is seasonal, with peak revenues and
operating income generally occurring in the second and fourth quarters of each
year as a result of the traditional spring and fall art auction seasons. (See
Item 7, "Management's Discussion and Analysis of Results of Operation," and
Note V of Notes to Consolidated Financial Statements under Item 8, "Financial
Statements and Supplementary Data.")
The Auction Market and Competition
Competition in the international art market is intense. A fundamental
challenge facing any auctioneer or dealer is to obtain high quality and valuable
property for sale. The Company's primary auction competitor is Christie's.
The owner of a work of art wishing to sell it has three principal options:
sale or consignment to, or private sale by, an art dealer; consignment to, or
private sale by, an auction house; or private sale to a collector or museum
without the use of an intermediary. The more valuable the property, the more
likely it is that the owner will consider more than one option and will solicit
proposals from more than one potential purchaser or agent, particularly if the
seller is a fiduciary representing an estate or trust. A complex array of
factors may influence the seller's decision. These factors include:
o The level of expertise of the dealer or auction house with
respect to the property;
o The extent of the prior relationship, if any, between the seller
and the firm;
o The reputation and historic level of achievement by a firm in
attaining high sale prices in the property's specialized
category;
o The breadth of staff expertise possessed by the firm;
o The desire for privacy on the part of sellers and buyers;
o The amount of cash offered by a dealer, auction house or other
purchaser to purchase the property outright;
o The level of guarantees or the terms of other financial options
offered by auction houses;
o The level of pre-sale estimates offered by auction houses;
o The time that will elapse before the seller will receive sale
proceeds;
3
<PAGE>
o The desirability of a public auction in order to achieve the
maximum possible price (a particular concern for fiduciary
sellers, such as trustees and executors);
o The amount of commission proposed by dealers or auction houses to
sell a work on consignment;
o The cost, style and extent of presale marketing and promotion to
be undertaken by a firm;
o Recommendations by third parties consulted by the seller;
o Personal interaction between the seller and the firm's staff; and
o The availability and extent of related services, such as a tax or
insurance appraisal and short-term financing.
The Company's ability to obtain high quality and valuable property for sale
depends, in part, on the relationships that certain employees of the Company,
particularly its senior art specialists and management, have established with
potential sellers.
It is not possible to measure with any particular accuracy the entire
international art market or to reach any conclusions regarding overall
competition because dealers and auction firms frequently do not publicly report
annual sales totals and the amounts reported are not verifiable.
Auction Regulation
Regulation of the auction business varies from jurisdiction to
jurisdiction. In many jurisdictions, the Company is subject to laws and
regulations that are not directed solely toward the auction business, including,
but not limited to, import and export regulations, cultural patrimony laws and
value added sales taxes. Such regulations do not impose a material impediment to
the worldwide business of the Company but do affect the market generally, and a
material adverse change in such regulations could affect the business. In
addition, the failure to comply with such local laws and regulations could
subject the Company to civil and/or criminal penalties in such jurisdictions.
FINANCE SEGMENT
Description of Business
The Company provides certain collectors and dealers with financing
generally secured by works of art that the Company either has in its possession
or permits the borrower to possess. The Company's financing activities are
conducted through its wholly-owned direct and indirect subsidiaries. The Company
believes it is one of the world's leaders in art-related financing activities.
Although the general policy of the Finance segment is to make secured loans
at loan to value ratios (principal loan amount divided by the low auction
estimate of the collateral) of 50% or lower, the Company will lend at loan to
value ratios higher than 50%. The majority of the Company's loans are variable
interest rate loans.
The Company generally makes two types of secured loans: (1) advances
secured by consigned property to borrowers who are contractually committed, in
the near term, to sell the property at auction (a "consignor advance"); and (2)
general purpose term loans to collectors or dealers secured by property not
presently intended for sale. The consignor advance allows a consignor to receive
funds shortly after consignment for an auction that will occur several weeks or
months in the future, while preserving for the benefit of the consignor the
potential of the auction process. The general purpose secured loans allow the
Company to establish or enhance a mutually beneficial relationship with dealers
and collectors. The loans are generally made with full recourse against 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. Under certain circumstances, the Company also makes
unsecured loans to collectors and dealers.
4
<PAGE>
In certain of these situations, the Company finances the purchase of
works of art by certain art dealers through unsecured loans. The property
purchased pursuant to such unsecured loans is sold by the dealer or at auction
with any profit or loss shared by the Company and the dealer. Interest income
related to such unsecured loans is reflected in the results of the Finance
segment, while the Company's share of any profit or loss is reflected in
the results of the Auction segment.
(See Notes B and E of Notes to Consolidated Financial Statements under
Item 8, "Financial Statements and Supplementary Data.")
The Company funds its financing activities generally through borrowings
under its credit facility and internally generated funds. (See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources," and Note J of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and Supplementary
Data.")
The Finance Market and Competition
A considerable number of traditional lending sources offer conventional
loans at a lower cost to borrowers than the average cost of those offered by the
Company. However, the Company believes that few lenders are willing to accept
works of art as sole collateral as they do not possess the ability both to
appraise and to sell works of art within a vertically integrated organization.
The Company believes that its financing alternatives are attractive to clients
who wish to obtain liquidity from their art assets.
DISCONTINUED OPERATIONS
In the fourth quarter of 2003, the Company committed to a plan to sell SIR,
its domestic real estate brokerage business. Accordingly, the assets and
liabilities of SIR are classified as held for sale in the Consolidated Balance
Sheets, and its operating results are reported as discontinued operations in the
Consolidated Statements of Operations.
On February 17, 2004, the Company consummated the sale of SIR to Cendant
and recognized pre-tax income in the range of $75 million in the first quarter
of 2004.
Additionally, in conjunction with this transaction, the Company entered
into an agreement with Cendant to license the Sotheby's International Realty
trademark and certain related trademarks in exchange for an ongoing license fee
based on the volume of commerce transacted under the trademarks. The license
agreement, which is for an initial 50-year term with a 50-year renewal option,
is applicable to Canada, Israel, Mexico, the U.S. and certain Caribbean
countries. The other non-U.S. offices and affiliates of the Company's real
estate brokerage business, which are not significant to the Company's overall
operations, will continue to operate as Sotheby's International Realty under
current management. However, Cendant has an option to acquire certain of these
offices and affiliates and a license to use the related trademarks in other
countries outside the U.S. during the five-year period following February 17,
2004 for a nominal amount.
The total purchase price paid by Cendant for SIR's company-owned real
estate brokerage operations, as well as the license agreement was approximately
$100.7 million, consisting of $98.9 million in cash and the assumption of a
$1.8 million note payable. Net cash proceeds from the sale, after deducting
approximately $5 million in transaction costs, were $93.9 million.
(See Note C of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data.")
FACTORS AFFECTING OPERATING RESULTS AND LIQUIDITY
See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operation--Factors Affecting Operating Results and Liquidity."
FINANCIAL AND GEOGRAPHICAL INFORMATION ABOUT SEGMENTS
See Note D of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data," for financial and geographical
information about the Company's segments.
5
<PAGE>
PERSONNEL
At December 31, 2003, the Company had 1,537 employees: 626 located in North
America; 576 in the U.K. and 335 in the rest of the world. As discussed above,
on February 17, 2004, the Company consummated the sale of SIR, its domestic real
estate brokerage business. The table below provides a breakdown of employees as
of December 31, 2003. Employees of SIR are reflected in the table below under
the caption "Discontinued Operations."
<TABLE>
<CAPTION>
Number of Employees
-------------------
<S> <C>
Auction segment..................... 1,287
Finance segment..................... 7
Discontinued Operations............. 98
Other............................... 145
-----
Total............................ 1,537
=====
</TABLE>
The Company regards its relations with its employees as good.
(See Note C of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data," for more detailed information
related to the sale of SIR.)
WEBSITE ADDRESS
The Company makes available free of charge its annual report on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K through a
hyperlink from its website, www.sothebys.com, to
www.shareholder.com/bid/edgar.cfm, a website maintained by an unaffiliated
third-party service. Such reports are made available on the same day that they
are electronically filed with or furnished to the Securities and Exchange
Commission.
ITEM 2. PROPERTIES
The Company's North American Auction and Finance operations, as well as its
corporate offices, are headquartered at 1334 York Avenue, New York, New York
(the "York Property"). The York Property is approximately 400,000 square feet.
The Company also leases warehouse space at one other location in Manhattan, New
York, and leases office and exhibition space in several other major cities
throughout the U.S., including Los Angeles and San Francisco, California;
Chicago, Illinois; Palm Beach, Florida; Philadelphia, Pennsylvania; and Boston,
Massachusetts.
The Company acquired the York Property in July 2000. During the first
quarter of 2001, the Company completed the construction of a six-story addition
and renovation of the York Property, which expanded the Company's auction,
warehouse and office space in New York City and enabled the Company to
consolidate many of its New York City operations. On February 7, 2003, the
Company sold the York Property and entered into an agreement to lease it back
from the buyer for an initial 20-year term, with options to extend the lease for
two additional 10-year terms. (See Item 7, "Management's Discussion and Analysis
of Results of Operation--Liquidity and Capital Resources," and Notes H and L of
Notes to Consolidated Financial Statements under Item 8, "Financial Statements
and Supplementary Data.")
The Company's U.K. operations (primarily auction) are centered at New Bond
Street, London, where the main salesrooms and administrative offices of
Sotheby's U.K. are located. The New Bond Street premises are approximately
200,000 square feet. The Company owns a portion of the New Bond Street premises
and a portion is leased under long-term leases. The Company also leases
approximately 50,000 square feet at Olympia, a landmark building located in
Kensington, West London. The Olympia facility, which commenced operations in
September 2001, is a specially dedicated middle market salesroom that expands
the Company's London auction operations. In addition, the Company leases
warehouse space at King's House in West London and owns land and a building in
Sussex (the "Sussex Property"), which previously housed an auction salesroom.
The Company is in the process of selling the Sussex Property.
6
<PAGE>
The Company also leases space primarily for auction operations in various
locations throughout Continental Europe, including salesrooms in Amsterdam, The
Netherlands; Geneva and Zurich, Switzerland; Milan, Italy; and Paris, France; in
Asia, including Hong Kong; Singapore; Taipei, Taiwan; and Tokyo, Japan; in
Australia and in South America.
In management's opinion, the Company's worldwide premises are generally
more than adequate for the current conduct of its business. Accordingly,
management is continuing to analyze the Company's worldwide premises and, where
appropriate, management will make any necessary changes to address the Company's
business needs.
ITEM 3. LEGAL PROCEEDINGS
In April 1997, the Antitrust Division of the United States Department of
Justice (the "DOJ") began an investigation of certain art dealers and major
auction houses, including the Company and its principal competitor, Christie's
International PLC ("Christie's"). The Company has pled guilty to a violation of
the United States ("U.S.") antitrust laws in connection with a conspiracy to fix
auction commission rates charged to sellers in the U.S. and elsewhere and, on
February 2, 2001, the U.S. District Court for the Southern District of New York
accepted the Company's plea and imposed on the Company a fine of $45 million
payable without interest over a period of five years. The Company has funded $18
million of the fine payable to the DOJ, and the remaining $27 million of the
fine is payable as follows: (a) $12 million due February 6, 2005 and (b) $15
million due February 6, 2006. The European Commission also conducted an
investigation regarding anti-competitive practices by the Company and Christie's
in the European Union and on October 30, 2002, issued a decision pursuant to
which it imposed a fine of approximately $20.1 million on the Company, which was
paid on February 5, 2003. The Canadian Competition Bureau is continuing to
conduct an investigation regarding commissions charged by the Company and
Christie's for auction services.
A number of private civil actions, styled as class actions, were also filed
against the Company alleging violations of federal and state antitrust laws
based upon alleged agreements between the Company and Christie's regarding
commissions charged to purchasers and sellers of property in the U.S. and
elsewhere, including actions alleging violations of federal antitrust laws in
connection with auctions in the U.S. (the "U.S. Antitrust Litigation") and
actions alleging violations of federal antitrust laws in connection with
auctions outside the U.S. (the "International Antitrust Litigation"). In
addition, several shareholder class action complaints were filed against the
Company and certain of its directors and officers, alleging failure to disclose
the alleged agreements and their impact on the Company's financial condition and
results of operations (the "Shareholder Litigation"). Also, a number of
shareholder derivative suits were filed against the directors of the Company
based on allegations related to the foregoing lawsuits and investigations. And a
number of indirect purchaser class action lawsuits were filed against the
Company in California courts alleging violations of antitrust laws of the State
of California. The U.S. Antitrust Litigation, the International Antitrust
Litigation, the Shareholder Litigation, all of the shareholder derivative suits
and all of the indirect purchaser class action lawsuits have been settled
pursuant to non-appealable court-approved settlement agreements that have been
substantially fully funded or reserved for. The Company has also settled a claim
alleging antitrust violations brought against it and Christie's by one of the
parties who opted out of the settlement of the U.S. Antitrust Litigation. As a
result of the above, the Company has now resolved all antitrust issues raised by
the DOJ and the European Commission and all related pending or threatened civil
litigation.
The Company also becomes involved, from time to time, in various claims and
lawsuits incidental to the ordinary course of its business.
Management does not believe that the outcome of any of the pending claims
or proceedings described above will have a material adverse effect on the
Company's business, results of operations, financial condition and/or liquidity.
7
<PAGE>
(See Notes Q and S of Notes to Consolidated Financial Statements under Item
8, "Financial Statements and Supplementary Data.")
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 2003.
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Market Information
The principal U.S. market for the Company's Class A Common Stock is the
NYSE (symbol: BID). The Class A Common Stock is also traded on the London Stock
Exchange.
The Company also has Class B Common Stock, convertible on a share for share
basis into Class A Common Stock. There is no public market for the Class B
Common Stock. Per share cash dividends, if any, are equal for the Class A Common
Stock and Class B Common Stock.
The quarterly price ranges on the NYSE of the Class A Common Stock for 2003
and 2002 are as follows:
<TABLE>
<CAPTION>
2003
---------------
Quarter Ended High Low
- ------------- ------ ------
<S> <C> <C>
March 31....... $ 9.40 $ 7.87
June 30........ $ 9.43 $ 6.49
September 30... $11.99 $ 7.62
December 31.... $14.10 $10.33
</TABLE>
<TABLE>
<CAPTION>
2002
---------------
Quarter Ended High Low
- ------------- ------ ------
<S> <C> <C>
March 31....... $17.00 $12.99
June 30........ $15.40 $13.55
September 30... $14.43 $ 7.00
December 31.... $ 9.60 $ 6.57
</TABLE>
The number of holders of record of the Class A Common Stock as of March 1,
2004 was 2,204. The number of holders of record of the Class B Common Stock as
of March 1, 2004 was 25.
The Company's credit facility has a covenant that prohibits the Company
from making dividend payments. (See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and Capital
Resources," and Note J of Notes to Consolidated Financial Statements under Item
8, "Financial Statements and Supplementary Data.")
The Company did not pay any dividends during 2003 and 2002 and does not
expect to pay dividends for the remaining term of the Company's credit facility.
9
<PAGE>
Equity Compensation Plans
The following table provides information as of December 31, 2003 with
respect to shares of the Company's common stock that may be issued under its
existing equity compensation plans, including the 1987 Stock Option Plan, the
1997 Stock Option Plan, the Restricted Stock Plan, the Performance Share
Purchase Plan and the Stock Compensation Plan for Non-Employee Directors:
<TABLE>
<CAPTION>
(A) (B) (C)
--------------------------------- ----------------------- --------------------------
Number of Securities
Number of Securities Weighted Average Remaining Available
to be Issued upon Exercise of Exercise Price of for Future Issuance
Outstanding Options, Warrants and Outstanding Options, Under Equity
Plan Category (1) Rights (2) Warrants and Rights (3) Compensation Plans (4) (5)
----------------- --------------------------------- ----------------------- --------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Equity compensation plans
approved by shareholders.... 14,482 $20.45 4,983
Equity compensation plans not
approved by shareholders.... -- -- --
------ ------ -----
Total....................... 14,482 $20.45 4,983
====== ====== =====
</TABLE>
(1) See Note M of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data," for a description of the
material features of and additional information related to the 1987 Stock
Option Plan, the 1997 Stock Option Plan, the Restricted Stock Plan, the
Performance Share Purchase Plan and the Stock Compensation Plan for
Non-Employee Directors.
(2) Includes 160,000 shares of Class B Common Stock issuable upon the vesting
of outstanding stock awards granted under the Restricted Stock Plan.
(3) The weighted-average exercise price does not take into account 160,000
shares issuable upon the vesting of outstanding stock awards granted under
the Restricted Stock Plan, which have no exercise price.
(4) Includes 1,840,000 shares of Class B Common Stock available for future
issuance under the Restricted Stock Plan.
(5) Includes 119,446 shares of Class A Common Stock available for future
issuance under the Stock Compensation Plan for Non-Employee Directors.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table provides selected financial data for the Company. In
the fourth quarter of 2003, the Company committed to a plan to sell SIR, its
domestic real estate brokerage business. Accordingly, the statement of
operations and per share data for all periods presented represents only results
from the Company's continuing operations.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Auction Sales (1)................................ $1,690,655 $1,774,240 $1,619,909 $1,936,316 $2,258,752
Statement of operations data:
- ----------------------------
Auction and related revenues..................... $ 309,038 $ 297,688 $ 286,513 $ 336,027 $ 390,101
Other revenues................................... $ 10,561 $ 12,844 $ 18,774 $ 26,293 $ 23,604
Total revenues................................... $ 319,599 $ 310,532 $ 305,287 $ 362,320 $ 413,705
Net interest expense $ (30,334) $ (20,174) $ (21,680) $ (12,341) $ (1,216)
(Loss) income from continuing operations......... $ (26,483)(3) $ (59,462)(4) $ (44,948)(5) $ (195,819)(6) $ 27,530
Basic and diluted (loss) income per share from
continuing operations......................... $ (0.43)(3) $ (0.97)(4) $ (0.74)(5) $ (3.32)(6) $ 0.47
Balance sheet data:
- ------------------
Working capital (deficit)........................ $ 92,123 $ 9,544 $ (13,903) $ 39,515 $ 159,460
Total assets..................................... $ 901,470 $ 875,705 $ 863,463 $1,078,111 $1,072,787
Credit facility borrowings....................... $ 20,000 $ 100,000 $ 130,000 $ 116,000 $ 272
Long-term debt................................... $ 99,539 $ 99,466 $ 99,398 $ 99,334 $ 99,275
York Property capital lease obligation........... $ 172,282 $ -- $ -- $ -- $ --
Net debt (2)..................................... $ (226,418) $ (150,810) $ (127,646) $ (160,711) $ (57,228)
Shareholders' equity............................. $ 127,408 $ 140,368 $ 185,870 $ 188,054 $ 377,044
</TABLE>
(1) Represents the aggregate hammer price of property sold at auction by the
Company, which includes buyer's premium.
(2) Calculated as credit facility borrowings, long-term debt and the York
Property capital lease obligation less cash and cash equivalents.
(3) Includes 2003 Retention Costs of $8.5 million, Net Restructuring Charges of
$5.0 million and Special Charges of $3.1 million, pre-tax.
(4) Includes 2002 Retention Costs of $22.6 million, Net Restructuring Charges
of $2.0 million and Special Charges of $41.0 million, pre-tax.
(5) Includes 2001 Retention Costs of $19.8 million, Net Restructuring Charges
of $16.5 million and Special Charges of $2.5 million, pre-tax.
(6) Includes 2000 Retention Costs of $3.4 million, Net Restructuring Charges of
$12.6 million and Special Charges of $203.1 million, pre-tax.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SEASONALITY
The worldwide art auction market has two principal selling seasons, spring
and fall. Accordingly, first and third quarter results reflect lower Auction
Sales (as defined below) and lower operating results than the second and fourth
quarters due to the fixed nature of many of the Company's operating expenses.
(See Note V of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data").
USE OF NON-GAAP FINANCIAL MEASURES
GAAP refers to generally accepted accounting principles in the United
States of America. Included in Management's Discussion and Analysis of Results
of Operations are financial measures presented in accordance with GAAP and also
on a non-GAAP basis. When material, the Company excludes the impact of changes
in foreign currency exchange rates when comparing current year results to the
prior year. Consequently, such period-to-period comparisons are provided on a
constant dollar basis by eliminating the impact of changes in foreign currency
exchange rates since the prior year. Management believes the use of this
non-GAAP financial measure provides investors with a more meaningful discussion
and analysis of material fluctuations in the Company's operating results.
Additionally, management utilizes this non-GAAP financial measure in analyzing
its operating results.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with GAAP requires management to make judgments, assumptions and
estimates that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Actual results may ultimately differ from
management's original estimates as future events and circumstances sometimes
do not develop as expected. Note B of Notes to Consolidated Financial Statements
describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. Management believes that
the following are the most critical areas in the application of its accounting
policies that may affect its financial condition and results of operations.
(1) Accounts Receivable--The Company is required to estimate the
collectibility of its accounts receivable balances, which are
primarily related to the Auction segment. A considerable amount of
judgment is required in assessing the collectibility of these
receivables, including judgments about the current creditworthiness
and financial condition of each client and related aging of past due
balances. Management evaluates specific accounts receivable balances
when it becomes aware of a situation where a client may not be able to
meet its financial obligations to the Company. The amount of the
required allowance is based on the facts available to management and
is reevaluated and adjusted as additional information is received.
Allowances are also established for probable losses inherent in the
remainder of the accounts receivable balance based on historical
collection data for certain aged receivable categories. Management's
judgments about the creditworthiness of the Company's clients may
prove, with the benefit of hindsight, to be inaccurate. Accordingly,
adjustments to the allowance for doubtful accounts have historically
been required to reflect changes in facts and circumstances. If the
creditworthiness of the Company's clients were to deteriorate,
additional allowances would be required resulting in an adverse impact
on the operating results of the Auction segment. Alternatively, if the
creditworthiness of the Company's clients were to improve, reductions
in the allowance for doubtful accounts would be required resulting in
a favorable impact on the operating results of the Auction segment.
(See Note E of Notes to Consolidated Financial Statements under
Item 8, "Financial Statements and Supplementary Data.")
(2) Notes Receivable--The Company is required to estimate the
collectibility of its notes receivable balances, which are related to
the client loan portfolio of the Finance segment. A considerable
amount of judgment is required in assessing the collectibility of
these loans, including judgments about the estimated realizable value
of any underlying collateral and the current creditworthiness and
financial condition of each borrower. Management evaluates specific
loans when it becomes aware of a situation where a borrower may not be
able to repay the loan. The amount of the required allowance is based
on the facts available to management and is reevaluated and adjusted
as additional information is received. Secured loans that may not be
collectible from the borrower are analyzed based on the current
estimated realizable value of the collateral securing each loan. The
Company establishes reserves for such secured loans that management
believes are under-collateralized, and with respect to which the
under-collateralized amount may not be collectible from the borrower.
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
12
<PAGE>
ability to realize on its collateral may be limited or delayed by the
application of such laws. Unsecured loans are analyzed based on
management's estimate of the current collectibility of each loan,
taking into account the creditworthiness and financial condition of
the borrower. A reserve is also established for probable losses
inherent in the remainder of the loan portfolio based on historical
data related to loan write-offs. If the estimated realizable value of
any underlying collateral and/or the creditworthiness of borrowers in
the Company's client loan portfolio were to deteriorate, additional
allowances may be required resulting in an adverse impact on the
operating results of the Finance segment. However, historical losses
relating to the Company's client loan portfolio have been infrequent
and the data used by management to develop the allowance for credit
losses has been reliable in developing historically accurate
estimates. (See Note E of Notes to Consolidated Financial Statements
under Item 8, "Financial Statements and Supplementary Data.")
(3) Inventory--Inventory consists of objects purchased for investment
purposes, as well as objects obtained incidental to the auction
process, primarily as a result of the failure of guaranteed property
to sell at auction at or above the minimum price guaranteed by the
Company, defaults by purchasers after the consignor has been paid and
honoring the claims of purchasers. Inventory is valued at the lower of
cost or management's estimate of net realizable value. This estimate
is based on management's judgments about the art market in general and
the value of individual items held in inventory. If the market value
of this inventory were to decline, the Company would be required to
evaluate whether to record a loss in the Auction segment to reduce the
carrying value of the inventory. However, historical subsequent
adjustments to the net realizable value allowances have been minimal.
(See Note F of Notes to Consolidated Financial Statements under
Item 8, "Financial Statements and Supplementary Data.")
(4) Investments--The Company uses the equity method to account for its
investment in AMA. The carrying value of this investment is based on
an estimate of the fair value of the underlying inventory of fine art
owned by the Partnership, which is carried at the lower of cost or
market value. This estimate is based on judgments about the art market
in general and the value of individual items in AMA's inventory. If
the market value of this inventory were to decline, the Company would
be required to record a loss in the Auction segment to reduce the
carrying value of the Company's investment in AMA. (See Note G of
Notes to Consolidated Financial Statements under Item 8, "Financial
Statements and Supplementary Data.")
(5) Goodwill--The Company has goodwill related to its Auction reporting
unit. Goodwill is tested for impairment on an annual basis and
whenever an event occurs or circumstances change that would more
likely than not reduce the fair value of the Auction reporting unit
below its recorded book value. The determination of whether goodwill
is impaired involves significant judgments regarding the fair value of
the Auction reporting unit. Management's estimate of this fair value
is determined on the basis of discounted future cash flows expected
from the Auction reporting unit. This cash flow projection is based on
short and long-term forecasts of operating results of the Auction
reporting unit. Due to unpredictable market conditions, it is possible
that the forecasts used to support the Company's goodwill may change
in the future, which could result in impairment charges that would
adversely affect the operating results of the Auction reporting unit.
(See Note I of Notes to Consolidated Financial Statements under Item
8, "Financial Statements and Supplementary Data.")
(6) Pension Benefits--The pension obligations related to the Company's
U.K. defined benefit pension plan are developed from an actuarial
valuation. Inherent in this valuation are key assumptions and
estimates, including the discount rate, expected return on plan
assets, future compensation increases, and other factors, which are
updated on an annual basis. In determining these assumptions and
estimates, management considers current market conditions, market
indices and other relevant data. The discount rate assumption
represents the approximate weighted average rate at which the
Company's pension obligations could be effectively settled and is
based on a hypothetical portfolio of high-quality corporate bonds
with maturity dates approximating the length of time remaining until
individual benefit payment dates. The assumption for the expected
return on plan assets is based on dividend and interest yields
available on equity and bond markets as of the plan's measurement
date and weighted according to the composition of invested plan
assets. The assumption for future compensation increases is based on
historical data for the Company and current economic data for
inflation.
During the three-year period from 2000 to 2002, actual asset returns
were less than the Company's assumed rate of return on plan assets,
principally contributing to unrecognized net losses of approximately
$71.4 million at December 31, 2003. These unrecognized losses will
be systematically recognized as an increase in future net periodic
pension expense in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 87, "Employers' Accounting for Pensions."
Unrecognized losses in excess of 10% of the greater of the
market-related value of plan assets or the plan's projected benefit
obligation are recognized over a period of approximately 14 years,
which represents the average remaining service period of active
employees expected to receive benefits under the plan. In 2004, the
Company currently expects the amortization of such unrecognized losses
to be approximately $1 million. In accordance with SFAS No. 87, the
market-related value of plan assets reflects changes in the fair value
of plan assets over a five-year period.
13
<PAGE>
The fair value of plan assets is based on the performance of the
financial markets, particularly the equity markets. The equity markets
can be, and recently have been, very volatile. Therefore, the market
value of plan assets can change dramatically in a relatively short
period of time. Additionally, the measurement of the plan's benefit
obligations is highly sensitive to changes in interest rates. As a
result, if the equity markets decline and/or interest rates decrease
in 2004, the plan's estimated accumulated benefit obligation could
exceed the fair value of plan assets and, therefore, the Company would
be required to establish an additional minimum liability, which would
result in a reduction in shareholders' equity for the amount of the
shortfall plus the amount of the Company's current $26.1 million
prepaid pension cost. (See statement on Forward Looking Statements.)
(See Note N of Notes to Consolidated Financial Statements under Item
8, "Financial Statements and Supplementary Data.")
(7) Legal and Other Contingencies--The Company is subject to legal
proceedings, lawsuits and other claims. Management is required to
assess the likelihood of any adverse judgments or outcomes in these
matters, as well as potential ranges of probable losses. A
determination of the amount of reserves, if any, required for these
contingencies is based on a careful analysis of each individual
exposure with, in some cases, the assistance of outside legal counsel.
The required reserves may change in the future due to new developments
in each matter or changes in approach such as a change in settlement
strategy in dealing with these matters. (See Notes Q and S of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements
and Supplementary Data.")
(8) Net Restructuring Charges--During 2003, 2002 and 2001, the Company
recorded charges in connection with its restructuring plans. The
related restructuring liabilities include estimates for severance and
employee termination benefits and settlements of contractual
obligations, as well as for the value of impaired assets. Management
reassesses the amount of the restructuring liability required to
complete each restructuring plan at the end of each quarter. Actual
experience has been and may continue to be different from management's
original estimates of the Company's restructuring liabilities. When
actual results differ from estimates, the restructuring liability is
adjusted and the amount of any adjustment impacting earnings is
recorded within Net Restructuring Charges in the Consolidated
Statements of Operations. (See Note U of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and
Supplementary Data.")
(9) Income Taxes--At December 31, 2003, the Company had net deferred tax
assets of $106.8 million primarily resulting from net operating loss
carryforwards and deductible temporary differences, which will reduce
taxable income in future periods over a number of years. Included in
this net deferred tax asset is a valuation allowance of $34.5 million
to reduce the Company's deferred tax assets to the amount that is more
likely than not to be realized. In assessing the need for the
valuation allowance management considers, among other things, its
projections of future taxable income and ongoing prudent and feasible
tax planning strategies. If the Company does not meet its projection
of taxable income for 2004, it will be more difficult to support the
realization of these deferred tax assets. As a result, an additional
valuation allowance may be required in 2004, which would have an
adverse impact on the Company's results of operations. Conversely,
should management determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would have a favorable
impact on the Company's results of operations in the period such
determination was made. (See Note K of Notes to Consolidated Financial
Statements under Item 8, "Financial Statements and Supplementary
Data.")
As discussed below under "Discontinued Operations," on February 17,
2004, the Company consummated the sale of its domestic real estate
brokerage business to Cendant for $100.7 million (see Note C of Notes
to Consolidated Financial Statements under Item 8, "Financial
Statements and Supplementary Data"). As a result of the
sale, the Company will utilize approximately $26 million of the asset
related to the net operating loss carryforwards discussed above to
offset the taxable gain on the transaction.
(See statement on Forward Looking Statements.)
(10) Stock-Based Compensation--As permitted by generally accepted
accounting principles, management has elected to measure stock-based
compensation in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB
Opinion No. 25, stock-based compensation is measured using the
intrinsic value approach. During 2003, 2002 and 2001, the Company was
not required to record compensation expense related to the 1987 Stock
Option Plan and the 1997 Stock Option Plan as all options under these
plans are granted with an exercise price equal to or greater than the
fair market value of the Company's Class A Common Stock at the date of
grant.
14
<PAGE>
Generally accepted accounting principles also permit stock-based
compensation to be measured based on the fair value of options granted
in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." (See Note B of Notes to Consolidated Financial
Statements under Item 8, "Financial Statements and Supplementary
Data," for pro forma disclosure of the Company's net loss and loss per
share for 2003, 2002 and 2001 assuming management had elected to adopt
the optional measurement provisions of SFAS No. 123.)
OVERVIEW
Global economic uncertainties partially attributable to the impending
war with Iraq had an adverse impact on the key property gathering period
for the spring auction season and negatively impacted the Company's results of
operations for the first half of 2003, as discretionary sellers postponed
selling plans and buyers took a more cautious approach to their collecting.
In the autumn, however, as public confidence improved along with the quality
and quantity of consignments around the world, the international art market
recovered and the Company experienced significantly better fourth quarter
results when compared to the prior year (see Note V of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and Supplementary
Data").
Management currently expects the recovery in the international art market
to carry over into 2004. To illustrate, the first quarter of 2004 is developing
into the Company's strongest first quarter since 1999 largely due to the
landmark private sale of the Forbes Collection of Faberge, as well as strong
Impressionist and Contemporary sales in London. In addition, although the
property gathering period for the spring auction season is not yet complete,
early signs point to a strong spring auction season and improved second quarter
results. (See statement on Forward Looking Statements.)
AUCTION SALES FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
For the year ended December 31, 2003, Auction Sales totaled $1.7 billion, a
decrease of $83.6 million, or 5%, when compared to 2002. During 2003, the
favorable impact of foreign currency translations on worldwide Auction Sales was
approximately $89.8 million. Excluding the impact of favorable foreign currency
translations, Auction Sales decreased $173.4 million, or 10%, to $1.6 billion.
This decrease in worldwide Auction Sales reflects an 18% decrease in the number
of lots sold in 2003 as compared to 2002, partially offset by a 10% increase in
the average selling price per lot sold.
The lower level of worldwide Auction Sales during 2003 was primarily due to
a $103.9 million, or 44%, decline in Auction Sales attributable to single-owner
collections and an $85.7 million, or 41%, decrease in results from the spring
Impressionist and Contemporary sales in New York, both in part attributable to
global economic uncertainties related to the build up to the war in Iraq. The
comparison of Auction Sales to the prior year was also negatively influenced by
a significant decrease in results from the July Old Master Paintings sale in
London, which in 2002 included the sale of Sir Peter Paul Rubens' masterpiece
"The Massacre of the Innocents" for $77 million and for which there was no
comparable painting sold in 2003. Additionally, the comparison of Auction Sales
to the prior year was unfavorably impacted by the discontinuation on April 30,
2003 of separate online auctions on sothebys.com as part of the 2002
Restructuring Plan, which resulted in a $27.9 million decrease in Auction Sales
in 2003 (see Note U of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data").
These decreases were partially offset by a $112.0 million improvement in
2003 in fourth quarter various-owner Auction Sales principally attributable to
the recent recovery in the international art market, as discussed above.
Specifically, Auction Sales for the fourth quarter of 2003 reflect an $80.1
million, or 48%, increase in results from the fall Impressionist and
Contemporary sales in New York, as well as improved results from the
December Old Master Paintings sale in London.
AUCTION SALES FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Auction Sales totaled $1.8 billion in 2002, an increase of $154.3 million,
or 10%, compared to the prior year. During 2002, the favorable impact of foreign
currency translations on worldwide Auction Sales was approximately $50.8
million. Excluding the impact of favorable foreign currency translations,
Auction Sales increased $103.5 million, or 6%, to $1.7 billion. The increase in
worldwide Auction Sales reflects a 32% increase in the average selling price per
lot sold in 2002 as compared to 2001, partially offset by a 20% decrease in the
number of lots sold.
The higher level of worldwide Auction Sales was principally the result of
the July 2002 Old Master Paintings sale in London, which included the sale of
Rubens' masterpiece, "The Massacre of the Innocents," for approximately $77
million. Also favorably impacting Auction Sales in 2002 were favorable
various-owner sales results in North America of Impressionist Art, Contemporary
Art and American Paintings. Additionally, in 2002, Auction Sales were favorably
impacted by the diminished presence of Phillips, which provided strong
competition and increased its market share in certain collecting categories in
2001. In January 2003, Phillips announced plans to discontinue public auctions
of Impressionist and Modern art, as well as to eliminate most regularly
scheduled art auctions in the U.S., thereby further reducing its influence on
the competitive environment in the international art market.
15
<PAGE>
The overall increase in Auction Sales in 2002 was partially offset by lower
results in certain other collecting categories in North America and Europe.
Specifically, in North America, 2002 Auction Sales reflect lower sales results
from certain decorative art and collectible categories, as well as decreased
sales of Old Master Paintings, Nineteenth Century Paintings, wine and jewelry.
In Europe, 2002 Auction Sales reflect lower sales of British Pictures and
decreased sales of Old Master Paintings (excluding the sale of the Rubens
masterpiece discussed above), as well as decreased jewelry sales in Switzerland.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Note D ("Segment Reporting") of Notes to Consolidated Financial Statements
should be read in conjunction with this discussion.
Auction and Related Revenues--Effective January 2003, the Company increased
its buyer's premium for auction sales in its major salesrooms worldwide. The
buyer's premium is now generally 20% of the hammer (sale) price on the first
$100,000 and 12% of any remaining amount over $100,000. Previously, the buyer's
premium was generally 19.5% of the hammer (sale) price up to $100,000 and 10% of
any remaining amount over $100,000.
Auction and related revenues increased $11.4 million, or 4%, to $309.0
million in 2003 when compared to 2002. During 2003, the favorable impact of
foreign currency translations on auction and related revenues was $18.4 million.
Excluding the impact of favorable foreign currency translations, auction and
related revenues decreased $7.1 million, or 2%, to $290.6 million in 2003. This
decrease was principally due to a $5.1 million decline in principal activities,
as well as a $3.6 million decrease in private treaty revenues. The decline in
principal activities was mainly due to a lower level of auction guarantees
issued in 2003 and decreased income from the Company's investment in AMA (see
Note G of Notes to Consolidated Financial Statements under Item 8, "Financial
Statements and Supplementary Data"). Also unfavorably impacting principal
activities in 2003 was a $1.1 million valuation allowance recorded in the fourth
quarter of 2003 for inventory purchased for resale. Despite the significant
decrease in Auction Sales in 2003, the revenue decreases discussed above
were partially offset by a $1.7 million, or 1%, increase in auction commissions
principally due to improved commission margins resulting from the new buyer's
premium rate structure that became effective in January 2003, higher vendor's
commissions rates, reduced shared and introductory auction commissions and a
favorable change in sales mix.
Other Revenues--Other revenues consist primarily of revenues from the
Finance segment, as well as from the Company's art education activities and its
non-U.S. real estate brokerage activities. Other revenues decreased $2.3
million, or 18%, to $10.6 million in 2003 when compared to 2002. This decrease
was principally due to a $1.5 million decrease in revenues from the Company's
U.K. art education business, which was sold in September 2003, as well as a $0.7
million, or 12%, decline in revenues from the Finance segment. The decline in
Finance revenues was primarily due to a 6% decrease in the average loan
portfolio balance, slightly lower interest rates and decreased loan facility
fees. The decrease in the average loan portfolio balance was primarily due to a
conservative loan policy in response to an uncertain economy in the early part
of 2003 and limited capital availability. As discussed in more detail below
under "Liquidity and Capital Resources," the Company's present intention is
to expand the Finance segment's loan portfolio in 2004 in an effort to attract
more auction consignments. (See Statement of Forward Looking Statements.)
Direct Costs of Services--Direct costs of services (consisting largely of
corporate marketing and sale marketing expenses, as well as catalogue production
and distribution costs) decreased $7.0 million, or 13%, to $46.1 million in 2003
when compared to 2002. During 2003, the unfavorable impact of foreign currency
translations on direct costs was approximately $3.3 million. Excluding the
impact of unfavorable foreign currency translations, direct costs decreased
$10.3 million, or 19%, to $42.8 million in 2003. This decrease was largely
attributable to $5.1 million in savings achieved in marketing costs principally
due to management's efforts to reduce discretionary spending in response to
the lower level of Auction Sales and the discontinuation on April 30, 2003 of
separate online auctions on sothebys.com as part of the 2002 Restructuring Plan
(see Note U of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data"). Additionally, 2003 results
reflect a $2.6 million reduction in catalogue production costs primarily
resulting from a lower number of lots offered at auction, as well as the
Company's catalogue savings initiatives, which were gradually implemented
throughout most of 2002. Also favorably impacting the comparison of direct costs
to 2002 was the significant decrease in single-owner Auction Sales, which are
typically more expensive due to higher catalogue production, sale promotion and
exhibition costs.
16
<PAGE>
Salaries and Related Costs--Salaries and related costs increased $4.6
million, or 3%, to $144.7 million in 2003 when compared to 2002. During 2003,
the unfavorable impact of foreign currency translations on salaries and related
costs was approximately $7.6 million. Excluding the impact of unfavorable
foreign currency translations, salaries and related costs decreased $3 million,
or 2%, to $137.1 million in 2003. This decrease was largely due to savings
achieved in the Auction segment as a result of the 2002 Restructuring Plan (see
Note U of Notes to Consolidated Financial Statements under Item 8, "Financial
Statements and Supplementary Data") and management's other cost containment
efforts. These savings were partially offset by approximately $1.7 million in
additional compensation expense that became effective in July 2003, as well as
$0.7 million for one-time payments made to a group of key employees in July
2003. Also unfavorably impacting the comparison to 2002 was an increase of
approximately $1.7 million in costs related to the Company's defined benefit
pension plan for U.K. employees (see Note N of Notes to Consolidated Financial
Statements under Item 8, "Financial Statements and Supplementary Data").
Additionally, salaries and related costs for 2003 reflect increased incentive
bonus costs of $1.5 million, employee termination benefits of $1.0 million
related to further headcount reductions and stock compensation expense of $0.4
million related to the Sotheby's Holdings, Inc. 2003 Restricted Stock Plan,
which was approved by the Compensation Committee of the Company's Board of
Directors in February 2003 and by a vote of the Company's shareholders in April
2003 (see Note M of Notes to Consolidated Financial Statements under Item 8
"Financial Statements and Supplementary Data").
Since 2001, pension costs related to the Company's U.K. defined benefit
pension plan have increased substantially principally due to a decline in the
equity markets and decreasing interest rates. In 2004, management currently
anticipates an increase of approximately $1.5 million in costs related to the
U.K. pension plan when compared to 2003 principally due to the amortization of
unrecognized net losses in accordance with SFAS No. 87. (See "Application of
Critical Accounting Policies" above.) (See statement of Forward Looking
Statements.)
General and Administrative Expenses--General and administrative expenses
increased $4.3 million, or 5%, to $94.8 million in 2003 when compared to 2002.
During 2003, the unfavorable impact of foreign currency translations on general
and administrative expenses was $4.7 million. Excluding the impact of
unfavorable foreign currency translations, general and administrative expenses
decreased $0.5 million, or 1%, to $90.1 million. This decrease was largely
attributable to savings of $3.2 million achieved in travel and entertainment
expenses principally due to headcount reductions resulting from the Company's
restructuring plans and management's other efforts to reduce discretionary
spending. Also favorably impacting the comparison to the prior period was $1.9
million in savings achieved in computer systems development expenses and
telecommunications costs. These favorable variances were partially offset by a
$2.2 million increase in professional fees, a $1.2 million increase in facility
related expenses and a $0.8 million increase in insurance costs. The increase in
professional fees was principally due to costs incurred related to the ongoing
implementation of Section 404 of the Sarbanes-Oxley Act and professional
fees related to the Exchange Offer (see "Other Matters" below) for which
there were no comparable expenses in the prior year. The increase in facility
related expenses was principally due to the commercial rent tax associated with
the York Property capital lease (see Notes H and L of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and Supplementary
Data"), as well as higher heating costs for the York Property as a result of
colder temperatures in the winter of 2003. Also unfavorably impacting the
comparison to the prior year was slightly unfavorable bad debt experience in
2003, which resulted in an adverse impact on general and administrative expenses
of approximately $0.5 million.
Depreciation and Amortization Expense--Depreciation and amortization
expense increased $3.5 million, or 16%, to $25.3 million in 2003 when compared
to 2002. During 2003, the unfavorable impact of foreign currency translations on
depreciation and amortization expense was $0.7 million. Excluding the impact of
unfavorable foreign currency translations, depreciation and amortization expense
increased $2.8 million, or 13%, to approximately $24.7. The increase was
principally due to incremental amortization expense associated with the capital
lease asset recorded in February 2003 in conjunction with a sale-leaseback
transaction involving the York Property. (See "Liquidity and Capital Resources"
below and Notes H, J and L of Notes to Consolidated Financial Statements under
Item 8, "Financial Statements and Supplementary Data" for additional information
related to the sale-leaseback transaction.)
Retention Costs--In 2001 and 2002, the Company implemented retention
programs that provided cash awards payable to a group of key employees upon
fulfillment of full-time employment through certain dates in 2003 and 2004.
Certain employees granted such awards received cash payments of approximately
$13.2 million during 2003. All amounts related to the retention programs
described above were amortized over the related contractual service
17
<PAGE>
periods. During 2003 and 2002, the Company recognized retention costs of $8.5
million and $22.6 million, respectively.
The final cash payment of $0.4 million due under the retention programs was
made in January 2004 and, as a result, the retention programs have concluded.
Accordingly, in 2004, the amount of retention costs included in the Company's
results of operations will not be material.
(See Note T of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data.")
Restructuring Plans--During 2003 and 2002, the Company recorded the
following amounts related to its restructuring plans:
<TABLE>
<CAPTION>
2003 2002
------ -------
(Thousands of dollars)
<S> <C> <C>
2000 Restructuring Plan .............................. $ -- $(1,231)
2001 Restructuring Plan .............................. 53 (989)
2002 Restructuring Plan .............................. 4,986 4,181
------ -------
Total ............................................. $5,039 $ 1,961
====== =======
</TABLE>
(See Note U of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data," for information relating to the
2000 Restructuring Plan and the 2001 Restructuring Plan.)
During the fourth quarter of 2002, management approved plans to further
restructure the Auction segment, as well as to carry out additional headcount
reductions in certain corporate departments (the "2002 Restructuring Plan"). The
goal of the 2002 Restructuring Plan is to improve profitability through further
cost savings and other strategic actions, as described below. Total net annual
cost savings resulting from the 2002 Restructuring Plan are expected to be
approximately $17 million. See below for a more detailed discussion of these
cost savings.
In December 2002, the Company committed to the termination of approximately
60 employees as a result of the 2002 Restructuring Plan and recorded
restructuring charges of $4.2 million in the fourth quarter of 2002, principally
consisting of $4.0 million in employee termination benefits, as well as $0.1
million in lease terminations costs. These headcount reductions impacted the
live auction business of the Auction segment primarily in North America, as well
as certain corporate departments. Estimated annual savings achieved in salaries
and related costs as a result of the headcount reductions and attrition is
approximately $5 million.
In February 2003, as part of the 2002 Restructuring Plan, the Company and
eBay entered into an agreement pursuant to which separate online auctions on
sothebys.com were discontinued on April 30, 2003. As a result, the Company
recorded restructuring charges of approximately $2.0 million in the first
quarter of 2003 consisting of approximately $1.0 million for employee
termination benefits, $0.5 million for a minimum guaranteed fee owed to eBay for
which the Company will receive no future economic benefit and approximately $0.5
million for impairment losses related to certain technology assets. These
actions resulted in estimated net annual cost savings of approximately $8
million, which have been achieved principally through lower salaries and related
costs resulting from the termination of approximately 30 employees and through
attrition. Additionally, savings have been achieved in direct costs of services
and general and administrative expenses.
During 2003, as part of the 2002 Restructuring Plan, management committed
to approximately 40 additional headcount reductions in Europe in the Auction
segment. As a result, the Company recorded restructuring charges of $3.7 million
and $0.5 million in the first and fourth quarters of 2003, respectively, for
employee termination benefits. These actions resulted in estimated annual cost
savings of approximately $4 million, which have been achieved principally
through lower salaries and related costs.
During the first quarter of 2003, as part of the 2002 Restructuring Plan,
the Company entered into an agreement to outsource the operation of its
mainframe computer systems. In conjunction with the decision to outsource such
operations, management committed to the termination of six employees in the
corporate Information Technology department and, as a result, the Company
recorded restructuring charges of approximately $0.1 million in the first
quarter of 2003 for employee termination benefits. These actions have resulted
in estimated net annual
18
<PAGE>
cost savings of approximately $0.3 million. Such savings, have been achieved
primarily through lower salaries and related costs.
During 2003, the Company recorded restructuring charges of approximately
$0.3 million for other costs related to the 2002 Restructuring Plan. Such costs,
which were expensed as incurred, primarily included fees for legal and other
professional services related to the 2002 Restructuring Plan.
During 2003, the Company recorded favorable adjustments of $1.5 million to
Net Restructuring Charges principally due to changes in management's original
estimates of employee termination benefits related to the 2002 Restructuring
Plan.
(With respect to all statements made herein regarding the Company's
restructuring plans, see statement on Forward Looking Statements.)
Special Charges--In 2003 and 2002, the Company recorded special charges of
$3.1 million and $41.0 million, respectively, related to the investigation by
the DOJ, other governmental investigations and the related civil antitrust
litigation. See Note S of Notes to Consolidated Financial Statements under Item
8, "Financial Statements and Supplementary Data," for information on special
charges related to the investigation by the DOJ, other governmental
investigations and the related civil antitrust litigation.
Net Interest Expense--Net interest expense increased $10.2 million in 2003
when compared to 2002. This increase was primarily due to $16.1 million in
interest expense resulting from the capital lease obligation recorded in
February 2003 in conjunction with the sale-leaseback transaction involving the
York Property (see "Liquidity and Capital Resources" below and Note J of Notes
to Consolidated Financial Statements Item 8, "Financial Statements and
Supplementary Data," for additional information related to the sale-leaseback
transaction), as well as $1.8 million for the amortization of interest expense
related to the vendor's commission discount certificates issued in June 2003 as
part of the U.S. Antitrust Litigation settlement (see Note S of Notes to
Consolidated Financial Statements Item 8, "Financial Statements and
Supplementary Data"). These increases were partially offset by a $7.5 million
reduction in interest expense associated with the Company's credit facility
principally as a result of decreased average outstanding borrowings and lower
amortization of arrangement and amendment fees.
Income Tax Benefit--The effective tax benefit rate for continuing
operations was approximately 30% in 2003, compared to approximately 26% in 2002.
The increase in the tax benefit rate was primarily attributable to the fact that
in 2002 the fine paid to the European Commission and a portion of the
International Antitrust Litigation settlement were not tax deductible.
This increase was partially offset by permanent disallowances of compensation,
as well as certain one time adjustments in 2003 that decreased the effective
tax benefit rate by approximately 4%. (See Notes K and S of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data.") (See "Application of Critical Accounting Policies" above.)
Discontinued Operations--In the fourth quarter of 2003, the Company
committed to a plan to sell SIR, its domestic real estate brokerage business.
Accordingly, for all periods presented, the assets and liabilities of SIR are
classified as held for sale in the Consolidated Balance Sheets, and its
operating results are reported as discontinued operations in the Consolidated
Statements of Operations.
On February 17, 2004, the Company consummated the sale of SIR to Cendant
and recognized pre-tax income in the range of $75 million in the first quarter
of 2004.
Additionally, in conjunction with this transaction, the Company entered
into an agreement with Cendant to license the Sotheby's International Realty
trademark and certain related trademarks in exchange for an ongoing license fee
based on the volume of commerce transacted under the trademarks. The license
agreement, which is for an initial 50-year term with a 50-year renewal option,
is applicable to Canada, Israel, Mexico, the U.S. and certain Caribbean
countries. The other non-U.S. offices and affiliates of the Company's real
estate brokerage business, which are not significant to the Company's overall
operations, will continue to operate as Sotheby's International Realty under
current management. However, Cendant has an option to acquire certain of these
offices and affiliates and a license to use the related trademarks in other
countries outside the U.S. during the five-year period following February 17,
2004 for a nominal amount.
The total purchase price paid by Cendant for SIR's company-owned real
estate brokerage operations, as well as the license agreement was approximately
$100.7 million, consisting of $98.9 million in cash and the assumption of a
$1.8 million note payable. Net cash proceeds from the sale, after deducting
approximately $5 million in transaction costs, were $93.9 million.
19
<PAGE>
On October 28, 2003, SIR acquired the brokerage offices of Jackson Hole
Realty ("JHR") in Jackson, Wyoming for a total acquisition cost of $7.2 million.
The total acquisition cost consisted of $5 million in cash, a $1.9 million note
payable due to the previous owners and $0.3 million in costs directly related to
the transaction. The purpose of the acquisition was to significantly increase
SIR's presence in the Jackson Hole market. JHR's results are included in Income
from Discontinued Operations beginning on October 28, 2003.
In 2003, income from discontinued operations before taxes increased $1.6
million, or 19%, when compared to 2002. The improvement when compared to the
prior year was primarily due to a $3.0 million, or 9%, increase in revenues
principally due to higher sales volume resulting from a 10.7% increase in unit
sales and a 2.1% increase in the average selling price; partially offset by
decreased commission retention rates due to a greater proportion of sales
completed by senior agents who earn a higher share of the gross commission. The
increase in revenues was partially offset by a $1.1 million, or 10%, increase in
salaries and related costs and a $0.3 million, or 3%, increase in general and
administrative expenses. The higher level of salaries and related costs reflects
compensation increases taking effect in 2003 and the full year impact of
employees hired in 2002, as well as increased sales incentive bonus costs
resulting from a higher sales volume in 2003. The increase in general and
administrative expenses was principally due to higher facility related costs
primarily resulting from the expansion of certain brokerage offices.
(See Note C of Notes to Consolidated Financial Statements Item 8,
"Financial Statements and Supplementary Data.," for historical financial data
related to SIR.)
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Note D ("Segment Reporting") of Notes to Consolidated Financial Statements
should be read in conjunction with this discussion.
Auction and Related Revenues--Auction and related revenues increased $11.2
million, or 4%, to $297.7 million in 2002 when compared to 2001. During 2002,
the favorable impact of foreign currency translations on auction and related
revenues was $9.4 million. Excluding the impact of favorable foreign currency
translations, worldwide auction and related revenues increased $1.8 million, or
1%, to $288.3 million.
This increase was principally due to the favorable impact of the revised
buyer's premium rate structure that became effective on April 1, 2002, as well
as the $9 million in auction commissions attributable to the July 2002 sale of
Rubens' masterpiece, "The Massacre of the Innocents" and the incremental auction
commissions generated by the other increases in Auction Sales discussed above.
Also favorably impacting the comparison to 2001 are increased revenues from
principal activities primarily due to higher profits resulting from the
Company's interest in the purchase and resale of art by certain dealers (see
Note E of Notes to Consolidated Financial Statements under Item 8, "Financial
Statements and Supplementary Data"), successful auction guarantees and increased
income from the Company's investment in AMA (see Note G of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and Supplementary
Data"). These increases were partially offset by margin erosion primarily
resulting from the competitive environment for consignments and commissions
shared with unaffiliated third parties who participated in the Company's auction
guarantee transactions (see Note R of Notes to Consolidated Financial Statements
under Item 8, "Financial Statements and Supplementary Data") in order to reduce
the Company's principal risk. Also unfavorably impacting the comparison to 2001
are lower private treaty revenues, as well as decreased catalogue subscription
sales.
Other Revenues--Other revenues decreased $5.9 million, or 32%, to $12.8
million in 2002 when compared to 2001. The decrease was almost entirely
attributable to a $5.3 million, or 47%, decrease in revenues from the Finance
segment. This decrease in Finance revenues was primarily due to a lower average
loan portfolio balance and lower interest rates. The lower average loan
portfolio balance was principally due to the collection of maturing loans in
2002, as well as the decreased funding of new unsecured loans.
Direct Costs of Services--Direct costs of services decreased $6.6 million,
or 11%, to $53.1 million in 2002 when compared to 2001. During 2002, the
unfavorable impact of foreign currency translations on direct costs of services
was approximately $1.6 million. Excluding the impact of unfavorable foreign
currency translations, direct costs of services decreased $8.2 million, or 14%,
to $51.5 million. This decrease was due in part to a $3.8 million reduction in
catalogue production costs primarily resulting from the Company's use of digital
photography and other
20
<PAGE>
catalogue savings initiatives, as well as a decrease in the number of lots sold
at auction during 2002, as discussed above. Additionally, 2002 results reflect
savings in marketing expenses and other auction direct costs principally
resulting from the Company's restructuring plans (see Note U of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data") and management's other cost containment efforts.
Salaries and Related Costs--Salaries and related costs decreased $9.0
million, or 6%, to $140.1 million in 2002 when compared to 2001. During 2002,
the unfavorable impact of foreign currency translations on salaries and related
costs was approximately $3.2 million. Excluding the impact of unfavorable
foreign currency translations, salaries and related costs decreased $12.2
million, or 8%, to $136.9 million. This decrease was primarily due to savings
achieved in the Auction segment as a result of the Company's restructuring plans
and management's other cost containment efforts. Additionally, 2002 results
reflect reduced salaries and related costs resulting from the capitalization of
$1.8 million in costs associated with computer software developed for internal
use. These decreases were partially offset by a lower net pension benefit in
2002 related to the Company's U.K. defined benefit pension plan (see Note N of
Notes to Consolidated Financial Statements under Item 8, "Financial Statements
and Supplementary Data").
General and Administrative Expenses--General and administrative expenses
increased $0.8 million, or 1%, to $90.6 million in 2002 when compared to 2001.
During 2002, the unfavorable impact of foreign currency translations on general
and administrative expenses was approximately $1.9 million. Excluding the impact
of unfavorable foreign currency translations, general and administrative
expenses decreased $1.1 million, or 1%, to $88.7 million. This decrease was
principally due to savings achieved in travel and entertainment expenses,
facility rental costs and telecommunication costs primarily as a result of the
Company's restructuring plans and management's other cost containment efforts.
Also favorably influencing the comparison to the prior year are a decreased
level of authenticity claims and goodwill gestures in 2002, as well as the
reversal of $1.9 million of accruals that were no longer required due to
favorable changes in circumstances. These favorable variances were partially
offset by a $1.4 million increase in insurance costs principally in the Auction
segment. The comparison to the prior year is also unfavorably influenced by the
reversal in 2001 of approximately $4.8 million of accruals that were no longer
required due to favorable changes in circumstances. Additionally, general and
administrative expenses for 2002 and 2001 include the reversal of $1.1 million
and $1.6 million, respectively, of bad debt accruals that were no longer
necessary due to the collection or settlement of the related client receivable
balances.
Depreciation and Amortization Expense--Depreciation and amortization
expense decreased $1.5 million, or 6%, to $21.9 million in 2002 when compared to
2001. This decrease was primarily attributable to lower depreciation and
amortization expense due to the write-off of computer hardware and software in
the fourth quarter of 2001 as a result of the Company's strategic alliance with
eBay (see Note U of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data"), as well as the cessation of
goodwill amortization as a result of the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets," on January 1, 2002 (see Note I of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data"). This decrease was partially offset by the incremental
depreciation and amortization expense associated with capital projects placed
into service during 2001 and 2002, including depreciation expense attributable
to the final phase of the York Property that was placed in service in April
2001.
Internet Related Operating Expenses--In 2002, Internet related operating
expenses totaled $9.3 million. In 2001, Internet related operating expenses
totaled $22.6 million (excluding Internet related net restructuring charges of
approximately $8.4 million). The significant decrease was principally due to
savings achieved as a result of the Company's restructuring plans and other cost
containment efforts. (See Note U of Notes to Consolidated Financial Statements
under Item 8, "Financial Statements and Supplementary Data.")
Retention Costs--In 2002 and 2001, the Company recognized expense of
approximately $22.6 million and $19.8 million, respectively, related to the
Company's retention programs for a group of key employees. (See Note T of Notes
to Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data.")
Restructuring Plans--In 2002 and 2001, the Company recorded net
restructuring charges of $2.0 million and $16.5 million, respectively. (See Note
U of Notes to Consolidated Financial Statements under Item 8, "Financial
Statements and Supplementary Data.")
21
<PAGE>
Special Charges--In 2002 and 2001, the Company recorded special charges of
$41.0 million and $2.5 million, respectively, related to the investigation by
the DOJ, other governmental investigations and the related civil antitrust
litigation. (See Note S of Notes to Consolidated Financial Statements under Item
8, "Financial Statements and Supplementary Data.")
Net Interest Expense--Net interest expense decreased $1.5 million, or 7%,
in 2002 when compared to 2001. This decrease was largely due to lower interest
expense resulting from a lower average cost of borrowing related to the
Company's credit facility, as well as lower outstanding borrowings. However, the
comparison to the prior year was unfavorably influenced by $1.3 million in
interest income earned in 2001 related to an overdue client receivable balance
for which there was no comparable amount earned in 2002, as well as decreased
interest income resulting from lower cash balances and lower interest rates.
(See Note J of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data.")
Income Tax Benefit--The effective tax benefit rate for continuing
operations was approximately 26% in 2002, compared to approximately 42% in 2001.
This decrease was primarily due to the fact that the fine imposed by the
European Commission is not tax deductible and a portion of the International
Antitrust Litigation settlement is not tax deductible. (See Notes K and S of
Notes to Consolidated Financial Statements under Item 8, "Financial Statements
and Supplementary Data.")
Discontinued Operations--In the fourth quarter of 2003, the Company
committed to a plan to sell SIR, its domestic real estate brokerage business.
Accordingly, for all periods presented, the assets and liabilities of SIR are
classified as held for sale in the Consolidated Balance Sheets, and its
operating results are reported as discontinued operations in the Consolidated
Statements of Operations. (See Note C of Notes to Consolidated Financial
Statements Item 8, "Financial Statements and Supplementary Data.")
In 2002, income from discontinued operations before taxes increased $2.7
million, or 48%, when compared to 2001. The improvement when compared to the
prior year was primarily due to a $3.7 million, or 12%, increase in revenues.
The increase in revenues was mainly due to higher sales volume principally
resulting from a 22% increase in unit sales, partially offset by a 7% decrease
in average selling price. The higher level of revenues in 2002 was partially
offset by a $0.4 million increase in incentive bonus costs and a $0.3 million
increase in depreciation and amortization expense.
FINANCIAL CONDITION AS OF DECEMBER 31, 2003
This discussion should be read in conjunction with the Consolidated
Statements of Cash Flows (see Item 8, "Financial Statements and Supplementary
Data").
During 2003, total cash and cash equivalents related to the Company's
continuing and discontinued operations increased approximately $16.4 million and
$0.3 million, respectively, primarily due to the factors discussed below.
Net cash used by operations was $45.6 million during 2003 and was largely
the result of a net loss from continuing operations, as well as $50 million in
payments made to fund the European Commission fine, the International Antitrust
Litigation settlement and a portion of the fine payable to the United States
Department of Justice (see Note S of Notes to Consolidated Financial Statements
under Item 8, "Financial Statements and Supplementary Data"). Additionally,
during 2003, the Company funded approximately $13.2 million in retention
payments to a group of key employees (see Note T of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and Supplementary
Data") and approximately $8.5 million of employee termination benefits paid in
connection with the Company's restructuring plans (see Note U of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data") and other headcount reductions. These cash outflows from
operations were partially offset by $7.5 million in cash provided by the
Company's discontinued domestic real estate brokerage operations (see Note C of
Notes to Consolidated Financial Statements under Item 8, "Financial Statements
and Supplementary Data"). Also influencing cash used by operations during the
period is a $51.1 million decrease in Accounts Receivable, partially offset by a
$19.6 million decrease in Due to Consignors.
22
<PAGE>
Net cash provided by investing activities was $141.4 million in 2003 and
was primarily due to the $167.1 million in net cash proceeds received from the
York Property sale-leaseback transaction (see Note H and J of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data"), as well as the collection of $98.4 million in maturing
client loans. These cash inflows from investing activities during 2003 were
partially offset by the funding of $113 million in new client loans, as well as
capital expenditures related to the Company's continuing operations of $6.6
million. Also partially offsetting net cash provided by investing activities in
2003 was $7.2 million of investing cash outflows related to the Company's
discontinued domestic real estate brokerage operations, consisting of the $5.3
million in cash paid related to the acquisition of JHR and $1.9 million in
capital expenditures (see Note C of Notes to Consolidated Financial Statements
under Item 8, "Financial Statements and Supplementary Data").
Net cash used by financing activities was $81.5 million during 2003 and was
primarily due to the net repayment of credit facility borrowings.
COMMITMENTS AS OF DECEMBER 31, 2003
The following table summarizes the Company's material contractual
obligations and commitments as of December 31, 2003. In the fourth quarter of
2003, the Company committed to a plan to sell SIR, its domestic real estate
brokerage business. On February 17, 2004, the Company consummated the sale of
SIR (see Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operation--Discontinued Operations," and Note C of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data"). Accordingly, the contractual obligations and commitments
presented below relate only to the Company's continuing operations. (See
"Liquidity and Capital Resources" below for a discussion of the capital
resources that will be used to fund these commitments.)
<TABLE>
<CAPTION>
Payments Due by Period
----------------------------------------------------
Less than 1 to 3 3 to 5 After
Total One Year Years Years 5 Years
-------- --------- -------- ------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Principal payments on borrowings:
Credit facility borrowings (1)................ $ 20,000 $ 20,000 $ -- $ -- $ --
Long-term debt (2)............................ 100,000 -- -- -- 100,000
-------- -------- -------- ------- --------
Sub-total.................................. 120,000 20,000 -- -- 100,000
-------- -------- -------- ------- --------
Interest payments on borrowings:
Credit facility borrowings (1)................ 156 156 -- -- --
Long-term debt (2)............................ 37,240 6,875 13,750 13,750 2,865
-------- -------- -------- ------- --------
Sub-total.................................. 37,396 7,031 13,750 13,750 2,865
-------- -------- -------- ------- --------
Other commitments:
York Property capital lease obligation (3) ... 424,985 18,025 37,289 38,574 331,097
Operating lease obligations (4)............... 90,662 13,819 23,859 17,295 35,689
DOJ antitrust fine (5)........................ 33,000 6,000 27,000 --
Auction guarantees (6)........................ 44,966 44,966 -- -- --
Employment agreements (7)..................... 8,438 3,375 5,063 -- --
-------- -------- -------- ------- --------
Sub-total.................................. 602,051 86,185 93,211 55,869 366,786
-------- -------- -------- ------- --------
Total................................... $759,447 $113,216 $106,961 $69,619 $469,651
======== ======== ======== ======= ========
</TABLE>
(1) Represents the outstanding principal and approximate interest payments
related to the Company's credit facility borrowings. (See Note J of Notes
to Consolidated Financial Statements under Item 8, "Financial Statements
and Supplementary Data.")
(2) Represents the aggregate outstanding principal and semi-annual interest
payments due on the Company's long-term debt. (See Note J of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data.")
23
<PAGE>
(3) Represents rental payments due under the capital lease obligation for the
York Property, as discussed below and in Notes H and L of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data."
(4) Represents rental payments due under the Company's operating lease
obligations. (See Note L of Notes to Consolidated Financial Statements
under Item 8, "Financial Statements and Supplementary Data.")
(5) Represents the remaining fine payable to the DOJ. (See Note S of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data.")
(6) 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 and, therefore, the Company must pay the
difference between the sale price at auction and the amount of the
guarantee. If the property does not sell, the amount of the guarantee must
be paid, but the Company has the right to recover such amount through the
future sale of the property. The amount disclosed in the table above
consists of approximately $56.5 million in gross auction guarantees less
partner shares and prefunded amounts. (See Note R of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and Supplementary
Data.")
(7) Represents the aggregate three-year commitment for future salaries related
to employment agreements with a number of employees, excluding incentive
bonuses. (See Note Q of Notes to Consolidated Financial Statements under
Item 8, "Financial Statements and Supplementary Data.")
The vendor's commission discount certificates (the "Discount Certificates")
that were distributed in June 2003 as part of the U.S. Antitrust Litigation
settlement (see Note S of Notes to Consolidated Financial Statements under Item
8, "Financial Statements and Supplementary Data") are fully redeemable in
connection with any auction that is conducted by the Company or Christie's in
the U.S. or the U.K. The Discount Certificates may be used to satisfy
consignment charges involving vendor's commission, risk of loss and/or catalogue
illustration. The Discount Certificates will expire on May 14, 2008; however,
any unused Discount Certificates may be redeemed for cash at their face value at
any time between May 15, 2007 and May 14, 2008. As of December 31, 2003, the
outstanding face value of unused Discount Certificates that the Company could be
required to redeem was approximately $61.8 million.
Additionally, in certain situations, the Company makes short-term
commitments to consignors to extend additional credit. However, potential
consignor advances related to such commitments are subject to certain
limitations and conditions. The total amount of such commitments was $22.4
million as of December 31, 2003. (See Notes E and Q of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and Supplementary
Data.")
CONTINGENCIES
See Note Q of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data" for information on contingencies.
DERIVATIVES
The Company utilizes forward exchange contracts to manage exposures related
to foreign currency risks, which primarily arise from short-term foreign
currency denominated intercompany balances. Generally, such intercompany
balances are centrally funded and settled through the Company's global treasury
function. The Company's objective for holding derivative instruments is to
minimize foreign currency risks using the most effective methods to eliminate or
reduce the impacts of these exposures.
The forward exchange contracts entered into by the Company are used as
economic cash flow hedges of the Company's exposure to short-term foreign
currency denominated intercompany balances. Such forward exchange contracts are
typically short-term with settlement dates no more than one month from their
inception. These contracts are not designated as hedging instruments under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, and are recorded in the Company's Consolidated Balance Sheets at fair
value, which is based on referenced market rates. Changes in the fair value of
the Company's forward exchange contracts are
24
<PAGE>
recognized currently in earnings and are generally offset by the revaluation of
the underlying intercompany balances in accordance with SFAS No. 52, "Foreign
Currency Translation."
As of December 31, 2003 and 2002, the Consolidated Balance Sheets included
$0.3 million and $0.4 million, respectively, recorded within Other Current
Assets reflecting the fair value of the Company's outstanding forward exchange
contracts.
(See Note P of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data.")
LIQUIDITY AND CAPITAL RESOURCES
On February 7, 2003, the Company completed the sale of the York Property to
an affiliate of RFR Holding LLC ("RFR") for $175 million in cash. Net cash
proceeds of approximately $167 million, after deducting taxes and fees related
to the transaction, were used in part to refinance $100 million in outstanding
borrowings under the senior secured term facility of the Company's previous
credit agreement (the "Amended and Restated Credit Agreement"). The Company then
leased the York Property back from RFR for an initial 20-year term, with options
to extend the lease for two additional 10-year terms. Rental payments during the
initial term are approximately $18 million per year, escalating 7% every three
years during the term of the lease. (See Note L of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and Supplementary
Data.")
Additionally, on that date, the Company extended the maturity date of the
Amended and Restated Credit Agreement from February 11, 2003 to February 6,
2004. As a result of this extension, the Company paid amendment and arrangement
fees of $1.7 million, which were amortized to interest expense over the extended
term of the agreement. On February 3, 2004, the Company further extended the
maturity date of the Amended and Restated Credit Agreement to March 5, 2004.
As discussed above, on February 17, 2004, the Company consummated the sale
of its domestic real estate brokerage business and received net cash proceeds of
approximately $93.9 million.
On March 4, 2004, the Company used existing cash balances to repay the
remaining $20 million in borrowings outstanding under the senior secured term
facility of the Amended and Restated Credit Agreement.
In addition, on March 4, 2004, the Company entered into a new senior
secured credit agreement with General Electric Capital Corporation (the
"GE Capital Credit Agreement"). The GE Capital Credit Agreement is available
through March 4, 2007 and provides for borrowings of up to $200 million, of
which $100 million is currently committed and the remainder is in the process of
being offered to an international syndicate of lenders. Because of the Company's
decreased need for external capital resources due to the net cash proceeds
received from the sale of its domestic real estate brokerage business, as
described above, the Company may ultimately decide to limit the aggregate amount
committed for borrowings under the GE Capital Credit Agreement to an amount that
is less than $200 million.
Borrowings under the GE Capital Credit Agreement are available for the
funding of the Company's ordinary working capital requirements and general
corporate needs. To date, the Company has paid arrangement fees of $1.8 million
related to the GE Capital Credit Agreement, which will be amortized to interest
expense over the three-year term of the agreement.
The Company's obligations under the GE Capital Credit Agreement are secured
by substantially all of the assets of the Company, as well as the assets of its
subsidiaries in the U.S. and the U.K. The GE Capital Credit Agreement also
contains financial covenants requiring the Company to not exceed a certain
maximum level of capital expenditures and to meet certain quarterly fixed charge
coverage ratio tests. Additionally, the GE Capital Credit Agreement has a
covenant that prohibits the Company from making dividend payments.
At the option of the Company, borrowings under the GE Capital Credit
Agreement generally bear interest equal to: (i) 1.25% plus the higher of the
Prime Rate, or the Federal Funds Rate plus 0.5% or, (ii) LIBOR plus 2.75%.
Beginning on March 31, 2005, the applicable interest rate charged for borrowings
under the GE Capital Revolving Facility may be adjusted up or down depending on
the Company's performance under the quarterly fixed charge coverage ratio tests.
The Company generally relies on operating cash flows supplemented by
borrowings to meet its financing requirements. With the cash proceeds received
from the sale of SIR and borrowings available under the GE Capital Credit
Agreement, the Company has considerably more liquidity and financial
flexibility than it has had in the recent past. It is the Company's present
intention to use this additional liquidity to increase its investment in its
auction operations and expand its loan portfolio in an effort to attract more
consignments and thus increase its revenues in both the Auction and Finance
segments. (See statement on Forward Looking Statements.)
The Company currently believes that operating cash flows, current cash
balances and borrowings under the GE Capital Credit Agreement will be adequate
to meet its short-term and long-term commitments, operating needs and capital
requirements through March 4, 2007.
The Company's short-term operating needs and capital requirements include
peak seasonal working capital requirements, other short-term commitments to
consignors, the potential funding of the Company's client loan portfolio and the
funding of capital expenditures, as well as the following short-term commitments
which were outstanding as of March 1, 2004:
25
<PAGE>
o $18.0 million in aggregate rent payments due under the capital
lease obligation for the York Property (see Note L of Notes to
Consolidated Financial Statements under Item 8, "Financial
Statements and Supplementary Data");
o $13.8 million in aggregate rent payments due under the Company's
operating lease obligations (see Note L of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and
Supplementary Data");
o $12.0 million due on February 6, 2005 under the Company's DOJ
antitrust fine (see Note S of Notes to Consolidated Financial
Statements under Item 8, "Financial Statements and Supplementary
Data");
o $6.9 million in total interest payments related to the Company's
long-term debt securities (see Note J of Notes to Consolidated
Financial Statements under Item 8, "Financial Statements and
Supplementary Data"); and
o $3.4 million due under existing employment agreements (see Note Q
of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data").
The Company's long-term operating needs and capital requirements include
the potential funding of the Company's client loan portfolio and the funding of
capital expenditures beyond the next twelve months and through March 4, 2007, as
well as the funding of the Company's long-term contractual obligations and
commitments summarized in the table above through March 4, 2007.
In addition to the short-term and long-term operating needs and capital
requirements described above, the Company is obligated to fund the redemption of
the Discount Certificates distributed as part of the U.S. Antitrust Litigation
settlement (see Note S of Notes to Consolidated Financial Statements under Item
8, "Financial Statements and Supplementary Data"). As discussed above, the
Discount Certificates are fully redeemable in connection with any auction that
is conducted by the Company or Christie's in the U.S. or the U.K. The Discount
Certificates may be used to satisfy consignment charges involving vendor's
commission, risk of loss and/or catalogue illustration. The Discount
Certificates will expire on May 14, 2008; however, any unused Discount
Certificates may be redeemed for cash at their face value at any time between
May 15, 2007 and May 14, 2008. As of December 31, 2003, the outstanding face
value of unused Discount Certificates that the Company could be required to
redeem was approximately $61.8 million.
FACTORS AFFECTING OPERATING RESULTS AND LIQUIDITY
Operating results from the Company's Auction and Finance operating
segments, as well as the Company's liquidity, are significantly influenced by a
number of factors, many of which are not within the Company's control. These
factors, which are not ranked in any particular order, include:
o The overall strength of the international economy and financial
markets and, in particular, the economies of the U.S., the U.K.,
and the major countries or territories of Continental Europe and
Asia (principally Japan and Hong Kong);
o Interest rates, particularly with respect to the Finance
segment's client loan portfolio and the Company's credit facility
borrowings;
o The impact of political conditions in various nations on the
international economy and financial markets;
o Government laws and regulations which the Company is subject to,
including, but not limited to, import and export regulations,
cultural patrimony laws and value added sales taxes;
26
<PAGE>
o The effects of foreign currency exchange rate movements;
o The seasonality of the Company's auction business;
o Competition with other auctioneers and art dealers, specifically
in relation to the following factors: (a) the level of expertise
of the dealer or auction house with respect to the property, (b)
the extent of the prior relationship, if any, between the seller
and the firm, (c) the reputation and historic level of
achievement by a firm in attaining high sale prices in the
property's specialized category, (d) the breadth of staff
expertise, (e) the desire for privacy on the part of sellers and
buyers, (f) the amount of cash offered by a dealer, auction house
or other purchaser to purchase the property outright compared
with the estimates, guarantees or other financial options offered
by the Company, (g) the time that will elapse before the seller
will receive sale proceeds, (h) the desirability of a public
auction in order to achieve the maximum possible price, (i) the
amount of commission proposed by dealers or auction houses to
sell a work on consignment, (j) the cost, style and extent of
presale marketing and promotion to be undertaken by a firm, (k)
recommendations by third parties consulted by the seller, (l)
personal interaction between the seller and the firm's staff and
(m) the availability and extent of related services, such as tax
or insurance appraisal and short-term financing;
o The amount of quality property being consigned to art auction
houses (and, in particular, the number of single-owner sale
consignments), as well as the ability of the Company to sell such
property, both of which factors can cause auction and related
revenues to be highly variable from period-to-period;
o The demand for fine arts, antiques and collectibles;
o The success of the Company in attracting and retaining qualified
personnel, who have relationships with certain potential sellers
and buyers;
o The demand for art-related financing;
o The restrictive covenants in the Company's bank credit facilities
and senior unsecured debt, which could adversely affect the
Company's business by limiting its flexibility;
o The impact of any decline in the equity markets or decrease in
interest rates on the Company's plan assets and obligations
related to its U.K. defined benefit pension plan;
o The unfavorable trend in pension costs related to the Company's
U.K. defined benefit pension plan; and
o The ability of the Company to support the realization of its
deferred tax assets.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company continually evaluates its market risk associated with its
financial instruments and forward exchange contracts during the course of its
business. The Company's financial instruments include cash and cash equivalents,
restricted cash, notes receivable, consignor advances, credit facility
borrowings, long-term debt, the fine payable to the United States Department of
Justice and the settlement liability related to the Discount Certificates issued
in connection with the U.S. Antitrust Litigation.
The Company believes that its interest rate risk is minimal as a
hypothetical 10% increase or decrease in interest rates is immaterial to the
Company's cash flow, earnings and fair value related to financial instruments.
(See statement on Forward Looking Statements.)
The Company enters into forward exchange contracts to hedge foreign
currency transactions. The Company's forward exchange contracts do not subject
the Company to material risk from exchange rate movements because gains and
losses on such contracts substantially offset gains and losses on the assets or
transactions being hedged. The Company is exposed to credit-related losses in
the event of nonperformance by counterparties to forward exchange contracts, but
the Company does not expect any counterparties to fail to meet their obligations
given their high credit ratings. At December 31, 2003, the Company had $52.2
million of notional value forward currency
27
<PAGE>
exchange contracts outstanding. Notional amounts do not quantify risk or
represent assets or liabilities of the Company, but are used in the calculation
of cash settlements under contracts.
The Consolidated Balance Sheet at December 31, 2003 includes $0.3 million
recorded within Other Current Assets reflecting the fair value of the Company's
outstanding forward exchange contracts. The Company's Consolidated Balance Sheet
at December 31, 2002 includes $0.4 million recorded within other current assets
to reflect the fair value of these contracts. See Note P of Notes to
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data," for additional information on the Company's use of
derivatives.
At December 31, 2003, a hypothetical 10% strengthening or weakening of the
U.S. dollar relative to all other currencies would result in a decrease or
increase in cash flow of approximately $4.9 million. (See statement on Forward
Looking Statements.)
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. This Statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003 and should be applied
prospectively. SFAS No. 149 has no impact on the Company's current accounting
and financial reporting.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which addresses how an issuer classifies and measures financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and is otherwise effective for the
first interim period beginning after June 15, 2003. SFAS No. 150 has no impact
on the Company's current accounting and financial reporting.
The FASB issued Financial Accounting Standards Board Interpretation ("FIN")
No. 46R, "Consolidation of Variable Interest Entities." This Interpretation of
Accounting Research Bulletin No. 51, Consolidated Financial Statements," which
replaces FIN No. 46, addresses the consolidation of entities that are not
controlled through voting interests or in which the equity investors do not bear
the residual economic risks and rewards. These entities have been commonly
referred to as special purpose entities ("SPE"), although other non-SPE-type
entities may be subject to the Interpretation. This Interpretation provides
guidance related to identifying variable interest entities ("VIE"), including
SPE's, and determining whether such entities should be consolidated. Transfers
to a qualifying SPE ("QSPE") and certain other interests in QSPE's are not
subject to this Interpretation. Application of this Interpretation is required
in financial statements of public entities that have interests in VIE's or
potential VIE's commonly referred to as SPE's for periods ending after
December 15, 2003. Application by public entities for all other types of
entities is required in financial statements for periods ending after March 15,
2004. The Company has adopted the disclosure provisions of FIN No. 46R and is
currently evaluating the impact, if any, that FIN No. 46R will have on its
accounting and financial reporting.
OTHER MATTERS
In February 2003, the Compensation Committee of the Board of Directors
approved an exchange offer of cash or restricted stock under the Restricted
Stock Plan for stock options to eligible employees that hold certain stock
options under the Company's 1997 Stock Option Plan (the "Exchange Offer"). The
Exchange Offer was tendered by the Company on March 1, 2004 and will expire on
March 31, 2004.
The determination as to whether an individual will receive restricted stock
or cash was dependent upon the number of underlying eligible options that each
employee held. The amount of restricted stock that will be issued or cash that
will be paid to each employee under the Exchange Offer was calculated using a
discounted option pricing valuation model based on the number of eligible
options held. Assuming all eligible employees accept the Exchange Offer, the
total amount of options to be cancelled will be approximately 5.3 million and
the number of shares of restricted stock that will be issued is approximately 1
million shares. These shares will be issued upon acceptance of the Exchange
Offer at the market price of the Company's Class A Common Stock at that time and
will be expensed over a four-year vesting period. The total amount of the
compensation expense related to the restricted stock
28
<PAGE>
issuance, assuming that all eligible employees accept the Exchange Offer, is
expected to be approximately $15 million. Based on the same assumptions, the
cash payment in conjunction with the Exchange Offer is expected to be
approximately $2 million, which will be expensed in full upon acceptance. A
number of variables will impact the total amount of compensation expense related
to the Exchange Offer, including the market price of the Company's Class A
Common Stock at the date of issuance and the number of employees who accept the
Exchange Offer.
(See Note M of Notes to Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data").
(With respect to all statements made herein regarding the Exchange Offer,
see statement on Forward Looking Statements.)
FORWARD LOOKING STATEMENTS
This Form 10-K contains certain forward looking statements, as such term is
defined in Section 21E of the Securities Exchange Act of 1934, as amended,
relating to future events and the financial performance of the Company. 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 factors listed above
under "Factors Affecting Operating Results and Liquidity" above, which are
not ranked in any particular order.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion under this caption contained in Item 7.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
SOTHEBY'S HOLDINGS, INC.
New York, New York
We have audited the accompanying consolidated balance sheets of Sotheby's
Holdings, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity for each of the three years in the period ended December
31, 2003. Our audits also included the consolidated financial statement schedule
listed at Item 15d. These consolidated financial statements and consolidated
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the consolidated financial
statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sotheby's Holdings, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Notes B and I of the Notes to the Consolidated Financial
Statements, the Company has changed its method of accounting for goodwill to
conform to Statement of Financial Accounting Standards No. 142 on January 1,
2002.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New York
March 12, 2004
30
<PAGE>
SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
------------ ------------ ------------
2003 2002 2001
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Auction and related revenues............................. $309,038 $297,688 $286,513
Other revenues........................................... 10,561 12,844 18,774
-------- -------- --------
Total revenues........................................ 319,599 310,532 305,287
-------- -------- --------
Expenses:
Direct costs of services................................. 46,103 53,075 59,679
Salaries and related costs............................... 144,701 140,136 149,116
General and administrative expenses...................... 94,838 90,552 89,773
Depreciation and amortization expense.................... 25,344 21,871 23,357
Retention costs.......................................... 8,466 22,564 19,754
Net restructuring charges................................ 5,039 1,961 16,532
Special charges.......................................... 3,112 41,042 2,519
-------- -------- --------
Total expenses........................................ 327,603 371,201 360,730
-------- -------- --------
Operating loss........................................... (8,004) (60,669) (55,443)
Interest income.......................................... 2,498 2,509 4,751
Interest expense......................................... (32,832) (22,683) (26,431)
Other income (expense)................................... 762 990 (98)
-------- -------- --------
Loss from continuing operations before taxes............. (37,576) (79,853) (77,221)
Income tax (benefit)..................................... (11,093) (20,391) (32,273)
-------- -------- --------
Loss from continuing operations.......................... (26,483) (59,462) (44,948)
-------- -------- --------
Discontinued operations (Note C):
Income from discontinued operations before taxes... 9,968 8,392 5,675
Income tax expense................................. 4,141 3,685 2,423
-------- -------- --------
Income from discontinued operations...................... 5,827 4,707 3,252
-------- -------- --------
Net loss................................................. $(20,656) $(54,755) $(41,696)
======== ======== ========
Basic and diluted loss per share:
Loss from continuing operations.................... $ (0.43) $ (0.97) $ (0.74)
Earnings from discontinued operations.............. 0.09 0.08 0.05
-------- -------- --------
Basic and diluted loss per share......................... $ (0.34) $ (0.89) $ (0.69)
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
31
<PAGE>
SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31,
------------ ------------
2003 2002
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................................................... $ 62,498 $ 46,097
Restricted cash.................................................................................... 8,179 9,643
Accounts receivable, net of allowance for doubtful accounts of $6,052 and $7,744................... 231,968 275,626
Notes receivable and consignor advances, net of allowance for credit losses of $1,600 and $1,573... 82,253 51,264
Inventory, net..................................................................................... 14,848 13,690
Deferred income taxes.............................................................................. 5,117 11,923
Prepaid expenses and other current assets.......................................................... 45,904 41,175
Current assets held for sale (Note C).............................................................. 29,244 8,055
-------- --------
Total Current Assets............................................................................ 480,011 457,473
-------- --------
Non-Current Assets:
Notes receivable................................................................................... 26,689 44,016
Properties, less allowance for depreciation and amortization of $98,310 and $83,598................ 248,261 230,045
Goodwill........................................................................................... 13,565 13,215
Investments........................................................................................ 28,678 30,355
Deferred income taxes.............................................................................. 101,684 83,877
Other assets....................................................................................... 2,582 1,554
Non-current assets held for sale (Note C).......................................................... -- 15,170
-------- --------
Total Assets.................................................................................... $901,470 $875,705
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Due to consignors.................................................................................. $255,198 $274,327
Credit facility borrowings......................................................................... 20,000 --
Accounts payable and accrued liabilities........................................................... 82,145 93,730
Deferred revenues.................................................................................. 4,787 5,540
Accrued income taxes............................................................................... 4,441 4,145
York Property capital lease obligation ............................................................ 113 --
Deferred gain on sale of York Property............................................................. 1,129 --
Settlement liabilities............................................................................. 5,281 55,542
Current liabilities held for sale (Note C)......................................................... 14,794 14,645
-------- --------
Total Current Liabilities....................................................................... 387,888 447,929
-------- --------
Long-Term Liabilities:
Credit facility borrowings......................................................................... -- 100,000
Long-term debt, net of unamortized discount of $461 and $534....................................... 99,539 99,466
Settlement liabilities............................................................................. 75,498 70,804
York Property capital lease obligation ............................................................ 172,169 --
Deferred gain on sale of York Property............................................................. 20,502 --
Other liabilities.................................................................................. 18,466 17,129
Long-term liabilities held for sale (Note C)....................................................... -- 9
-------- --------
Total Liabilities............................................................................... 774,062 735,337
-------- --------
Shareholders' Equity:
Common Stock, $0.10 par value...................................................................... 6,173 6,153
Authorized shares--125,000,000 of Class A and 77,000,000 of Class B, Issued and outstanding
shares--45,052,339 and 44,981,703 of Class A, and 16,521,150 and 16,549,650 of Class B at
December 31, 2003 and 2002, respectively
Additional paid-in capital......................................................................... 204,567 202,406
Accumulated deficit................................................................................ (78,540) (57,884)
Deferred compensation expense...................................................................... (1,507) --
Accumulated other comprehensive loss............................................................... (3,285) (10,307)
-------- --------
Total Shareholders' Equity...................................................................... 127,408 140,368
-------- --------
Total Liabilities and Shareholders' Equity...................................................... $901,470 $875,705
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
32
<PAGE>
SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
------------ ------------ ------------
2003 2002 2001
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Loss from continuing operations .......................................... $ (26,483) $ (59,462) $ (44,948)
Adjustments to reconcile loss from continuing operations to
net cash used by operating activities:
Depreciation and amortization expense .............................. 25,344 21,871 23,357
(Gain) loss on asset sales.......................................... (53) 191 --
Stock compensation expense ......................................... 387 -- --
Deferred income taxes .............................................. (16,538) (14,911) (40,868)
Tax benefit of stock option exercises .............................. 4 70 70
Asset provisions ................................................... 1,311 1,341 1,899
Asset write-offs ................................................... 686 437 7,043
Other .............................................................. 4,496 2,047 3,420
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ......................... 51,148 (33,843) 87,864
Settlement recovery--related party ................................. -- -- 106,000
(Increase) decrease in inventory ................................... (2,771) (3,830) 1,414
Increase in prepaid expenses and other current assets .............. (5,772) (7,451) (2,168)
(Increase) decrease in other long-term assets ...................... (489) 1,272 651
(Decrease) increase in short-term and long-term settlement
liabilities ..................................................... (50,457) 38,822 (117,906)
(Decrease) increase in due to consignors ........................... (19,626) 55,833 (73,137)
Increase in deferred income tax assets.............................. 5,574 6,224 1,044
Increase (decrease) in accrued income taxes ........................ 44 (8,450) 20,912
Decrease in accounts payable and accrued liabilities and other
liabilities ..................................................... (19,953) (21,354) (2,059)
Operating cash flow from discontinued operations (see Note C) ...... 7,537 279 6,370
--------- --------- ---------
Net cash used by operating activities ........................... (45,611) (20,914) (21,042)
--------- --------- ---------
Investing Activities:
Funding of notes receivable and consignor advances ................. (113,014) (133,258) (73,326)
Collections of notes receivable and consignor advances ............. 98,381 140,263 164,028
Capital expenditures ............................................... (6,596) (13,165) (27,611)
Proceeds from the sale of Chicago Auction Salesroom ................ -- 2,566 --
Proceeds from York Property sale-leaseback ......................... 167,054 -- --
Decrease in investments ............................................ 1,731 1,865 2,297
Investing cash out flow from discontinued operations (see Note C)... (7,197) (1,476) (6,072)
Decrease (increase) in restricted cash ............................. 1,001 (4,346) (4,635)
--------- --------- ---------
Net cash provided (used) by investing activities ................ 141,360 (7,551) 54,681
--------- --------- ---------
Financing Activities:
Proceeds from credit facility borrowings ........................... 145,000 100,000 299,000
Repayments of credit facility borrowings ........................... (225,000) (130,000) (285,000)
Decrease in York Property capital lease obligation ................. (1,584) -- --
Proceeds from exercise of stock options ............................ 43 2,391 1,327
--------- --------- ---------
Net cash (used) provided by financing activities ................ (81,541) (27,609) 15,327
Effect of exchange rate changes on cash ............................ 2,539 2,978 (783)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............... 16,747 (53,096) 48,183
Cash and cash equivalents, beginning of period ..................... 48,656 101,752 53,569
--------- --------- ---------
Cash and cash equivalents, end of period ........................... $ 65,403 $ 48,656 $ 101,752
========= ========= =========
Cash and cash equivalents, end of period:
Continuing operations .............................................. $ 62,498 $ 46,097 $ 99,119
Discontinued operations ............................................ 2,905 2,559 2,633
--------- --------- ---------
$ 65,403 $ 48,656 $ 101,752
========= ========= =========
Non-Cash Activities:
York Property capital lease asset and obligation ................... $ 173,866 $ -- $ --
========= ========= =========
Issuance of common stock related to Shareholder Litigation
settlement ...................................................... $ -- $ -- $ 40,000
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
33
<PAGE>
SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands)
<TABLE>
<CAPTION>
Retained Accumulated
Additional Earnings Deferred Other
Comprehensive Common Paid-In (Accumulated) Compensation Comprehensive
Loss Stock Capital Deficit Expense Loss
------------- ------ ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2001.............. $5,906 $158,424 $ 38,567 $ -- $(14,843)
------ -------- -------- ------- --------
Comprehensive loss:
Net loss............................. $(41,696) (41,696)
Other comprehensive loss,
net of tax--Foreign currency
translation....................... (1,934) (1,934)
--------
Comprehensive loss...................... $(43,630)
========
Stock options exercised................. 4 860
Tax benefit associated with
exercise of stock options............ 70
Issuance of common stock--Shareholder
Litigation Settlement................ 220 39,780
Shares issued to directors.............. 1 511
------ -------- -------- ------- --------
Balance at December 31, 2001............ 6,131 199,645 (3,129) -- (16,777)
------ -------- -------- ------- --------
Comprehensive loss:
Net loss............................. $(54,755) (54,755)
Other comprehensive income,
net of tax--Foreign currency
translation....................... 6,470 6,470
--------
Comprehensive loss...................... $(48,285)
========
Stock options exercised................. 21 2,370
Tax benefit associated with
exercise of stock options............ 70
Shares issued to directors.............. 1 321
------ -------- -------- ------- --------
Balance at December 31, 2002............ 6,153 202,406 (57,884) -- (10,307)
------ -------- -------- ------- --------
Comprehensive loss:
Net loss............................. $(20,656) (20,656)
Other comprehensive income,
net of tax--Foreign currency
translation....................... 7,022 7,022
--------
Comprehensive loss...................... $(13,634)
========
Stock options exercised................. 1 70
Tax benefit associated with
exercise of stock options............ 4
Restricted stock shares issued.......... 16 1,878 (1,894)
Amortization of restricted
stock grants......................... 387
Shares issued to directors.............. 3 209
------ -------- -------- ------- --------
Balance at December 31, 2003............ 6,173 $204,567 $(78,540) $(1,507) $ (3,285)
====== ======== ======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
34
<PAGE>
SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--ORGANIZATION AND BUSINESS
Sotheby's Holdings, Inc. (together with its subsidiaries, unless the
context otherwise requires, the "Company") is one of the world's two largest
auctioneers of fine arts, antiques and collectibles, offering property through
its worldwide Auction segment in approximately 70 collecting categories, among
them fine art, antiques and decorative art, jewelry and collectibles. 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 and collectible purchases and sales through private treaty
sales. The Company also conducts art-related financing activities through its
Finance segment and is engaged, to a lesser extent, in art education activities
and in real estate brokerage activities outside of the United States (the
"U.S.").
The Company was incorporated in Michigan in August 1983. In October 1983,
the Company acquired Sotheby Parke Bernet Group Limited, which was then a
publicly held company listed on the International Stock Exchange of the United
Kingdom and the Republic of Ireland Limited (the "London Stock Exchange") and
which, through its predecessors, had been engaged in the auction business since
1744. In 1988, the Company issued shares of Class A Common Stock to the public.
The Class A Common Stock is listed on the New York Stock Exchange and the London
Stock Exchange.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The Consolidated Financial Statements include
the accounts of Sotheby's Holdings, Inc. and its wholly owned subsidiaries.
Investments in affiliates in which the Company owns between 20% and 50%, but
which it does not control, are accounted for using the equity method (see Note
F). Intercompany transactions and accounts are eliminated.
Revenue Recognition--Auction and Related Revenues, which primarily includes
buyer's premium and seller's commission revenues earned on the hammer price of
property sold at auction, are recognized at the time of sale and are recorded
net of shared and introductory commissions paid to unaffiliated third parties.
Also included in Auction and Related Revenues are subscription revenues,
revenues earned from principal activities and private treaty revenues.
Subscription revenues are earned from the sale of auction catalogues and are
recognized over the period of the subscription. Revenues earned from principal
activities consist of net gains or losses on sales of inventory, the Company's
share of operating earnings or losses from its investment in Acquavella Modern
Art ("AMA") (see Note G), income or loss earned from auction guarantees (see
Note R) and gains or losses related to the sales of loan collateral where the
Company shares in the gain or loss if the property sells either above or below
its cost (see Note E). Gains or losses on sales of inventory and loan collateral
are recognized when an agreement with the purchaser is finalized and the Company
has fulfilled its obligations with respect to the transaction. The recognition
of a loss would be accelerated if the Company determined that an impairment of
the inventory or loan collateral had occurred or an obligation for payment
was probable. The Company's share of operating earnings or losses from its
investment in AMA is recognized on a monthly basis based on the results of AMA
in accordance with the equity method. Income or loss earned from auction
guarantees is recognized at the time of the related auction sale. Private treaty
revenues are earned through the brokering of art and collectible purchases and
sales and are recognized when an agreement with the purchaser is finalized and
the Company has fulfilled its obligations with respect to the transaction.
Other revenues consist principally of interest income earned on Notes
Receivable and Consignor Advances by the Finance segment, as well as revenues
earned from the Company's real estate brokerage and art education activities.
Interest income of the Finance segment is recognized when earned based on the
amount of the outstanding loan and the length of time the loan was outstanding
during the period. Where there is doubt regarding the ultimate collectibility of
principal for impaired loans, any cash receipts subsequently received are
thereafter directly applied to reduce the recorded investment in the loan.
Commissions earned by the Company's real estate brokerage activities are
recognized upon the closing of the related sale and are reported net of
commission payments to independent contractors. Revenues earned from the
Company's art education activities are recognized over the period during which
services are provided.
35
<PAGE>
Direct Costs of Services--Direct Costs of Services, which primarily include
the costs of obtaining and marketing property for auctions, are generally
expensed at the time of sale.
Cash and Cash Equivalents--Cash equivalents are liquid investments
comprised primarily of bank and time deposits with an original maturity of three
months or less. These investments are carried at cost, which approximates fair
value.
Restricted Cash-- Restricted Cash principally consists of amounts or
deposits whose use is restricted by either law or contract and primarily
includes deposits supporting rental obligations in the U.S. and Europe and net
auction proceeds owed to consignors in certain jurisdictions.
Properties--Properties (see Note H) are stated at cost less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Leaseholds
and leasehold improvements are amortized using the straight-line method over the
lesser of the life of the lease or the estimated useful life of the improvement.
Computer software consists of the capitalized cost of purchased computer
software, as well as direct external and internal computer software development
costs incurred in the acquisition or development of software for internal use.
These costs are amortized on a straight-line basis over the estimated useful
life of the software.
The Company capitalizes interest expense on projects when construction
requires a period of time to get the assets ready for their intended use.
Capitalized interest is allocated to properties once placed in service and
amortized over the life of the related assets. Capitalized interest totaled
approximately $0.6 million in 2001. There was no capitalized interest in
2003 or 2002.
Financial Instruments--The carrying amounts of Cash and Cash Equivalents,
Restricted Cash, Notes Receivable, Consignor Advances, and Credit Facility
Borrowings do not materially differ from their estimated fair value due to their
nature and the variable interest rates associated with each of these financial
instruments.
The fair value of Company's long-term debt was approximately $99.6 million
as of December 31, 2003. This amount was determined from quoted market prices.
(See Note J.) The carrying amounts of the fine payable to the United States
Department of Justice and the settlement liability related to the Discount
Certificates issued in connection with the U.S. Antitrust Litigation settlement
approximate their fair value. (See Note S.)
The Company utilizes forward exchange contracts to manage exposures related
to foreign currency risks, which primarily arise from short-term foreign
currency denominated intercompany balances. These contracts are not designated
as hedging instruments under Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, and are recorded in the Consolidated Balance Sheets at
fair value, which is based on quoted market prices. Changes in the fair value of
the Company's forward exchange contracts are recognized currently in earnings
and are generally offset by the revaluation of the underlying intercompany
balances in accordance with SFAS No. 52, "Foreign Currency Translation." (See
Note P.)
Inventory--Inventory consists of objects purchased for investment purposes,
as well as objects obtained incidental to the auction process. Inventory is
valued at the lower of cost or management's estimate of net realizable value.
(See Note F.)
Allowance for Doubtful Accounts--The Company's management evaluates
specific accounts receivable balances when it becomes aware of a situation where
a client may not be able to meet its financial obligations to the Company. The
amount of the required allowance is based on the facts available to management
and is reevaluated and adjusted as additional information is received.
Allowances are also established for probable losses inherent in the remainder of
the accounts receivable balance based on historical collection data for certain
aged receivable categories.
Allowance for Credit Losses--The Company's management evaluates specific
loans when it becomes aware of a situation where there is doubt as to the
collectibility of the loan. The amount of the required allowance is based on the
facts available to management and is reevaluated and adjusted as additional
information is received. Secured loans that may not be collectible are analyzed
based on the current estimated realizable value of the collateral securing each
loan, as well as the current creditworthiness and financial condition of each
borrower. The Company establishes reserves for such secured loans that
management believes are under-collateralized, and with respect to which, the
under-collateralized amount may not be collectible from the borrower. Unsecured
loans are analyzed based on management's estimate of the current collectibility
of each loan, taking into account the current
36
<PAGE>
creditworthiness and financial condition of the borrower. A reserve is also
established for probable losses inherent in the remainder of the loan portfolio
based on historical data related to loan write-offs. (See Note E.)
Goodwill--Prior to January 1, 2002, goodwill was amortized on a
straight-line basis over useful lives ranging from fifteen to forty years. On
January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with SFAS No. 142, goodwill is not amortized,
but is tested for impairment on at least an annual basis. (See Note I.)
Impairment of Long-Lived Assets--Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. In such situations,
long-lived assets are considered impaired when estimated future cash flows
(undiscounted and without interest charges) resulting from the use of the asset
and its eventual disposition are less than the asset's carrying amount.
Auction Guarantees--In the first quarter of 2003, the Company adopted the
recognition and measurement provisions of Financial Accounting Standards Board
Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," for guarantees issued or modified after December 31, 2002. The
liability related to Company's outstanding auction guarantees is recorded in the
Consolidated Balance Sheets at fair value, which is estimated based on an
analysis of historical loss experience related to auction guarantees.
Earnings (Loss) Per Share--Basic earnings (loss) per share is calculated by
dividing net income (loss) by the weighted average number of outstanding shares
of common stock. Because the Company reported a net loss in 2003, 2002 and 2001,
stock options and unvested shares of restricted stock are excluded from the
calculation of the weighted average number of shares for all years presented, as
they would be anti-dilutive. The weighted average number of shares used for
calculating basic and diluted earnings (loss) per share are as follows:
<TABLE>
<CAPTION>
2003 2002 2001
---- ---- ----
(In millions)
<S> <C> <C> <C>
Basic...................................................... 61.6 61.5 60.7
Dilutive effect of options and unvested restricted stock... -- -- --
---- ---- ----
Diluted.................................................... 61.6 61.5 60.7
==== ==== ====
</TABLE>
In 2003, 2002 and 2001, there were no reconciling items between the net
loss used in calculating basic and diluted loss per share.
Foreign Currency Translation--Assets and liabilities of foreign
subsidiaries are translated at year-end exchange rates. Income statement amounts
are translated using weighted average monthly exchange rates during the year.
Gains and losses resulting from translating foreign currency financial
statements are recorded in accumulated other comprehensive income (loss) until
the subsidiary is sold or liquidated.
Stock-Based Compensation--As permitted under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has elected to measure stock-based
compensation for the 1987 Stock Option Plan and the 1997 Stock Option Plan using
the intrinsic value approach under APB Opinion No. 25, the former standard. If
the former standard for measurement is elected, SFAS No. 123 requires
supplemental disclosure to show the effects of using this measurement criteria.
Had compensation cost for the 1987 Stock Option Plan and the 1997 Stock
Option Plan been determined based on the fair value at the grant date for awards
subsequent to January 1, 1995 consistent with the provisions of SFAS No. 123,
the Company's net loss and loss per share would have been equal to the pro forma
amounts indicated below:
37
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
(Thousands of dollars,
except per share data)
<S> <C> <C> <C>
Net loss, as reported ........................................ $(20,656) $(54,755) $(41,696)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of tax effects ........................................ (8,625) (16,935) (24,284)
-------- -------- --------
Pro forma net loss ........................................... $(29,281) $(71,690) $(65,980)
======== ======== ========
Loss per share:
Basic and diluted loss per share--as reported ............. $ (0.34) $ (0.89) $ (0.69)
======== ======== ========
Basic and diluted loss per share--pro forma ............... $ (0.48) $ (1.17) $ (1.09)
======== ======== ========
</TABLE>
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 issued in 2003, 2002 and 2001:
<TABLE>
<CAPTION>
2003 2002 2001
---------- --------- ---------
<S> <C> <C> <C>
Dividend yield............................. -- -- --
Expected volatility........................ 49.8% 53.7% 39.0%
Risk-free rate of return................... 3.2% 3.7% 5.5%
Expected life.............................. 4.5 years 2.6 years 4.5 years
</TABLE>
The compensation cost generated by the Black-Scholes model may not be
indicative of the future benefit received by the option holder.
(See Note M for additional information on the 1987 Stock Option Plan, the
1997 Stock Option Plan and the Restricted Stock Plan.)
Valuation Allowance for Deferred Tax Assets--The Company records a
valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. In assessing the need for the valuation
allowance management considers, among other things, its projections of future
taxable income and ongoing prudent and feasible tax planning strategies.
Reclassifications--Certain amounts in the 2002 and 2001 Consolidated
Financial Statements have been reclassified from Cash to Restricted Cash to
conform to the current year 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 materially from those
estimates and could change in the short-term.
Comprehensive Income (Loss)--SFAS No. 130, "Reporting Comprehensive
Income," requires certain transactions to be included as adjustments to net
income (loss) in order to report comprehensive income (loss). The Company's
comprehensive income (loss) includes the net income (loss) for the period, as
well as other comprehensive income (loss). Other comprehensive income (loss)
consists of the change in the foreign currency translation adjustment amount
during the period and is reported in the Consolidated Statement of Changes in
Shareholders' Equity. The foreign currency translation adjustment amount is
included in accumulated other comprehensive income (loss) in the Consolidated
Balance Sheets.
38
<PAGE>
Recently Issued Accounting Standards--In April 2003, the Financial
Accounting Standards Board (the "FASB") issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. This Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003 and should be applied prospectively. SFAS No. 149 has no impact on the
Company's current accounting and financial reporting.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which addresses how an issuer classifies and measures financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and is otherwise effective for the
first interim period beginning after June 15, 2003. SFAS No. 150 has no impact
on the Company's current accounting and financial reporting.
The FASB issued FIN No. 46R, "Consolidation of Variable Interest Entities."
This Interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," which replaces FIN No. 46, addresses the consolidation of
entities that are not controlled through voting interests or in which the equity
investors do not bear the residual economic risks and rewards. These entities
have been commonly referred to as special purpose entities ("SPE"), although
other non-SPE-type entities may be subject to the Interpretation. This
Interpretation provides guidance related to identifying variable interest
entities ("VIE"), including SPE's, and determining whether such entities should
be consolidated. Transfers to a qualifying SPE ("QSPE") and certain other
interests in QSPE's are not subject to this Interpretation. Application of this
Interpretation is required in financial statements of public entities that have
interests in VIE's or potential VIE's commonly referred to as SPE's for periods
ending after December 15, 2003. Application of public entities for all other
types of entities is required in financial statements for periods ending after
March 15, 2004. The Company has adopted the disclosure provisions of FIN No. 46R
and is currently evaluating the impact, if any, that FIN No. 46R will have on
its accounting and financial reporting.
NOTE C--DISCONTINUED OPERATIONS
In the fourth quarter of 2003, the Company committed to a plan to sell its
domestic real estate brokerage business, Sotheby's International Realty, Inc.
("SIR"). Accordingly, the assets and liabilities of SIR are classified as held
for sale in the Consolidated Balance Sheets, and its operating results are
reported as discontinued operations in the Consolidated Statements of
Operations. SIR was the principal component of the Company's Real Estate segment
(see Note D).
On February 17, 2004, the Company consummated the sale of SIR to a
subsidiary of Cendant Corporation ("Cendant") and recognized pre-tax income
in the range of $75 million in the first quarter of 2004.
Additionally, in conjunction with this transaction, the Company entered
into an agreement with Cendant to license the Sotheby's International Realty
trademark and certain related trademarks in exchange for an ongoing license fee
based on the volume of commerce transacted under the trademarks. The license
agreement, which is for an initial 50-year term with a 50-year renewal option,
is applicable to Canada, Israel, Mexico, the U.S. and certain Caribbean
countries.
The other non-U.S. offices and affiliates of the Company's real estate
brokerage business, which are not significant to the Company's overall
operations, will continue to operate as Sotheby's International Realty under
current management. Accordingly, the assets and liabilities of such offices and
affiliates are not classified as held for sale in the Consolidated Balance
Sheets, and their operating results are not reported as discontinued operations
in the Consolidated Statements of Operations. Cendant has an option to acquire
certain of these offices and affiliates and a license to use the related
trademarks in other countries outside the U.S. during the five-year period
following February 17, 2004 for a nominal amount.
The total purchase price paid by Cendant for SIR's company-owned real
estate brokerage operations, as well as the license agreement was approximately
$100.7 million, consisting of $98.9 million in cash and the assumption of a
$1.8 million note payable. Net cash proceeds from the sale, after decucting
approximately $5 million in transaction costs, were $93.9 million.
39
<PAGE>
The following is a summary of the operating results of SIR for 2003, 2002
and 2001:
<TABLE>
<CAPTION>
For the year ended
December 31,
---------------------------
2003 2002 2001
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Revenues .......................................... $37,543 $34,563 $30,876
Expenses .......................................... 27,706 26,153 25,204
------- ------- -------
Operating income .................................. 9,837 8,410 5,672
Other income (expense) ............................ 131 (18) 3
------- ------- -------
Income from discontinued operations before taxes... 9,968 8,392 5,675
Income tax expense ................................ 4,141 3,685 2,423
------- ------- -------
Income from discontinued operations ............... $ 5,827 $ 4,707 $ 3,252
======= ======= =======
</TABLE>
The following is a summary of the assets and liabilities of SIR as of
December 31, 2003 and 2002:
<TABLE>
<CAPTION>
December 31, December 31,
2003 2002
------------ ------------
(Thousands of dollars)
<S> <C> <C>
Assets:
Cash and cash equivalents ..................... $ 2,905 $ 2,559
Restricted cash ............................... 1,157 3,994
Accounts receivable, net ...................... 901 1,103
Properties, net ............................... 10,679 --
Goodwill ...................................... 10,089 --
Other current assets .......................... 3,513 399
------- -------
Current assets held for sale ............... 29,244 8,055
Properties, net ............................... -- 10,751
Goodwill ...................................... -- 3,338
Other non-current assets ...................... -- 1,081
------- -------
Assets held for sale ....................... $29,244 $23,225
======= =======
Liabilities:
Accounts payable and accrued liabilities ...... $10,956 $12,910
Other current liabilities ..................... 2,143 1,735
Long-term liabilities ......................... 1,695 --
------- -------
Current liabilities held for sale .......... 14,794 14,645
Long-term liabilities ......................... -- 9
------- -------
Liabilities held for sale .................. $14,794 $14,654
======= =======
</TABLE>
On October 28, 2003, SIR acquired the brokerage offices of Jackson Hole
Realty ("JHR") in Jackson, Wyoming for a total acquisition cost of $7.2 million.
The total acquisition cost consisted of $5 million in cash, a $1.9 million note
payable due to the previous owners and $0.3 million in costs directly related to
the transaction. The purpose of the acquisition was to significantly increase
SIR's presence in the Jackson Hole market. JHR's results are included in Income
from Discontinued Operations beginning on October 28, 2003. The acquisition cost
was allocated as follows (in thousands of dollars):
<TABLE>
<CAPTION>
<S> <C>
Goodwill............................................................... $6,510
Properties............................................................. 366
Acquired intangible asset, exclusive right............................. 292
------
Total allocation of acquisition cost ............................... $7,168
======
</TABLE>
40
<PAGE>
NOTE D--SEGMENT REPORTING
The Company's continuing operations are organized under two business
segments - Auction and Finance. The domestic operations of the Company's real
estate brokerage business, which was the principal component of the Real Estate
segment, has been classified as discontinued operations and is no longer
included in this presentation. The non-U.S. offices and affiliates of the
Company's remaining real estate brokerage activities are not a reportable
operating segment because they are not significant to the Company's overall
operations. (See Note C for further information on discontinued operations.)
The Company's segments are strategic business units that offer different
services. They are managed separately because each business requires different
resources and strategies. The Company's chief operating decision making group,
which is comprised of the Chief Executive Officer and the senior executives of
both of the Company's segments, regularly evaluates financial information about
these segments in deciding how to allocate resources and in assessing
performance. The performance of each segment is measured based on its profit or
loss from operations before taxes and excluding Special Charges (see Note S),
costs related to the Company's retention programs (see Note T) and Net
Restructuring Charges (see Note U), as well as the amortization of certain
interest charges related the DOJ antitrust fine and the settlement of the U.S.
Antitrust Litigation (see Note S).
The Auction segment is an aggregation of operations in North America,
Europe and Asia as they are similar in service, customers and the way in which
the service is provided. The Auction segment conducts live auctions of fine
arts, antiques and collectibles 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 and collectible purchases and sales through private treaty
sales. The Finance segment provides art-related financing generally secured by
works of art that the Company either has in its possession or that the Company
permits the borrower to possess (see Note E). "All Other" primarily includes art
education activities and the Company's remaining real estate brokerage
activities, which are conducted outside the U.S.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note B). Revenues are
attributed to geographic areas based on the location of the actual sale.
The following tables present the Company's segment information for the
years ended December 31, 2003, 2002 and 2001:
<TABLE>
<CAPTION>
All
For the year ended December 31, 2003 Auction Finance Other Total
- ------------------------------------ -------- ------- ------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Revenues............................ $309,038 $ 5,310 $ 5,251 $319,599
Interest income..................... $ 6,795 $ -- $ 15 $ 6,810
Interest expense.................... $ 28,358 $ 294 $ 55 $ 28,707
Depreciation and amortization....... $ 24,975 $ -- $ 156 $ 25,131
Segment loss........................ $(10,913) $(1,957) $(1,726) $(14,596)
</TABLE>
<TABLE>
<CAPTION>
All
For the year ended December 31, 2002 Auction Finance Other Total
- ------------------------------------ -------- ------- ------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Revenues............................ $297,688 $ 5,997 $ 6,847 $310,532
Interest income..................... $ 7,020 $ 31 $ 41 $ 7,092
Interest expense.................... $ 19,708 $ 307 $ 44 $ 20,059
Depreciation and amortization....... $ 21,429 $ -- $ 244 $ 21,673
Segment loss........................ $ (8,014) $ (440) $(1,487) $ (9,941)
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
All
For the year ended December 31, 2001 Auction Finance Other Total
- ------------------------------------ -------- ------- ------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Revenues............................ $286,513 $11,303 $ 7,471 $305,287
Interest income..................... $ 14,338 $ -- $ 66 $ 14,404
Interest expense.................... $ 23,197 $ 307 $ 1 $ 23,505
Depreciation and amortization....... $ 22,881 $ -- $ 237 $ 23,118
Segment loss........................ $(31,181) $ (913) $(1,830) $(33,924)
</TABLE>
The following is a reconciliation of the totals reported for the Company's
reportable operating segments to the applicable line items in the Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
2003 2002 2001
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Revenues:
Total revenues for reportable operating segments $314,348 $303,685 $297,816
Other revenues 5,251 6,847 7,471
-------- -------- --------
Total revenues $319,599 $310,532 $305,287
======== ======== ========
Loss from continuing operations before taxes:
Total loss before taxes for reportable segments $(12,870) $ (8,454) $(32,094)
All Other (1,726) (1,487) (1,830)
Unallocated amounts:
Special Charges (see Note S) (3,112) (41,042) (2,519)
Amortization of discount related to DOJ
antitrust fine (see Note S) (2,358) (2,624) (2,926)
Amortization of discount related to Discount
Certificates (see Note S) (1,767) -- --
Retention Costs (see Note T) (8,466) (22,564) (19,754)
Net Restructuring Charges (see Note U) (5,039) (1,961) (16,532)
Unallocated expenses related to
discontinued operations (a) (see Note C) (2,237) (1,720) (1,566)
-------- -------- --------
Loss from continuing operations before taxes $(37,575) $(79,852) $(77,221)
======== ======== ========
</TABLE>
(a) Represents amounts previously allocated to the Company's discontinued
domestic real estate brokerage business, which represent expenses of
the Company's ongoing operations.
42
<PAGE>
Other significant reconciling items related to the Company's segment
information are listed below:
<TABLE>
<CAPTION>
Segment Reconciling Consolidated
Totals Items Total
------- ----------- ------------
(Thousands of dollars)
<S> <C> <C> <C>
For the year ended December 31, 2003:
Interest income................... $ 6,810 $(4,312)(a) $ 2,498
Interest expense.................. $28,707 $ 4,125 (b) $32,832
Depreciation expense $25,131 $ 213 (c) $25,344
For the year ended December 31, 2002:
Interest income................... $ 7,092 $(4,583)(a) $ 2,509
Interest expense.................. $20,059 $ 2,624 (b) $22,683
Depreciation expense $21,673 $ 199 (c) $21,872
For the year ended December 31, 2001:
Interest income................... $14,404 $(9,653)(a) $ 4,751
Interest expense.................. $23,505 $ 2,926 (b) $26,431
Depreciation expense $23,118 $ 239 (c) $23,357
</TABLE>
(a) Represents the elimination of interest charged by Auction to
Finance for funding Finance's loan portfolio.
(b) Represents the amortization of certain interest charges related
to the DOJ antitrust fine and the settlement of the U.S.
Antitrust Litigation (see Note S).
(c) Represents unallocated corporate depreciation and amortization
expense related to discontinued operations (see Note C).
Information concerning geographical areas for the Company's continuing
operations is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
2003 2002 2001
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Revenues:
United States................... $125,280 $134,446 $142,328
United Kingdom.................. 129,146 123,323 114,962
Other International Countries... 65,173 52,763 47,997
-------- -------- --------
Total........................ $319,599 $310,532 $305,287
======== ======== ========
</TABLE>
As of December 31, 2003 and 2002 total assets for the Company's segments are:
<TABLE>
<CAPTION>
2003 2002
-------- --------
(Thousands of dollars)
<S> <C> <C>
Auction..... $651,150 $646,099
Finance..... 107,678 102,676
All Other... 1,574 4,033
-------- --------
Total.... $760,402 $752,808
======== ========
</TABLE>
43
<PAGE>
The following is a reconciliation of Assets for the Company's reportable
operating segments to the amounts reported in the Consolidated Balance Sheets:
<TABLE>
<CAPTION>
As of December 31,
----------------------
2003 2002
-------- --------
(Thousands of dollars)
<S> <C> <C>
Total Assets for reportable operating segments... $758,828 $748,775
All Other assets................................. 1,574 4,033
Deferred tax assets.............................. 106,801 95,800
Assets held for sale ............................ 29,244 23,225
Unallocated assets related to discontinued
operations(a).................................. 5,023 3,872
-------- --------
Consolidated assets........................... $901,470 $875,705
======== ========
</TABLE>
(a) Represents amounts previously allocated to the Company's
discontinued domestic real estate brokerage business, which
represent assets of the Company's ongoing operations.
NOTE E--RECEIVABLES
Accounts Receivable--Accounts Receivable primarily relates to the Company's
Auction segment. 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 for 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, under negotiated contractual arrangements or when
the purchaser takes possession of the property before payment is made, the
Company is liable to the consignor for the net sale proceeds. As of December 31,
2003 and 2002, Accounts Receivable included approximately $96.7 million and
$90.7 million, respectively, of such amounts due from purchasers. As of December
31, 2003, approximately $85 million of the amount outstanding at December 31,
2002 had been collected. As of March 1, 2004, approximately $71.8 million of the
amount outstanding at December 31, 2003 had been collected. Management believes
that adequate allowances have been established to provide for potential losses
on any uncollected amounts.
As of December 31, 2003 and 2002, Accounts Receivable consisted of the
following:
<TABLE>
<CAPTION>
As of December 31,
----------------------
2003 2002
-------- --------
(Thousands of dollars)
<S> <C> <C>
Accounts receivable ............... $238,020 $283,370
Allowance for doubtful accounts ... (6,052) (7,744)
-------- --------
Total .......................... $231,968 $275,626
======== ========
</TABLE>
Notes Receivable and Consignor Advances--The Company provides certain
collectors and dealers with financing generally secured by works of art that the
Company either has in its possession or permits the borrower to possess.
Although the Company's general policy is to make secured loans at loan to value
ratios (principal loan amount divided by the low auction estimate of the
collateral) of 50% or lower, the Company will lend at loan to value ratios
higher than 50%. The Company generally makes two types of secured loans: (1)
advances secured by consigned property to borrowers who are contractually
committed, in the near term, to sell the property at auction (a "consignor
advance"); and (2) general purpose term loans to collectors or dealers secured
by property not presently intended for sale. The consignor advance allows a
consignor to receive funds shortly after consignment for an auction that will
occur several weeks or months in the future, while preserving for the benefit of
the consignor the potential of the auction process. The general purpose secured
loans allow the Company to establish or enhance a mutually beneficial
relationship with dealers and collectors. The loans are generally made with full
recourse to the borrower. In certain instances, however, loans are made with
recourse limited to the works of art pledged as security for the loan. To the
extent that the Company is looking wholly or partially to the collateral for
repayment of its loans, repayment can be adversely impacted by a decline in the
art market in general or in the value of the particular collateral. In addition,
in situations where the borrower becomes subject to bankruptcy or insolvency
laws, the Company's ability to realize on its collateral may be limited or
delayed by the application of such laws. Under certain circumstances, the
Company also makes unsecured loans to collectors and dealers. Included in Notes
Receivable and Consignor Advances are unsecured loans totaling $11.3 million and
$23.2 million at December 31, 2003 and 2002, respectively.
44
<PAGE>
In certain situations, the Company also finances the purchase of works of
art by certain art dealers through unsecured loans. The property purchased
pursuant to such unsecured loans is sold by the dealer or at auction with any
net profit or loss shared by the Company and the dealer. Interest income related
to such unsecured loans is reflected in the results of the Finance segment,
while the Company's share of any profit or loss is reflected in the results of
the Auction segment. The total of all such unsecured loans was $7.8 million and
$17.0 million at December 31, 2003 and 2002, respectively. These amounts are
included in the total unsecured loan balances provided in the previous
paragraph.
As of December 31, 2003 and 2002, Notes Receivable and Consignor Advances
consisted of the following:
<TABLE>
<CAPTION>
As of December 31,
----------------------
2003 2002
-------- -------
(Thousands of dollars)
<S> <C> <C>
Current:
Notes receivable and consignor advances, net of allowance
for credit losses of $1,600 and $1,573 ................. $ 76,390 $50,470
Prefunded auction guarantees (see Note R) ................. 5,863 794
-------- -------
Sub-total .............................................. 82,253 51,264
Non-current:
Notes receivable and consignor advances ................... 26,689 44,016
-------- -------
Total ............................................... $108,942 $95,280
======== =======
</TABLE>
At December 31, 2003, one consignor advance comprised approximately 37% of
net Notes Receivable and Consignor Advances (current and non-current). The
Company collected the entire outstanding balance of this consignor advance in
February 2004.
The weighted average interest rates charged on Notes Receivable and
Consignor Advances were 5.5% and 5.3% during 2003 and 2002, respectively.
Notes Receivable and Consignor Advances included loans to employees of $0.2
million and $0.6 million at December 31, 2003 and 2002, respectively. The
weighted average interest rates on these loans were 5.5% and 6.1% at December
31, 2003 and 2002, respectively.
Changes in the Allowance for Credit Losses relating to Notes Receivable and
Consignor Advances during 2003 and 2002 were as follows:
<TABLE>
<CAPTION>
2003 2002
------ ------
(Thousands of dollars)
<S> <C> <C>
Allowance for credit losses at January 1 ........... $1,573 $1,436
Change in loan loss provision ...................... 548 338
Write-offs ......................................... (537) (238)
Foreign currency exchange rate changes ............. 16 37
------ ------
Allowance for credit losses at December 31 ......... $1,600 $1,573
====== ======
</TABLE>
45
<PAGE>
NOTE F--INVENTORY
Inventory consists of objects purchased for investment purposes, as well as
objects obtained incidental to the auction process primarily as a result of the
failure of guaranteed property to sell at auction at or above the minimum price
guaranteed by the Company (see Note R), defaults by purchasers after the
consignor has been paid and honoring the claims of purchasers. The cost of
inventory and the related allowances to adjust the cost to management's
estimated net realizable value as of December 31, 2003 and 2002 are as follows:
<TABLE>
<CAPTION>
As of December 31,
--------------------
2003 2002
------- -------
(Thousands of dollars)
<S> <C> <C>
Inventory, at cost ................... $20,269 $17,699
Net realizable value allowances ...... (5,421) (4,009)
------- -------
Total ............................. $14,848 $13,690
======= =======
</TABLE>
NOTE G--INVESTMENTS
On May 23, 1990, the Company purchased the common stock of the Pierre
Matisse Gallery Corporation ("Matisse") for approximately $153 million. The
assets of Matisse consisted of a collection of fine art (the "Matisse
Inventory"). Upon consummation of the purchase, the Company entered into the AMA
partnership agreement with Acquavella Contemporary Art, Inc. ("ACA") and
contributed the Matisse Inventory to AMA. The purpose of AMA is to sell the
Matisse Inventory. The term of the AMA partnership agreement, which was extended
for one year in February 2004, expires on March 31, 2005.
The Company does not control AMA; consequently, the Company uses the equity
method to account for its investment in AMA and accordingly records its share of
AMA's operating earnings (losses) within Auction and Related Revenues in the
Consolidated Statements of Operations. The Company's 50% interest in the net
assets of AMA is included in Investments in the Consolidated Balance Sheets. The
carrying value of the Company's investment in AMA totaled $27.1 million and
$28.7 million as of December 31, 2003 and 2002, respectively. The Company's
share of AMA's earnings totaled $0.1 million in 2003 and 2001, and $0.9 million
in 2002.
Pursuant to the AMA partnership agreement, upon the death of the majority
shareholder of ACA, the successors-in-interest to ACA have the right, but not
the obligation, to require the Company to purchase their interest in AMA at a
price equal to the fair market value of such interest. The fair market value
shall be determined by independent accountants pursuant to a process and a
formula set forth in the partnership agreement that includes an appraisal of the
works of art held by AMA at such time. The net assets of AMA consist principally
of the Matisse Inventory. At December 31, 2003, the carrying value of this
inventory was $79.7 million.
Cash distributions from AMA are split evenly with ACA since the Company has
received the return of its initial investment. To the extent that AMA requires
working capital, the Company has agreed to lend the same to AMA. As of December
31, 2003 and 2002, no such amounts were outstanding.
At December 31, 2003 and 2002, the carrying value of the Company's
investments in another affiliate was $1.5 million and $1.6 million,
respectively. The Company does not control this affiliate; consequently, the
Company uses the equity method to account for its investment. The Company has
agreed to lend this affiliate up to $1.5 million under a revolving line of
credit. As of December 31, 2003 and 2002, no amounts were outstanding under this
line of credit.
46
<PAGE>
NOTE H--PROPERTIES
Properties consists of the following:
<TABLE>
<CAPTION>
As of December 31,
-------------------
2003 2002
-------- --------
(Thousands of dollars)
<S> <C> <C>
Land ............................................... $ -- $ 20,423
York Property capital lease (see Note L) ........... 173,866 --
Buildings and building improvements ................ 2,431 134,630
Leasehold improvements ............................. 61,225 57,334
Computer hardware and software ..................... 56,321 52,978
Furniture, fixtures and equipment .................. 47,014 44,912
Construction in progress ........................... 4,160 1,516
Other .............................................. 1,554 1,850
-------- --------
346,571 313,643
Less: accumulated depreciation and amortization .... (98,310) (83,598)
-------- --------
Total ........................................... $248,261 $230,045
======== ========
</TABLE>
On February 7, 2003, the Company completed the sale of its headquarters
building at 1334 York Avenue in New York, New York (the "York Property") to an
affiliate of RFR Holding LLC ("RFR") for $175 million in cash. Net cash proceeds
of approximately $167 million, after deducting taxes and fees related to the
transaction, were used in part to refinance $100 million in outstanding
borrowings under the senior secured term facility of the Company's previous
credit agreement (see Note J). The Company is leasing the York Property back
from RFR for an initial 20-year term, with options for the Company to extend the
lease for two additional 10-year terms. The resulting lease is being accounted
for as a capital lease (see Note L).
The sale of the York Property resulted in a deferred gain of approximately
$23 million, which is being amortized on a straight-line basis to Depreciation
and Amortization Expense over the initial 20-year lease term.
The Company's obligations under the GE Capital Credit Agreement are secured
by substantially all of the assets of the Company. (See Note J.)
NOTE I--GOODWILL
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with SFAS No. 142, goodwill is not amortized,
but is tested for impairment on at least an annual basis. The Company completed
a transitional impairment test as of the date of adoption, as well as its annual
impairment test for 2003, and concluded that its goodwill was not impaired.
The table below reconciles the net loss and loss per share reported for the
year ended December 31, 2001 to the adjusted net loss and loss per share, which
is presented as if the Company adopted SFAS No. 142 on January 1, 2001. The
table below also compares the adjusted 2001 net loss and loss per share to the
net loss and loss per share for 2003 and 2002.
47
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
2003 2002 2001
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Reported net loss............................. $(20,656) $(54,755) $(41,696)
Goodwill amortization, net of taxes........... -- -- 1,086
-------- -------- --------
Adjusted net loss............................. $(20,656) $(54,755) $(40,610)
======== ======== ========
Reported loss per share....................... $ (0.34) $ (0.89) $ (0.69)
Goodwill amortization, net of taxes........... -- -- 0.02
-------- -------- --------
Adjusted loss per share....................... $ (0.34) $ (0.89) $ (0.67)
======== ======== ========
</TABLE>
Goodwill related to the Company's continuing operations is entirely
attributable to the Auction segment. During 2003 and 2002, changes in the
carrying value of such Goodwill were as follows:
<TABLE>
<CAPTION>
2003 2002
------- -------
(Thousands of dollars)
<S> <C> <C>
Balance as of January 1 ................................. $13,215 $13,307
Foreign currency exchange rate changes and other
activity ............................................. 350 (92)
------- -------
Balance as of December 31 ............................... $13,565 $13,215
======= =======
</TABLE>
As of December 31, 2003 and 2002, Goodwill related to the Company's
discontinued domestic real estate brokerage business totaled $10.1 million and
$3.3 million, respectively. (See Note C).
NOTE J--CREDIT ARRANGEMENTS
Bank Credit Facilities--On February 7, 2003, the Company refinanced $100
million in outstanding borrowings under the senior secured term facility of its
previous credit agreement (the "Amended and Restated Credit Agreement") in
conjunction with a sale-leaseback transaction involving the York Property (see
Note H). Additionally, on that date, the Company extended the maturity date of
the Amended and Restated Credit Agreement from February 11, 2003 to February 6,
2004. As a result of this extension, the Company paid amendment and arrangement
fees of $1.7 million, which were amortized to interest expense over the extended
term of the agreement. On February 3, 2004, the Company further extended the
maturity date of the Amended and Restated Credit Agreement to March 5, 2004. On
March 4, 2004, the Company used existing cash balances to repay the remaining
$20 million in borrowings outstanding under the senior secured term facility of
the Amended and Restated Credit Agreement.
As of December 31, 2003 and 2002, the Company had outstanding borrowings of
$20 million and $100 million, respectively, under the senior secured term
facility of the Amended and Restated Credit Agreement. The amount outstanding as
of December 31, 2002 was classified as long-term in the Consolidated Balance
Sheets due to the refinancing of such amount in conjunction with the
sale-leaseback transaction described above. During 2003 and 2002, the weighted
average interest rate charged on outstanding borrowings under the Amended and
Restated Credit Agreement was approximately 5.2%.
On March 4, 2004, the Company entered into a new senior secured credit
agreement with General Electric Capital Corporation (the "GE Capital Credit
Agreement"). The GE Capital Credit Agreement is available through March 4, 2007
and provides for borrowings of up to $200 million, of which $100 million is
currently committed and the remainder is in the process of being offered to an
international syndicate of lenders. Because of the Company's decreased need for
external capital resources due to the net cash proceeds received from the sale
of its domestic real estate brokerage business, as described above, the Company
may ultimately decide to limit the aggregate amount committed for borrowings
under the GE Capital Credit Agreement to an amount that is less than $200
million.
Borrowings under the GE Capital Credit Agreement are available for the
funding of the Company's ordinary working capital requirements and general
corporate needs. To date, the Company has paid arrangement fees of $1.8 million
related to the GE Capital Credit Agreement, which will be amortized to interest
expense over the three-year term of the agreement.
48
<PAGE>
The Company's obligations under the GE Capital Credit Agreement are secured
by substantially all of the assets of the Company, as well as the assets of its
subsidiaries in the U.S. and the U.K. The GE Capital Credit Agreement also
contains financial covenants requiring the Company to not exceed a certain
maximum level of capital expenditures and to meet certain quarterly fixed charge
coverage ratio tests. Additionally, the GE Capital Credit Agreement has a
covenant that prohibits the Company from making dividend payments.
At the option of the Company, borrowings under the GE Capital Credit
Agreement generally bear interest equal to: (i) 1.25% plus the higher of the
Prime Rate or the Federal Funds Rate plus 0.5%, or (ii) LIBOR plus 2.75%.
Beginning on March 31, 2005, the applicable interest rate charged for borrowings
under the GE Capital Revolving Facility may be adjusted up or down depending on
the Company's performance under the quarterly fixed charge coverage ratio tests.
Senior Unsecured Debt--In February 1999, the Company issued a tranche of
long-term debt securities (the "Notes"), pursuant to the Company's $200 million
shelf registration with the Securities and Exchange Commission, for an aggregate
offering price of $100 million. The ten-year Notes have an effective interest
rate of 6.98% payable semi-annually in February and August.
The Notes have covenants that impose limitations on the Company from
placing liens on certain property and entering into certain sale-leaseback
transactions. The Company is in compliance with these covenants.
An event of default related to the GE Capital Credit Agreement discussed
above does not, in and of itself, constitute an event of default under the
Indenture pursuant to which the Notes were issued.
If and to the extent required under the Indenture pursuant to which the
Notes were issued and subject to certain exceptions contained in the Indenture,
the security documents executed in connection with the GE Capital Credit
Agreement provide that the obligations under the Notes shall be secured equally
and ratably with that portion of the obligations under the GE Capital Credit
Agreement that exceed the permitted exceptions contained in the Indenture.
Interest Expense--During 2003, 2002 and 2001, interest expense related to
the Company's continuing operations was $32.8 million, $22.7 million and $26.4
million, respectively, and consisted of the following:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
2003 2002 2001
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Amended and Restated Credit Agreement:
Interest expense on outstanding borrowings ................... $ 1,979 $ 6,800 $ 9,834
Amortization of amendment and arrangement fees ............... 1,929 4,492 5,162
Commitment fees .............................................. 358 482 644
------- ------- -------
Sub-total ................................................. 4,266 11,774 15,640
------- ------- -------
Interest expense on York Property capital lease obligation
(see Note L) ................................................. 16,119 -- --
Interest expense on long-term debt .............................. 6,948 6,943 6,938
Amortization of discount related to DOJ antitrust fine
(see Note S) ................................................. 2,358 2,624 2,509
Amortization of discount related to Discount Certificates
(see Note S) ................................................. 1,767 -- --
Other interest expense .......................................... 1,374 1,342 1,344
------- ------- -------
Total ..................................................... $32,832 $22,683 $26,431
======= ======= =======
</TABLE>
Other interest expense principally relates to interest accrued on the
unfunded obligation under the Company's Benefits Equalization Plan (see Note N).
Interest Paid--Interest paid, net of capitalized interest, totaled $27.5
million, $16.5 million and $23.1 million during 2003, 2002 and 2001,
respectively.
49
<PAGE>
NOTE K--INCOME TAXES
The significant components of the income tax benefit from continuing operations
consist of the following:
<Table>
<Caption>
Year ended December 31,
-----------------------------------------------------------
2003 2002 2001
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
(Loss) income before taxes:
Domestic $ (43,055) $ (46,814) $ (58,691)
Foreign 5,479 (33,039) (18,530)
-----------------------------------------------------------
Total $ (37,576) $ (79,853) $ (77,221)
===========================================================
Income taxes - current:
Federal $ - $ (9,450) $ 6,289
State and local - - (993)
Foreign 5,445 3,970 3,299
-----------------------------------------------------------
5,445 (5,480) 8,595
-----------------------------------------------------------
Income taxes - deferred:
Federal and state (12,440) (2,107) (28,672)
Foreign (4,098) (12,804) (12,196)
-----------------------------------------------------------
(16,538) (14,911) (40,868)
-----------------------------------------------------------
Total $ (11,093) $ (20,391) $ (32,273)
===========================================================
</Table>
The components of deferred income tax assets and liabilities from
continuing operations are disclosed below:
<Table>
<Caption>
Year ended December 31,
----------------------------------------
2003 2002
---- ----
(Thousands of dollars)
<S> <C> <C>
Deferred tax assets:
Asset provisions and accrued liabilities $ 34,861 $ 32,975
Difference between book and tax basis of
depreciable and amortizable assets 2,036 2,707
Tax loss and credit carryforwards 113,743 107,195
----------------------------------------
150,640 142,877
Valuation allowance (34,493) (37,240)
----------------------------------------
Total 116,147 105,637
----------------------------------------
Deferred tax liabilities:
Basis differences in partnership assets 9,346 9,837
----------------------------------------
Total 9,346 9,837
----------------------------------------
Net deferred tax asset $ 106,801 $ 95,800
========================================
</Table>
As of December 31, 2003, the Company had a tax asset related to U.S.
federal tax loss carryovers of $53.5 million, which begin to expire in 2020 and
foreign tax credit carryforwards of $9.7 million, expiring in 2004. The Company
also has various foreign and state loss carryovers totaling $50.5 million that
expire in 2004 and thereafter. The Company provided a valuation allowance for
certain state, federal and foreign loss and tax credit carryforwards of $34.5
million and $37.2 million at December 31, 2003 and 2002, respectively. The
valuation allowance decreased by $2.7 million during 2003 and increased by $6.7
million during 2002. The changes in the valuation allowance resulted from
management's evaluation of the utilization of state, federal and foreign
operating losses and U.S. federal tax credit carryforwards. In assessing the
need for the valuation allowance management considers, among other things, its
projections of future taxable income and ongoing prudent and feasible tax
planning strategies.
As discussed in Note C, on February 17, 2004, the Company consummated the
sale of its domestic real estate brokerage business to Cendant for $100.7
million. As a result of the sale, the Company will utilize approximately $26
million of the asset related to the net operating loss carryforwards to offset
the taxable gain on the transaction.
The effective tax rate from continuing operations varied from the
statutory rate as follows:
<Table>
<Caption>
Year ended December 31,
-----------------------------------------------------------
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.00% 35.00% 35.00%
State and local taxes, net of federal tax benefit 8.02 5.21 8.30
Foreign taxes at rates different than U.S. rates 2.26 1.79 3.13
Non-deductible antitrust expenses (2.53) (11.27) (1.14)
Effect of operating losses and tax credits (8.02) (4.39) (2.79)
Other (5.20) (0.80) (0.71)
-----------------------------------------------------------
Effective income tax benefit rate 29.53% 25.54% 41.79%
===========================================================
</Table>
Undistributed earnings of foreign subsidiaries included in consolidated
retained earnings at December 31, 2003 and 2002 amounted to $81.4 million and
$76.1 million, respectively. Such amounts are considered to be reinvested
indefinitely or will be distributed from income in such a way 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 net income tax payments (refunds) from continuing operations
during 2003, 2002 and 2001 were $5.9 million, $4.5 million and ($12.3) million,
respectively.
The tax expense (benefit) for the years ended December 31, 2003, 2002
and 2001 related to the foreign currency translation adjustment included in
Other Comprehensive Income (Loss) was approximately $3.1 million, $3.6 million
and ($1.1) million, respectively.
NOTE L--LEASE COMMITMENTS
Capital Lease--On February 7, 2003, the Company sold the York Property and
leased it back from the buyer for an initial 20-year term, with options for the
Company to extend the lease for two additional 10-year terms (see Note H). The
lease is being accounted for as a capital lease. Under the lease agreement,
rental payments escalate 7% every three years during the initial term.
The following is a schedule, by year, of the future minimum lease payments
due under the York Property capital lease, together with the present value of
the future minimum lease payments as of December 31, 2003 (in thousands of
dollars):
<TABLE>
<S> <C>
2004 ................................................................ $ 18,025
2005 ................................................................ 18,025
2006 ................................................................ 19,264
2007 ................................................................ 19,287
2008 ................................................................ 19,287
Thereafter .......................................................... 331,097
--------
Total future minimum lease payments ................................. 424,985
Less: amount representing interest .................................. 252,703
--------
Present value of future minimum lease payments ................... $172,282
========
</TABLE>
In addition to the lease payments above, under the terms of the York
Property capital lease, the Company is required to pay real estate taxes and
operating costs related to the premises.
Operating Leases--The Company conducts business on premises leased in
various locations under long-term operating leases expiring through 2078. During
2003, 2002 and 2001, net rental expense under operating leases was as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
2003 2002 2001
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Net rental expense--continuing operations ................. $11,848 $10,423 $10,504
Net rental expense--discontinued operations (see Note C)... 4,415 3,960 4,073
------- ------- -------
Total .................................................. $16,263 $14,383 $14,577
======= ======= =======
</TABLE>
Future minimum lease payments related to the Company's continuing
operations under noncancelable operating leases in effect at December 31, 2003
are as follows (in thousands of dollars):
<TABLE>
<S> <C>
2004 ................................................................. $13,819
2005 ................................................................. 12,667
2006 ................................................................. 11,192
2007 ................................................................. 9,367
2008 ................................................................. 7,928
Thereafter ........................................................... 35,689
-------
Total future minimum lease payments ............................... $90,662
=======
</TABLE>
Future minimum lease payments exclude minimum sublease rental receipts of
$4.9 million owed to the Company in the future under noncancelable subleases.
50
<PAGE>
In addition to the lease payments above, under the terms of certain leases,
the Company is required to pay real estate taxes and utility costs and may be
subject to escalations in the amount of future minimum lease payments based on
certain contractual provisions.
NOTE M--SHAREHOLDERS' EQUITY
Common Stock--Each share of the Company's Class A Common Stock is entitled
to one vote and each share of the Company's Class B Common Stock is entitled to
ten votes. Both classes of common stock share equally in cash dividend
distributions, if any. The Class A Common Stock is traded on both the New York
Stock Exchange and the London Stock Exchange.
On March 30, 2001, the Company deposited 1.1 million shares of its Class A
Common Stock with a fair market value of $20 million in an escrow account to
extinguish a portion of the remaining liability related to the settlement of
certain shareholder class action complaints resulting from the investigation by
the Antitrust Division of the United States Department of Justice. On April 25,
2001, the Company deposited an additional 1.1 million shares of its Class A
Common Stock in an escrow account to extinguish the remainder of the liability.
(See Note S.)
Preferred Stock--In addition to the Class A Common Stock and Class B Common
Stock outstanding, the Company has the authority to issue 50 million shares of
no par value Preferred Stock. No such shares were issued and outstanding as of
December 31, 2003 and 2002.
Stock Option Plans--As of December 31, 2003, the Company has reserved 15.4
million shares of Class B Common Stock for future issuance in connection with
the 1987 Stock Option Plan (the "1987 Plan") and the 1997 Stock Option Plan (the
"1997 Plan"). The 1997 Plan succeeded the 1987 Plan.
Pursuant to both stock option plans, options are granted with an exercise
price equal to or greater than fair market value at the date of grant. Options
granted subsequent to September 1992 and through December 1996 pursuant to the
1987 Plan, and options granted subsequent to December 1996 pursuant to the 1997
Plan, generally vest and become exercisable ratably after each of the first,
second, third, fourth and fifth years following the date of grant (except in the
U.K. where certain options vest three-fifths after the third year and one-fifth
after each of the fourth and fifth years following the date of grant). All
options granted on or after April 29, 1997 will vest immediately upon a change
of control (as defined in the 1997 Plan document). The options are exercisable
into shares of Class B Common Stock, which are authorized but unissued shares.
The shares of Class B Common Stock issued upon exercise are freely convertible
into an equivalent number of shares of Class A Common Stock. Pursuant to both
stock option plans, options generally expire ten years after the date of grant.
During the first and fourth quarters of 2000, the Compensation Committee of
the Board of Directors (the "Compensation Committee") awarded special grants of
3 million and 2 million stock options, respectively, pursuant to the 1997 Plan
in addition to the normal annual grant. The options granted in the fourth
quarter of 2000 vest and become exercisable ratably after each of the first,
second, and third years following the date of grant.
In January 2002, the Compensation Committee approved a grant of 1.6 million
options pursuant to the 1997 Plan which were due to vest the earlier of one year
from the date of grant or the day after the Company's Class A Common Stock
closes at or above $30 per share for ten consecutive trading days. These options
vested in January 2003 as the Company's Class A Common Stock did not close at or
above $30 per share for ten consecutive trading days during the one-year period
after the date of grant. Such options will expire the earlier of five years
after the date of grant or six months after the Company's Class A Common Stock
closes at or above $30 per share for ten consecutive trading days.
During 2003, the Compensation Committee approved grants of 940,000 stock
options pursuant to the 1997 Plan. Such options, which were granted at an
exercise price equal to the fair market value of the Company's Class A Common
Stock at the date of grant, generally vest and become exercisable ratably after
each of the first, second, third and fourth years following the date of grant
and expire ten years after the date of grant.
In February 2003, the Compensation Committee approved an exchange offer of
cash or restricted stock under the Sotheby's Holdings, Inc. 2003 Restricted
Stock Plan (the "Restricted Stock Plan") for stock options to eligible employees
that hold certain stock options under the 1997 Plan (the "Exchange Offer"). The
Exchange Offer was tendered by the Company on March 1, 2004 and will expire on
March 31, 2004.
51
<PAGE>
The determination as to whether an individual will receive restricted stock
or cash was dependent upon the number of underlying eligible options that each
employee held. The amount of restricted stock that will be issued or cash that
will be paid to each employee under the Exchange Offer was calculated using a
discounted option pricing valuation model based on the number of eligible
options held. Assuming all eligible employees accept the Exchange Offer, the
total amount of options to be cancelled will be approximately 5.3 million and
the number of shares of restricted stock that will be issued is approximately 1
million shares. These shares will be issued upon acceptance of the Exchange
Offer at the market price of the Company's Class A Common Stock at that time and
will be expensed over a four-year vesting period.
At December 31, 2003, there were outstanding options under the 1997 Plan
and the 1987 Plan for the purchase of 14.3 million shares, at prices ranging
from $8.65 to $38.25 per share. Stock option transactions during 2003, 2002 and
2001 are summarized as follows (shares in thousands):
<TABLE>
<CAPTION>
Shares Options Outstanding
Reserved for --------------------------------------
Issuance under Weighted
the Plans Shares Prices Average Price
-------------- ------ ------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 2001.......... 16,139 13,228 $10.87-$42.63 $22.13
Options expired - 1987 Plan (12)
Options granted.................. 1,785 $11.24-$26.38 $22.63
Options canceled................. (819) $10.87-$42.63 $23.81
Options exercised................ (53) (53) $10.87-$24.25 $16.16
------ ------ ------------- ------
Balance at December 31, 2001........ 16,074 14,141 $10.87-$42.63 $22.11
Options expired - 1987 Plan (77)
Options granted.................. 1,650 $13.69-$14.14 $13.70
Options canceled................. (1,145) $10.87-$42.63 $23.17
Options exercised................ (172) (172) $10.87-$14.75 $12.88
------ ------ ------------- ------
Balance at December 31, 2002........ 15,825 14,474 $10.87-$38.25 $21.18
Options expired - 1987 Plan (382)
Options granted.................. 940 $ 8.65-$10.89 $ 9.08
Options canceled................. (1,110) $10.87-$38.25 $19.99
Options exercised................ (7) (7) $10.87 $10.87
------ ------ ------------- ------
Balance at December 31, 2003........ 15,436 14,297 $ 8.65-$38.25 $20.47
====== ====== ============= ======
</TABLE>
The following table summarizes information about options outstanding at
December 31, 2003 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Weighted Average
Outstanding Remaining Weighted Exercisable Weighted
Range of Prices At 12/31/03 Contractual Life Average Price At 12/31/03 Average Price
- --------------------- ----------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$8.6500-$12.7875..... 1,544 7.6 years $ 9.86 426 $11.02
$12.7876-$17.0500.... 2,119 2.7 years $14.14 2,083 $14.14
$17.0501-$21.3125.... 5,100 5.0 years $18.89 3,817 $18.90
$21.3126-$25.5750.... 2,562 6.0 years $24.13 1,688 $23.94
$25.5751-$29.8375.... 1,938 6.5 years $26.43 1,923 $26.42
$29.8376-$34.1000.... 16 5.6 years $31.93 13 $31.93
$34.1001-$38.2500.... 1,018 5.1 years $36.98 839 $36.98
------ --------- ------ ------ ------
14,297 5.3 years $20.47 10,789 $21.22
====== ========= ====== ====== ======
</TABLE>
52
<PAGE>
The weighted average fair value per share of options granted during 2003,
2002 and 2001 was $3.78, $4.99 and $9.15, respectively. At December 31, 2003,
2002 and 2001, 10.8 million, 7.7 million and 5.8 million options were
exercisable at weighted average exercise prices of $21.22, $21.88 and $21.02,
respectively.
Performance Share Purchase Plan--As of December 31, 2003, the Company has
reserved 1.9 million shares of Class B Common Stock for issuance in connection
with the Performance Share Purchase Plan (the "Performance Plan"). At December
31, 2003, 25,000 options were outstanding under the Performance Plan.
The following table summarizes information about options outstanding at
December 31, 2003 under the Performance Plan (shares in thousands):
<TABLE>
<CAPTION>
Shares Options Outstanding
Reserved for ------------------------------------
Issuance under Weighted
the Plan Shares Price Average Price
-------------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 2001........... 1,958 286 $3.69-$5.03 $4.69
Options canceled.................. -- -- -- --
Options exercised................. -- -- -- --
----- ---- ----------- -----
Balance at December 31, 2001......... 1,958 286 $3.69-$5.03 $4.69
Options canceled.................. -- (213) $5.03 $5.03
Options exercised................. (48) (48) $3.69 $3.69
----- ---- ----------- -----
Balance at December 31, 2002......... 1,910 25 $3.69 $3.69
Options canceled.................. -- -- -- --
Options exercised................. -- -- -- --
----- ---- ----------- -----
Balance at December 31, 2003......... 1,910 25 $3.69 $3.69
===== ==== =========== =====
</TABLE>
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 are exercisable upon the
fulfillment of certain performance criteria, based on the Company's earnings per
share or return on equity, or both, as determined by the Compensation Committee
or the Section 162(m) Subcommittee thereof, as applicable, as well as
fulfillment of time vesting requirements. The options, which generally have a
three-year performance period, time vest regardless of achieving the performance
goal, in one third increments on each of the third, fourth and fifth
anniversaries of the date of grant. If the performance goal has been achieved at
the time these options begin time vesting, the options will become exercisable
when the time vesting requirement is met. If the performance goal has not been
achieved by the end of the performance period, the options will not become
exercisable upon time vesting. Rather, the designated performance goal will
automatically be adjusted, and the performance period will be extended one year.
Upon achievement of the adjusted performance goal, the options will be
exercisable to the extent they have time vested. If the adjusted performance
goal is not achieved by the end of the fifth year after the date of grant, the
options will expire. During the term of each Performance Plan option, the option
accrues dividend equivalents (if dividends are declared by the Board of
Directors of the Company) which are payable to the option holder when the option
becomes exercisable.
Restricted Stock Plan--In February 2003, the Compensation Committee
approved the adoption of the Restricted Stock Plan, effective May 1, 2003. The
Restricted Stock Plan was approved by a vote of shareholders on April 29, 2003.
The purpose of the Restricted Stock Plan is to enable the Company to retain
valued employees, to continue to attract the finest executives and to enhance
the retentive and incentive impact of outstanding equity compensation awards.
The Restricted Stock Plan provides for the issuance of restricted shares of the
Company's Class B Common Stock ("Restricted Stock") to eligible employees, as
selected by the Compensation Committee. In making such selections, the
Compensation Committee may take into account the nature of the services rendered
by such employees, their present and potential contributions to the Company's
success, and such other factors as the Compensation Committee in its discretion
shall deem relevant. The Restricted Stock Plan also permits the issuance
53
<PAGE>
of shares of Restricted Stock in exchange for the cancellation of certain
options granted to eligible employees under the 1987 Plan and 1997 Plan,
as discussed above. The aggregate number of shares of Restricted Stock that
may be issued by the Company under the Restricted Stock Plan is 2 million
shares, which may be issued from the Company's authorized but unissued or
reacquired shares of Class B Common Stock. Restricted Stock shares granted
pursuant to the Restricted Stock Plan generally vest ratably after each of
the first, second, third and fourth years following the date of grant. During
the vesting period, the participants have voting rights and receive dividends,
if any, but the shares may not be sold, assigned, transferred, pledged or
otherwise encumbered.
In 2003, the Compensation Committee awarded 160,000 shares of Restricted
Stock pursuant to the Restricted Stock Plan with a fair value of approximately
$1.9 million. Such amount was recorded as Deferred Compensation Expense in the
Shareholders' Equity section of the Consolidated Balance Sheet and is being
amortized to Salaries and Related Costs over the vesting period described above.
For the year ended December 31, 2003, the Company recognized stock compensation
expense of approximately $0.4 million related to Restricted Stock issued
pursuant to the Restricted Stock Plan.
Stock Compensation Plan for Non-Employee Directors--Effective April 30,
1998, the Company amended the Director Stock Ownership Plan. As of December 31,
2003, the Company has reserved 119,446 shares of Class A Common Stock for
issuance in connection with the Stock Compensation Plan for Non-Employee
Directors (the "Amended Plan"). During 2003, the number of shares issued to
non-employee directors under the Amended Plan (including deferred stock units)
was 22,074. During both 2002 and 2001, the number of shares issued to
non-employee directors under the Amended Plan (including deferred stock units)
was 27,120.
NOTE N--PENSION ARRANGEMENTS
Retirement Savings Plan--The Company has a defined contribution plan for
U.S. employees who have completed three consecutive months of employment (the
"Retirement Savings Plan"). The Company contributes an amount equal to 2% of
each participant's eligible compensation to the plan. Additionally, participants
may elect to contribute between 2% and 12% of their eligible compensation, up to
the maximum amount allowable under Internal Revenue Service ("IRS") regulations,
on a pre-tax basis. Employee savings are matched by a Company contribution of up
to an additional 6% of the participant's eligible compensation. During 2003,
2002 and 2001, pension expense related to the Retirement Savings Plan was as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
2003 2002 2001
------ ------ ------
(Thousands of dollars)
<S> <C> <C> <C>
Pension expense--continuing operations................... $2,863 $3,341 $3,396
Pension expense--discontinued operations (see Note C).... 352 331 268
------ ------ ------
Total................................................. $3,215 $3,672 $3,664
====== ====== ======
</TABLE>
Benefits Equalization Plan--The Company also has an unfunded defined
contribution Benefits Equalization Plan (the "BEP"). The BEP is available to
certain officers of the Company whose contributions to the Retirement
Savings Plan are limited by IRS regulations. Such officers may enter into
agreements pursuant to which their salaries will be reduced and the Company
will maintain accounts on their behalf in the amount of the difference between
the aggregate amount of contributions that would have been made to the
Retirement Savings Plan in the absence of the limitations, and the aggregate
amount of contributions actually made to the Retirement Savings Plan. Employee
savings are matched by a Company contribution of up to 6% of the participant's
eligible compensation. Contributions to the BEP earn interest at a rate equal
to 3.3% above the 10-year U.S. Treasury Bond rate. The total unfunded liability
of the BEP was $17.9 million and $15.4 million as of December 31, 2003 and
2002, respectively, and is included within Other Liabilities in the Consolidated
Balance Sheets. During 2003, 2002 and 2001, pension expense related to the
BEP was as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
2003 2002 2001
------ ------ ------
(Thousands of dollars)
<S> <C> <C> <C>
Pension expense--continuing operations................... $633 $318 $765
Pension expense--discontinued operations (see Note C).... 63 69 100
---- ---- ----
Total................................................. $696 $387 $865
==== ==== ====
</TABLE>
54
<PAGE>
During 2002, the Company entered into a final settlement agreement with its
former Chief Executive Officer with respect to the Department of Justice
investigation and other related matters. As part of this settlement agreement,
the Company's former Chief Executive Officer relinquished $2.05 million of
vested benefits under the BEP (see Note S).
Defined Benefit Plan--The Company also makes contributions to a defined
benefit pension plan covering substantially all U.K. employees (the "U.K.
Plan"). The Company uses a September 30 measurement date for the U.K. Plan.
Effective April 1, 2004, the U.K. Plan will be closed to new entrants.
From that date, a defined contribution will be available to new entrants.
The table below details the change in the benefit obligation, the change in
the fair value of plan assets, the funded status and the net pension asset
recognized related to the U.K. Plan as of December 31, 2003 and 2002:
<TABLE>
<CAPTION>
As of December 31,
-------------------
2003 2002
-------- --------
(Thousands of dollars)
<S> <C> <C>
Change in benefit obligation
- ----------------------------
Benefit obligation at beginning of year........... $168,370 $124,998
Service cost...................................... 5,928 5,041
Interest cost..................................... 9,355 7,995
Contributions by plan participants................ 1,033 1,338
Actuarial loss.................................... 10,103 16,957
Benefits paid..................................... (3,689) (2,983)
Special termination benefits...................... 790 --
Foreign currency exchange rate changes............ 20,994 15,024
-------- --------
Benefit obligation at end of year.............. 212,884 168,370
-------- --------
Change in plan assets
- ---------------------
Fair value of plan assets at beginning of year.... 130,038 135,309
Actual return (loss) on plan assets............... 19,510 (18,695)
Employer contributions............................ 3,395 2,064
Contributions by plan participants................ 1,033 1,338
Benefits paid..................................... (3,689) (2,983)
Foreign currency exchange rate changes............ 16,401 13,005
-------- --------
Fair value of plan assets at end of year....... 166,688 130,038
-------- --------
Funded status..................................... (46,196) (38,332)
Unrecognized transitional asset................... -- (10)
Unrecognized prior service cost................... 905 1,047
Unrecognized net actuarial loss................... 71,402 59,269
-------- --------
Net pension asset recognized................... $ 26,111 $ 21,974
======== ========
</TABLE>
The accumulated benefit obligation for the U.K. Plan was $160.3 million and
$125.5 million as of December 31, 2003 and 2002, respectively.
55
<PAGE>
Components of Net Pension Cost (Benefit)
During 2003, 2002 and 2001, the components of the net pension cost
(benefit) were:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Service cost......................... $ 5,928 $ 5,041 $ 4,946
Interest cost........................ 9,355 7,995 6,816
Expected return on plan assets....... (14,441) (13,245) (12,055)
Amortization of prior service cost... 239 219 265
Amortization of actuarial gain....... -- (155) (1,297)
Amortization of transitional asset... (10) (447) (429)
-------- -------- --------
Sub-total......................... 1,071 (592) (1,754)
Curtailment gain..................... -- -- (434)
Special termination benefits......... 790 -- 330
-------- -------- --------
Net pension cost (benefit)........ $ 1,861 $ (592) $ (1,858)
======== ======== ========
</TABLE>
During 2003 and 2001, as a result of the Company's restructuring plans (see
Note U) and other headcount reductions, the Company recognized special
termination benefits of $0.8 million and $0.3 million, respectively, related to
the U.K. Plan. The special termination benefits were principally reflected in
the Consolidated Statements of Operations as part of Net Restructuring Charges
(see Note U). Additionally, during 2001, as a result of the Company's
restructuring plans (see Note U), the Company recorded a curtailment gain of
approximately $0.4 million. The curtailment gain was reflected in the
Consolidated Statements of Operations as part of the net pension benefit in
Salaries and Related Costs.
Assumptions
The following assumptions were used in determining the benefit obligation
related to the U.K. Plan:
<TABLE>
<CAPTION>
As of December 31,
-----------------
2003 2002
---- ----
<S> <C> <C>
Weighted average discount rate........................... 5.20% 5.50%
Weighted average rate of compensation increase........... 4.25% 4.00%
</TABLE>
The following assumptions were used in determining the net pension (cost)
related to the U.K. Plan:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate...................................... 5.50% 6.20% 6.50%
Weighted average rate of compensation increase...................... 4.00% 4.50% 5.00%
Weighted average expected long-term rate of return on plan assets... 8.00% 8.00% 8.00%
</TABLE>
The expected long-term rate of return on plan assets was based on dividend
and interest yields currently available on equity and bond markets as of the
measurement date and weighted according to the composition of invested assets as
of that date.
56
<PAGE>
Plan Assets
As of September 30, 2003 and 2002, the weighted average asset allocations
for the U.K. Plan were:
<TABLE>
<CAPTION>
As of September 30,
-------------------
2003 2002
---- ----
<S> <C> <C>
Asset Category
Equity securities.................................. 74% 74%
Debt securities.................................... 18% 18%
Real estate........................................ 4% 4%
Other.............................................. 4% 4%
</TABLE>
The investment policy for the U.K. Plan is established by its trustees (the
"Trustees") in consultation with the management of the Company. The primary
investment objective is to maximize the return on the assets of the U.K. Plan
while controlling the level of risk. The Trustees have agreed that a diversified
portfolio of assets with a relatively high concentration of equity securities is
appropriate. The diversification should be within and across asset categories.
Additionally, the Trustees require that 95% of investments should be realizable
at short notice.
Contributions
The Company expects to contribute approximately $2.8 million to the U.K.
Plan in 2004.
NOTE O--RELATED PARTY TRANSACTIONS
Prior to December 1995, the Company had a loan program whereby it 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 one
to two percentage points below the Prime Rate. In December 1995, the majority of
the loans under this program were refinanced and replaced by a bank loan program
providing comparable loan terms and interest rates. The Company guarantees all
repayment obligations under this bank loan program, which is available to
employees at the Chief Executive Officer's discretion. For loans under this
program exceeding $0.5 million, the approval of either the Compensation
Committee or the Executive Committee of the Board of Directors is required. All
loans are immediately repayable in the event an employee leaves the Company. The
amount of guarantees outstanding under this program was $0.4 million at December
31, 2003.
The Company has another bank loan guarantee program, which is 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 interest
at an annual rate equal to the Prime Rate. All of the repayment obligations of
the employee are guaranteed by the Company and are repayable when an employee
leaves the Company. The amount of guarantees outstanding under this program was
$0.1 million at December 31, 2003.
During 2001, the Company recognized approximately $3.8 million of
commission revenue related to auction transactions with related parties. During
2003 and 2002, commission revenue related to auction transactions with related
parties was not material.
(See Note E for additional related party disclosures.)
NOTE P--DERIVATIVE INSTRUMENTS
The Company utilizes forward exchange contracts to manage exposures related
to foreign currency risks, which primarily arise from short-term foreign
currency denominated intercompany balances. Generally, such intercompany
balances are centrally funded and settled through the Company's global treasury
function. The Company's objective for holding derivative instruments is to
minimize foreign currency risks using the most effective methods to eliminate or
reduce the impacts of these exposures.
The forward exchange contracts entered into by the Company are used as
economic cash flow hedges of the Company's exposure to short-term foreign
currency denominated intercompany balances. Such forward exchange contracts are
typically short-term with settlement dates no more than one month from their
inception. These contracts are not designated as hedging instruments under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, and are recorded in the Company's Consolidated Balance Sheets at fair
value,
57
<PAGE>
which is based on referenced market rates. Changes in the fair value of the
Company's forward exchange contracts are recognized currently in earnings and
are generally offset by the revaluation of the underlying intercompany balances
in accordance with SFAS No. 52, "Foreign Currency Translation."
As of December 31, 2003 and 2002, the Consolidated Balance Sheets included
$0.3 million and $0.4 million, respectively, recorded within Other Current
Assets reflecting the fair value of the Company's outstanding forward exchange
contracts.
NOTE Q--COMMITMENTS AND CONTINGENCIES
Letters of Credit--As of December 31, 2003, the Company had outstanding
letters of credit of approximately $2.2 million primarily relating to rental
obligations.
Employment Agreements--During the second half of 2003 the Company entered
into employment agreements with a number of employees, which expire in June
2006. Such agreements provide, among other benefits, for minimum salary levels,
as well as incentive bonuses which are payable only if specified Company and
individual goals are attained. The aggregate commitment for future salaries for
the entire three-year period, excluding incentive bonuses, is approximately
$10.1 million, of which approximately $2.3 million had been paid through March
1, 2004.
Lending Commitments--In certain situations, the Company enters into legally
binding arrangements to lend, primarily on a collateralized basis, to potential
consignors and other individuals who have collections of fine art or other
objects (see Note E). However, potential consignor advances related to such
arrangements are subject to certain limitations and conditions. Unfunded
commitments to extend additional credit were approximately $22.4 million at
December 31, 2003.
Legal Actions--The Canadian Competition Bureau is continuing to conduct an
investigation regarding commissions charged by the Company and Christie's for
auction services.
The Company also becomes involved, from time to time, in various claims and
lawsuits incidental to the ordinary course of its business.
In the opinion of management, the contingencies described above under Legal
Actions and in Note R are not currently expected to have a material adverse
effect on the Company's business, results of operations, financial condition
and/or liquidity.
(See Notes L, R, S and U for other commitments. See Note R for other
contingencies.)
NOTE R--AUCTION GUARANTEES
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 and, therefore, the Company must pay the difference
between the sale price at auction and the amount of the guarantee. If the
property does not sell, the amount of the guarantee must be paid, but the
Company has the right to recover such amount through the future sale of the
property. Generally, 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 loan a portion of the
guaranteed amount prior to the auction.
In the first quarter of 2003, the Company adopted the recognition and
measurement provisions of FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," for guarantees issued or modified after December 31, 2002.
58
<PAGE>
As of December 31, 2003, the Company had outstanding auction guarantees
totaling approximately $56.5 million, the property relating to which had a
mid-estimate sales price of approximately $83.7 million. The Company's net
exposure under such guarantees totaled approximately $50.8 million, which
consists of the gross guarantee amount of $56.5 million less partner shares. The
property under such guarantees is being offered at auction or privately during
the first half of 2004. As of December 31, 2003, $10.1 million of the guaranteed
amount had been advanced by the Company and its partners, of which the Company
has recorded its $5.9 million share within Notes Receivable and Consignor
Advances in the Consolidated Balance Sheets (see Note E). As of December 31,
2003, the carrying amount of the liability related to the Company's auction
guarantees was approximately $0.5 million and was reflected in the Consolidated
Balance Sheets within Accounts Payable and Accrued Liabilities.
As of March 1, 2004, the Company had outstanding auction guarantees
totaling approximately $92 million, the property relating to which had a
mid-estimate sales price of approximately $109.2 million. The Company's net
exposure under such guarantees totaled approximately $49.9 million, which
consists of the gross guarantee amount of $92 million less partner shares. The
property under such guarantees will be offered at auction in the first half of
2004. As of March 1, 2004, $14.6 million of the guaranteed amount had been
advanced by the Company and its partners, of which the Company's share was $8.9
million.
NOTE S--SPECIAL CHARGES
During 2003, 2002 and 2001, the Company recorded the following special
charges related to the investigation by the Antitrust Division of the United
States Department of Justice (the "DOJ"), other governmental investigations and
the related civil antitrust litigation, as discussed below:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
2003 2002 2001
------ ------- ------
(Thousands of dollars)
<S> <C> <C> <C>
European Commission fine............................................... $ -- $20,072 $ --
Settlement of International Antitrust Litigation....................... -- 20,000 --
Settlement of U.S. Antitrust Litigation opt out claim.................. 250 1,750 --
Settlement administration costs--International Antitrust Litigation.... 1,519 -- --
Settlement administration costs--U.S. Antitrust Litigation............. 395 -- --
Administrative costs for the printing, issuance and redemption of
Discount Certificates............................................... 152 -- --
Loss on redemption of Discount Certificates............................ 132 -- --
Legal and other costs.................................................. 664 2,780 3,089
Settlement with former Chief Executive Officer......................... -- (3,250) --
Class notification costs--U.S. Antitrust Litigation.................... -- (310) (570)
------ ------- ------
Total............................................................ $3,112 $41,042 $2,519
====== ======= ======
</TABLE>
In April 1997, the DOJ began an investigation of certain art dealers and
major auction houses, including the Company and its principal competitor,
Christie's International, PLC ("Christie's"). The Company has pled guilty to a
violation of the U.S. antitrust laws in connection with a conspiracy to fix
auction commission rates charged to sellers in the U.S. and elsewhere. On
February 2, 2001, the U.S. District Court for the Southern District of New York
accepted the Company's plea and imposed on the Company a fine of $45 million
payable without interest over a period of five years. As a result, in the third
quarter of 2000, the Company recorded Special Charges of $34.1 million, which
represents the present value of the fine payable. The $10.9 million discount on
the amount due is being amortized to interest expense over the five-year period
during which the fine is being paid. As of March 1, 2004, the Company had
funded $18 million of the fine payable as follows: $3 million in each of June
2001 and February 2002, and $6 million in each of February 2003 and February
2004. The remaining $27 million of the fine is payable as follows: $12 million
due on February 6, 2005 and $15 million due on February 6, 2006.
59
<PAGE>
The European Commission also conducted an investigation regarding
anti-competitive practices by Christie's and the Company beginning in January
2000. On October 30, 2002, the European Commission issued a decision in which it
determined that the Company and Christie's had breached the competition
provisions of the Treaty Establishing the European Community by agreeing to fix
selling commissions and other trading terms in connection with auctions held in
the European Union between 1993 and 2000. Pursuant to this decision, the
European Commission imposed a fine of approximately $20.1 million on the Company
and, as a result, the Company recorded this amount in Special Charges in the
third quarter of 2002. The Company paid the European Commission fine on February
5, 2003.
A number of private civil complaints, styled as class action complaints,
were also filed against the Company alleging violations of federal and state
antitrust laws based upon alleged agreements between Christie's and the Company
regarding commissions charged to purchasers and sellers of property in the U.S.
and elsewhere, including actions alleging violations of federal antitrust laws
in connection with auctions in the U.S. (the "U.S. Antitrust Litigation"). On
September 24, 2000, the Company agreed to settle the U.S. Antitrust Litigation
and, as a result, recorded Special Charges of $100 million related to the
settlement in the third quarter of 2000. In accordance with the settlement
agreement, the Company has funded $50 million in cash and has issued to the
class of plaintiffs vendor's commission discount certificates (the "Discount
Certificates") with a face value of $62.5 million. The Court determined that the
$62.5 million face value of the Discount Certificates had a fair market value of
not less than $50 million, which equals the amount that was recorded in Special
Charges in the third quarter of 2000. The Discount Certificates, which were
issued in June 2003, are fully redeemable in connection with any auction
conducted by the Company or Christie's in the U.S. or the U.K. The Discount
Certificates may be used to satisfy consignment charges involving vendor's
commission, risk of loss and/or catalogue illustration. The Discount
Certificates will expire on May 14, 2008; however, any unused Discount
Certificates may be redeemed for cash at their face value at any time between
May 15, 2007 and May 14, 2008. The $12.5 million discount on the face value of
the Discount Certificates is being amortized to interest expense over the
four-year period prior to May 15, 2007, the first date at which the Discount
Certificates are redeemable for cash. At December 31, 2003, the outstanding face
value of unused Discount Certificates that the Company could be required to
redeem was approximately $61.8 million.
On April 10, 2003, the Company and Christie's entered into a settlement
agreement with one of the parties that opted out of the class action settlement
in the U.S. Antitrust Litigation. During the fourth quarter of 2002, the Company
recorded Special Charges of $1.75 million related to this claim. During the
first quarter of 2003, the Company recorded an additional $0.25 million in
Special Charges as a result of the completion of the settlement of this claim.
The amount due by the Company under the settlement has been fully funded.
Although there were other opt-outs from the settlement of the U.S. Antitrust
Litigation, no other claims have been asserted to date.
Three other purported class action lawsuits were filed in the U.S. District
Court for the Southern District of New York against the Company and its
wholly-owned subsidiary, Sotheby's, Inc., beginning in August 2000, alleging
violations of the federal antitrust laws and international law, on behalf of
purchasers and sellers in auctions conducted outside the U.S. Christie's was
also named as a defendant in these actions. The complaints in these actions (the
"International Antitrust Litigation") contained allegations identical to the
complaints in the U.S. Antitrust Litigation, but were considered separately from
the U.S. Antitrust Litigation. On March 10, 2003, the Company and Christie's
agreed to pay $20 million each to settle the International Antitrust Litigation.
During the fourth quarter of 2002, the Company recorded $20 million in Special
Charges as a result of the settlement related to the International Antitrust
Litigation. On April 7, 2003, pursuant to the settlement agreement for the
International Antitrust Litigation, the Company deposited $10 million into an
escrow account for the benefit of the members of the class of plaintiffs. The
remaining $10 million due under the settlement agreement was paid on June 23,
2003 following final court approval of the settlement.
During 2003, the Company recorded Special Charges of $1.5 million and $0.4
million, respectively, for administrative costs related to the settlements of
the International Antitrust Litigation and the U.S. Antitrust Litigation.
During 2003, the Company recorded Special Charges of $0.2 million for
administrative costs related to the printing, issuance and redemption of the
Discount Certificates. Additionally, during 2003, the Company recorded Special
Charges of $0.1 million representing a loss on the early redemption of Discount
Certificates.
60
<PAGE>
During 2003, 2002 and 2001, the Company recorded Special Charges of $0.7
million, $2.8 million and $3.1 million, respectively, consisting primarily of
legal and other professional fees related to the investigation by the DOJ, other
governmental investigations and the related civil antitrust litigation, as
discussed above.
During 2002, the Company entered into a final settlement agreement with its
former Chief Executive Officer with respect to the DOJ investigation and other
related matters. As part of this settlement agreement, in addition to
relinquishing all of her stock options in 2000, the Company's former Chief
Executive Officer paid the Company $3.25 million. Of this amount, $2.05 million
was paid by her relinquishment of vested benefits under the BEP and the
remaining $1.2 million was paid in cash. As a result, the Company recorded in
Special Charges a reduction of accrued compensation cost of $2.05 million and a
recovery of $1.2 million in the first quarter of 2002.
During 2000, the Company recorded special charges of $2.0 million for
estimated administrative costs related to the notification of the members of the
class of plaintiffs in the U.S. Antitrust Litigation. During the fourth quarter
of 2001, the Company recorded a $0.6 million reversal of the liability related
to the class notification costs as a result of the favorable completion of
negotiations with the vendor. During the fourth quarter of 2002, the Company
recorded an additional $0.3 million reversal of the liability related to the
class notification costs due to a lower than expected level of claims received
from members of the class of plaintiffs.
The Company's Settlement Liabilities related to the DOJ investigation,
other governmental investigations and the related civil antitrust litigation
consist of the following as of December 31, 2003 and 2002:
<TABLE>
<CAPTION>
As of December 31,
----------------------
2003 2002
------- --------
(Thousands of dollars)
<S> <C> <C>
Current:
- -------
European Commission fine......................... $ -- $ 21,350
International Antitrust Litigation............... -- 20,000
U.S. Antitrust Litigation (net).................. 1,330 8,800
DOJ antitrust fine (net)......................... 3,951 3,642
U.S. Antitrust Litigation opt out claim.......... -- 1,750
------- --------
Sub-total..................................... 5,281 55,542
------- --------
Long-term:
- ---------
U.S. Antitrust Litigation (net).................. 49,845 41,200
DOJ antitrust fine (net)......................... 25,653 29,604
------- --------
Sub-total..................................... 75,498 70,804
------- --------
Total...................................... $80,779 $126,346
======= ========
</TABLE>
The current portion of the liability for the Discount Certificates is based
on management's estimate of redemptions expected during the twelve-month period
after the balance sheet date.
61
<PAGE>
During 2003 and 2002, amounts charged to the Company's Settlement
Liabilities related to the DOJ investigation, other governmental investigations
and the related civil antitrust litigation were:
<TABLE>
<CAPTION>
U.S. DOJ
Antitrust Antitrust European International U.S.Antitrust
Litigation Fine Commission Antitrust Litigation Opt
(net) (net) Fine Litigation Out Claim Total
---------- --------- ---------- ------------- -------------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Settlement liability at January 1, 2002... $50,000 $33,622 $ -- $ -- $ -- $ 83,622
European Commission fine.................. -- -- 20,072 -- -- 20,072
Settlement of International Antitrust
Litigation ............................ -- -- -- 20,000 -- 20,000
Settlement of U.S. Antitrust Litigation
opt out claim.......................... -- -- -- -- 1,750 1,750
DOJ antitrust fine - amortization of
discount............................... -- 2,624 -- -- -- 2,624
Foreign currency exchange rate changes.... -- -- 1,278 -- -- 1,278
Cash payment.............................. -- (3,000) -- -- -- (3,000)
------- ------- -------- -------- ------- --------
Settlement liability at
December 31, 2002...................... 50,000 33,246 21,350 20,000 1,750 126,346
Settlement of U.S. Antitrust Litigation
opt out claim.......................... -- -- -- -- 250 250
Discount Certificates - amortization of
discount............................... 1,767 -- -- -- -- 1,767
Redemption of Discount Certificates....... (724) -- -- -- -- (724)
Loss on redemption of Discount
Certificates........................... 132 -- -- -- -- 132
DOJ antitrust fine - amortization of
discount............................... -- 2,358 -- -- -- 2,358
Foreign currency exchange rate changes.... -- -- 633 -- -- 633
Cash payments............................. -- (6,000) (21,983) (20,000) (2,000) (49,983)
------- ------- -------- -------- ------- --------
Settlement liability at
December 31, 2003...................... $51,175 $29,604 $ -- $ -- $ -- $ 80,779
======= ======= ======== ======== ======= ========
</TABLE>
NOTE T--RETENTION PROGRAMS
In 2001 and 2002, the Company implemented retention programs that provided
cash awards payable to a group of key employees upon fulfillment of full-time
employment through certain dates in 2003 and 2004. Certain employees granted
such awards received cash payments of approximately $13.2 million during 2003.
The final cash payment of $0.4 million due under the retention programs was made
in January 2004.
All amounts related to the retention programs described above were
amortized over the related contractual service periods. During 2003, 2002 and
2001, the Company recognized Retention Costs of $8.5 million, $22.6 million and
$19.8 million, respectively.
NOTE U--RESTRUCTURING PLANS
During 2003, 2002 and 2001, the Company recorded the following amounts
related to the restructuring plans described below:
<TABLE>
<CAPTION>
2003 2002 2001
------ ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
1998 Restructuring Plan............. $ -- $ -- $ (660)
2000 Restructuring Plan............. -- (1,231) (730)
2001 Restructuring Plan............. 53 (989) 17,922
2002 Restructuring Plan............. 4,986 4,181 --
------ ------- -------
Total............................ $5,039 $ 1,961 $16,532
====== ======= =======
</TABLE>
62
<PAGE>
1998 Restructuring Plan--During the second quarter of 2001, the Company
recorded a favorable adjustment to Net Restructuring Charges of $0.7 million to
reverse the remaining liability for the 1998 Restructuring Plan, which related
to the consolidation and integration of its corporate and administrative
operations into the York Property. The consolidation and integration was
completed in April 2001, and the Company determined that the remaining
restructuring liability was no longer required.
2000 Restructuring Plan--During the fourth quarter of 2000, management
completed a strategic and operational review of the Company's businesses. Based
on the results of this review, the Board of Directors approved a restructuring
plan in the Auction segment in December 2000 and the Company recorded
Restructuring Charges of $12.6 million in the fourth quarter of 2000.
As a result of the 2000 Restructuring Plan, the Company achieved savings in
Internet related operating expenses by eliminating headcount and reducing
marketing programs. Additionally, the Company further reduced operating expenses
by consolidating certain departmental resources and sales elsewhere within the
Auction segment. The further consolidation and integration of the Company's
auction operations into the York Property in April 2001 also contributed to
savings in operating expenses. Employee terminations related to the 2000
Restructuring Plan primarily impacted the administrative and support functions
of the Auction segment. Also, as part of the 2000 Restructuring Plan, the
Company commenced operations at a specially dedicated middle market salesroom at
Olympia in West London in September 2001. Olympia incorporated certain
departments from the Company's main U.K. auction salesroom at New Bond Street in
London and from the Company's former auction salesroom in Sussex. The 2000
Restructuring Plan included the termination of approximately 175 employees.
During 2002 and 2001, the Company recorded favorable adjustments of $1.0
million and $0.7 million, respectively, to Net Restructuring Charges principally
due to changes in management's original estimates of employee termination
benefits, lease and contract termination costs and other costs related to the
2000 Restructuring Plan. Also during 2002, the Company recorded a favorable
adjustment of $0.2 million to Net Restructuring Charges as a result of higher
than expected proceeds received from the final sale of assets related to certain
activities that were exited in conjunction with the 2000 Restructuring Plan.
The liability related to the 2000 Restructuring Plan was recorded within
Accounts Payable and Accrued Liabilities in the Company's Consolidated Balance
Sheets, and all remaining amounts due were paid out in the first quarter of
2003. Amounts charged to the liability for the 2000 Restructuring Plan were as
follows:
<TABLE>
<CAPTION>
Lease and
Employee Contract
Termination Termination Asset Other
2000 Restructuring Plan Benefits Costs Provisions Costs Total
- ----------------------- ----------- ----------- ---------- ----- -------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Restructuring charges............ $ 7,127 $1,117 $ 3,844 $546 $12,634
Asset write-offs................. -- -- (3,844) -- (3,844)
------- ------ ------- ---- -------
Liability at December 31, 2000... 7,127 1,117 -- 546 8,790
Cash payments.................... (5,423) (334) -- (246) (6,003)
Adjustments to liability......... (589) (42) -- (99) (730)
------- ------ ------- ---- -------
Liability at December 31, 2001... 1,115 741 -- 201 2,057
Cash payments.................... (411) (363) -- (179) (953)
Adjustments to liability......... (624) (371) -- (22) (1,017)
------- ------ ------- ---- -------
Liability at December 31, 2002... 80 7 -- -- 87
Cash payments.................... (80) (7) -- -- (87)
------- ------ ------- ---- -------
Liability at December 31, 2003... $ -- $ -- $ -- $ -- $ --
======= ====== ======= ==== =======
</TABLE>
2001 Restructuring Plan--During the third quarter of 2001, management
completed a further review of the Company's businesses. Based on the results of
this review, the Board of Directors approved a restructuring plan in September
2001 for the Company's live auction business within the Auction segment, as
well as for its Finance and Real Estate segments and certain corporate
departments. As a result, the Company recorded Net Restructuring Charges of
approximately $9.5 million in 2001 related to this phase of the 2001
Restructuring Plan. Of this amount,
63
<PAGE>
$9.1 million was recorded in the third quarter and $0.4 million was recorded in
the fourth quarter. The components of these Net Restructuring Charges are
described below.
In the third quarter of 2001, the Company decided to cease auction sales in
Chicago and initiated a program to sell the building where its Chicago salesroom
was located (the "Chicago Building"). As of the commitment date for the 2001
Restructuring Plan, the aggregate carrying value of the Chicago Building and
goodwill related to the Chicago auction business was approximately $6.3 million.
In the third quarter of 2001, the Company recorded a loss of approximately $3.4
million for assets to be disposed related to the Chicago auction business. In
the third quarter of 2002, the Company completed the sale of the Chicago
Building and recorded an unfavorable adjustment to Net Restructuring Charges of
$0.2 million principally due to lower than expected proceeds from the sale of
the Chicago Building partially offset by lower than estimated closing costs
associated with the transaction.
Additionally, headcount reductions were made primarily within the
administrative and support functions of the Company's live auction business, as
well as within its Finance and Real Estate segments and certain corporate
departments. During 2001, the Company recorded restructuring charges of $5.8
million for employee termination benefits related to these headcount reductions.
Of this amount, $5.1 million was recorded in the third quarter and $0.7 million
was recorded in the fourth quarter. The Company also recorded restructuring
charges of $0.6 million in 2001 for contract termination and other incremental
costs related to this phase of the 2001 Restructuring Plan.
During the fourth quarter of 2001, the Company recorded favorable
adjustments of $0.3 million to Net Restructuring Charges due to the reversal of
a portion of the remaining liability for the 2001 Restructuring Plan primarily
due to employee termination benefits related to the live auction business that
will not be paid as a result of unanticipated employee redeployment and a
contract termination fee that will not be incurred as a result of a better than
anticipated settlement of a vendor contract.
In the fourth quarter of 2001, as authorized by the Board of Directors,
management approved a restructuring plan for the Company's online auction
business within the Auction segment. As part of this plan, the Company
terminated its agreement with Amazon, Inc. ("Amazon") pursuant to which the
Company and Amazon operated a combined auction website. As a result, the Company
incurred an early termination fee and recorded a $5.3 million restructuring
charge in the fourth quarter of 2001. In January 2002, the Company entered into
a strategic alliance with eBay, Inc. ("eBay") whereby sothebys.com online
auctions were incorporated into the eBay marketplace in June 2002. Under the
strategic alliance, the Company managed property flow while eBay hosted and
maintained the e-commerce portion of the website. As a result of the strategic
alliance, the Company recorded a $2.9 million restructuring charge related to
impaired computer hardware and software in the fourth quarter of 2001.
Additionally, the Company recorded restructuring charges of $0.2 million for
employee termination benefits related to its online auction business during each
of the fourth quarter of 2001 and the first quarter of 2002.
In total, the 2001 Restructuring Plan included the termination of
approximately 150 employees worldwide.
During 2003, the Company recorded an unfavorable adjustment of $0.1 million
to Net Restructuring Charges primarily due to changes in management's original
estimates of employee termination benefits.
During 2002, the Company recorded favorable adjustments of $1.4 million to
Net Restructuring Charges primarily due to changes in management's original
estimates of employee termination benefits.
The liability related to the 2001 Restructuring Plan was recorded within
Accounts Payable and Accrued Liabilities in the Company's Consolidated Balance
Sheets, and all remaining amounts due were paid out in the second quarter of
2003. Amounts charged to the liability for the 2001 Restructuring Plan were as
follows:
64
<PAGE>
<TABLE>
<CAPTION>
Employee Contract
Termination Termination Asset Other
2001 Restructuring Plan Benefits Costs Provisions Costs Total
- ----------------------- ----------- ----------- ---------- ----- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Restructuring charges.................... $ 6,048 $ 5,385 $ 6,327 $ 449 $ 18,209
Asset write-offs......................... -- -- (5,890) -- (5,890)
Cash payments............................ (1,229) (5,235) -- (160) (6,624)
Adjustments to liability................. (187) (100) -- -- (287)
Foreign currency exchange rate changes... (35) -- -- (4) (39)
------- -------- ------- ----- ---------
Liability at December 31, 2001........... 4,597 50 437 285 5,369
Restructuring charges.................... 210 -- -- -- 210
Asset write-offs......................... -- -- (437) -- (437)
Cash payments............................ (2,794) -- -- (137) (2,931)
Adjustments to liability................. (1,252) (50) -- (89) (1,391)
Foreign currency exchange rate changes... 106 7 113
------- -------- ------- ----- ---------
Liability at December 31, 2002........... 867 -- -- 66 933
Cash payments............................ (952) -- -- (35) (987)
Adjustments to liability................. 84 -- -- (31) 53
Foreign currency exchange rate changes... 1 -- -- -- 1
------- -------- ------- ----- ---------
Liability at December 31, 2003........... $ -- $ -- $ -- $ -- $ --
======= ======== ======= ===== =========
</TABLE>
2002 Restructuring Plan--During the fourth quarter of 2002, management
approved plans to further restructure the Auction segment, as well as to carry
out additional headcount reductions in certain corporate departments. The goal
of the 2002 Restructuring Plan is to improve profitability through further cost
savings and other strategic actions, as described below.
In December 2002, the Company committed to the termination of approximately
60 employees as a result of the 2002 Restructuring Plan and recorded
restructuring charges of $4.2 million in the fourth quarter of 2002, principally
consisting of $4.0 million in employee termination benefits, as well as $0.1
million in lease terminations costs. These headcount reductions impacted the
live auction business of the Auction segment primarily in North America, as well
as certain corporate departments.
In February 2003, as part of the 2002 Restructuring Plan, the Company and
eBay entered into an agreement pursuant to which separate online auctions on
sothebys.com were discontinued on April 30, 2003. As a result, the Company
recorded restructuring charges of approximately $2.0 million in the first
quarter of 2003 consisting of approximately $1.0 million for employee
termination benefits, $0.5 million for a minimum guaranteed fee owed to eBay for
which the Company will receive no future economic benefit and approximately
$0.5 million for impairment losses related to certain technology assets.
This phase of the 2002 Restructuring Plan resulted in the termination of
approximately 30 employees in the Company's Auction segment.
During 2003, as part of the 2002 Restructuring Plan, management committed
to approximately 40 additional headcount reductions in Europe in the Auction
segment. As a result, the Company recorded restructuring charges of $3.7 million
and $0.5 million in the first and fourth quarters of 2003, respectively, for
employee termination benefits.
During the first quarter of 2003, as part of the 2002 Restructuring Plan,
the Company entered into an agreement to outsource the operation of its
mainframe computer systems. In conjunction with the decision to outsource such
operations, management committed to the termination of six employees in the
corporate Information Technology department and, as a result, the Company
recorded restructuring charges of approximately $0.1 million in the first
quarter of 2003 for employee termination benefits.
65
<PAGE>
During 2003, the Company recorded restructuring charges of approximately
$0.3 million for other costs related to the 2002 Restructuring Plan. Such costs,
which were expensed as incurred, primarily included fees for legal and other
professional services related to the 2002 Restructuring Plan.
During 2003, the Company recorded favorable adjustments of $1.5 million to
Net Restructuring Charges principally due to changes in management's original
estimates of employee termination benefits related to the 2002 Restructuring
Plan.
The liability related to the 2002 Restructuring Plan is recorded within
Accounts Payable and Accrued Liabilities in the Company's Consolidated Balance
Sheets. Amounts charged to the restructuring liability through December 31, 2003
were as follows:
<TABLE>
<CAPTION>
Employee Lease and
Termination Termination Asset Other
2002 Restructuring Plan Benefits Costs Provisions Costs Total
- ----------------------- ----------- ----------- ---------- ----- -------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Restructuring charges.................... $ 4,007 $ 124 $ -- $ 50 $ 4,181
Cash payments............................ (46) -- -- -- (46)
Foreign currency exchange rate changes... 8 -- -- -- 8
------- ----- ---- ----- -------
Liability at December 31, 2002........... 3,969 124 -- 50 4,143
Restructuring charges.................... 5,219 500 495 319 6,533
Asset write-offs......................... -- -- (495) -- (495)
Cash payments............................ (6,502) (621) -- (343) (7,466)
Adjustments to liability................. (1,471) (3) -- (25) (1,499)
Foreign currency exchange rate changes... 311 -- -- -- 311
------- ----- ----- ----- -------
Liability at December 31, 2003........... $ 1,526 $ -- $ -- $ 1 $ 1,527
======= ===== ===== ===== =======
</TABLE>
The remaining liability related to the 2002 Restructuring Plan is currently
expected to be paid out during the first quarter of 2004.
66
<PAGE>
NOTE V--QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
-------- -------- -------- --------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
For the year ended December 31, 2003:
Auction Sales $200,921 $580,084 $116,791 $792,859
Statement of Operations Data
- ----------------------------
Auction and related revenues $ 38,133 $107,580 $ 29,006 $134,319
Other revenues 3,059 2,838 2,121 2,543
-------- -------- -------- --------
Total revenues $ 41,192 $110,418 $ 31,127 $136,862
======== ======== ======== ========
(Loss) income from continuing operations $(27,649) $ 13,196 $(29,646) $ 17,616
======== ======== ======== ========
Net (loss) income $(27,620) $ 14,196 $(27,435) $ 20,203
======== ======== ======== ========
Basic and Diluted (Loss) Earnings Per Share
- -------------------------------------------
Basic (loss) income from continuing operations $ (0.45) $ 0.21 $ (0.48) $ 0.29
======== ======== ======== ========
Diluted (loss) income from continuing operations $ (0.45) $ 0.21 $ (0.48) $ 0.28
======== ======== ======== ========
Basic (loss) earnings per share $ (0.45) $ 0.23 $ (0.45) $ 0.33
======== ======== ======== ========
Diluted (loss) earnings per share $ (0.45) $ 0.23 $ (0.45) $ 0.33
======== ======== ======== ========
For the year ended December 31, 2002:
Auction Sales $190,059 $683,995 $208,550 $691,636
Statement of Operations Data
- ----------------------------
Auction and related revenues $ 35,611 $112,529 $ 36,130 $113,418
Other revenues 2,758 3,763 2,891 3,432
-------- -------- -------- --------
Total revenues $ 38,369 $116,292 $ 39,021 $116,850
======== ======== ======== ========
(Loss) income from continuing operations $(23,438) $ 15,716 $(44,586) $ (7,155)
======== ======== ======== ========
Net (loss) income $(23,105) $ 17,855 $(42,975) $ (6,530)
======== ======== ======== ========
Basic and Diluted (Loss) Earnings Per Share
- -------------------------------------------
Basic (loss) income from continuing operations $ (0.38) $ 0.26 $ (0.73) $ (0.12)
======== ======== ======== ========
Diluted (loss) income from continuing operations $ (0.38) $ 0.25 $ (0.73) $ (0.12)
======== ======== ======== ========
Basic (loss) earnings per share $ (0.38) $ 0.29 $ (0.70) $ (0. 11)
======== ======== ======== ========
Diluted (loss) earnings per share $ (0.38) $ 0.29 $ (0.70) $ (0. 11)
======== ======== ======== ========
</TABLE>
67
<PAGE>
REPORT OF MANAGEMENT
The Company's consolidated financial statements were prepared by
management, who is responsible for their integrity and objectivity. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on management's best
estimates and judgments.
Management is further responsible for maintaining systems of internal
control and related policies and procedures designed to provide reasonable
assurance that assets are adequately safeguarded and that the accounting records
reflect transactions executed in accordance with management's authorization.
<TABLE>
<S> <C> <C>
/s/ WILLIAM F. RUPRECHT /s/ WILLIAM S. SHERIDAN /s/ MICHAEL L. GILLIS
William F. Ruprecht William S. Sheridan Michael L. Gillis
President and Executive Vice President and Senior Vice President, Controller
Chief Executive Officer Chief Financial Officer and Chief Accounting Officer
</TABLE>
68
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2003, the Company has carried out an evaluation, under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the Company's disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective as of December 31, 2003. There has been no
change in the Company's internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) that occurred during the Company's fiscal year
ended December 31, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
69
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item is incorporated by reference to the
Company's definitive proxy statement for the annual meeting of shareholders to
be held in 2004 (the "Proxy Statement") under the captions "Election of
Directors," "Management--Executive Officers," "Management--Section 16(a)
Beneficial Ownership Reporting Compliance," and "Corporate Governance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
material appearing in the Proxy Statement under the captions
"Management--Compensation of Executive Officers" and "Compensation of
Directors." Notwithstanding anything to the contrary herein, the Audit Committee
Report, the Compensation Committee Report and the Performance Graph in the Proxy
Statement are not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the
table and related footnotes appearing in the Proxy Statement under the caption
"Class A and Class B Common Stock Ownership of Directors, Executive Officers and
5% Shareholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
material appearing in the Proxy Statement under the captions "Certain
Compensation Arrangements," "Certain Transactions" and "Compensation Committee
Interlocks and Insider Participation."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the
material appearing in the Proxy Statement under the caption "Independent
Auditors."
70
<PAGE>
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
15(a)(1) -- The following consolidated financial statements and the related
notes thereto of Sotheby's Holdings, Inc. and subsidiaries are
contained in Item 8, "Financial Statements and Supplementary
Data": Consolidated Statements of Operations--Years ended December
31, 2003, 2002 and 2001; Consolidated Balance Sheets--December 31,
2003 and 2002; Consolidated Statements of Cash Flows--Years ended
December 31, 2003, 2002 and 2001; Consolidated Statement of
Changes in Shareholders' Equity--Years ended December 31, 2003,
2002 and 2001.
15(a)(2) -- The following is a list of the consolidated financial statement
schedules of Sotheby's Holdings, Inc. and subsidiaries required by
Item 15(d): Schedule II--Valuation and Qualifying Accounts.
15(a)(3)
3(a) -- Amended and Restated Articles of Incorporation of Sotheby's
Holdings, Inc., as amended, incorporated by reference to Exhibit
4(b) to Registration Statement No. 33-26008, SEC File No. 1-9750,
on file at the Washington, D.C. office of the Securities and
Exchange Commission.
3(b) -- Amended and Restated By-Laws of Sotheby's Holdings, Inc., as
amended, through August 3, 2000, incorporated by reference to
Exhibit 3(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
4(a) -- See Exhibits 3(a) and 3(b).
4(b) -- Indenture, dated as of February 5, 1999, between Sotheby's
Holdings, Inc. and The Chase Manhattan Bank as Trustee,
incorporated by reference to Exhibit 4(a) to the current report on
Form 8-K, filed on February 10, 1999 with the Securities and
Exchange Commission.
4(c) -- Fixed Rate Note, dated February 5, 1999, made by Sotheby's
Holdings, Inc. in favor of Cede & Co., incorporated by reference
to Exhibit 4(b) to the current report on Form 8-K, filed on
February 10, 1999 with the Securities and Exchange Commission.
4(d) -- Instrument of resignation, appointment and acceptance, dated as of
December 23, 2002, by and among Sotheby's Holdings, Inc., JPMorgan
Chase Bank, as resigning trustee, and Wilmington Trust Company, as
successor trustee.
10(a)* -- Sotheby's, Inc. 1988 Benefit Equalization Plan, incorporated by
reference to Exhibit 10(t) to Registration Statement No. 33-17667.
10(b)* -- Sotheby's Holdings, Inc. 1987 Stock Option Plan as amended and
restated effective June 1, 1994 incorporated by reference to
Exhibit 10(o) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994.
10(c)* -- Sotheby's Holdings, Inc. Performance Share Purchase Plan,
incorporated by reference to Exhibit 10(a) to the Second Quarter
Form 10-Q for 1996.
10(d)* -- Sotheby's Holdings, Inc. 1997 Stock Option Plan Composite Plan
Document, effective January 1, 2000, incorporated by reference to
Exhibit 10(k) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
10(e) -- Agreement of Partnership of Acquavella Modern Art, dated May 29,
1990, between Sotheby's Nevada, Inc. and Acquavella Contemporary
Art, Inc. incorporated by reference to Exhibit 10(b) to the Form
8-K, filed on June 7, 1990, SEC File No. 1-9750, on file at the
Washington, D.C. office of the Securities and Exchange Commission.
10(f) -- First Amendment to Agreement of Partnership dated December 31,
2000, of Acquavella Modern Art, between Sotheby's Nevada, Inc. and
Acquavella Contemporary Art, Inc., incorporated by reference to
Exhibit 10(m) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
10(g) -- Second Amendment to Agreement of Partnership dated December 15,
2001, of Acquavella Modern Art, between Sotheby's Nevada, Inc. and
Acquavella Contemporary Art, Inc., incorporated by reference to
Exhibit 10(k) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
10(h) -- Third Amendment to Agreement of Partnership dated February 10,
2003, of Acquavella Modern Art, between Sotheby's Nevada, Inc. and
Acquavella Contemporary Art, Inc. incorporated by reference to
Exhibit 10(h) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
</TABLE>
71
<PAGE>
<TABLE>
<S> <C>
10(i) -- Fourth Amendment to Agreement of Partnership dated January 13,
2004, of Acquavella Modern Art, between Sotheby's Nevada, Inc. and
Acquavella Contemporary Art, Inc.
10(j) -- Amended and Restated Credit Agreement, dated as of February 7,
2003, among Sotheby's Holdings, Inc., Sotheby's Inc., Oatshare
Limited, Sotheby's Global Trading GmbH, the Lenders named therein;
and JPMorgan Chase Bank, as administrative agent and collateral
agent, incorporated by reference to Exhibit 10(c) to the First
Quarter 10-Q for 2003.
10(k) -- Purchase and Sale Agreement between SIBS, LLC, as Seller and RFR
Holding Corp., as Purchaser; Dated: As of December 16, 2002;
Property: 1334 York Avenue, New York, New York 10021, incorporated
by reference to Exhibit 10(a) to the First Quarter 10-Q for 2003.
10(l) -- Lease between 1334 York Avenue L.P., "Landlord," and Sotheby's,
Inc., "Tenant," February 7, 2003; Premises: 1334 York Avenue, New
York, New York, incorporated by reference to Exhibit 10(b) to the
First Quarter 10-Q for 2003.
10(m)* -- Agreement between Sotheby's Holdings, Inc. and Robin Woodhead,
incorporated by reference to Exhibit 10(b) to the Third Quarter
10-Q for 2001.
10(n)* -- Agreement between Sotheby's Holdings, Inc. and Donaldson C.
Pillsbury, incorporated by reference to Exhibit 10(b) to the First
Quarter 10-Q for 2002.
10(o)* -- Employment Agreement between Sotheby's, Inc. and Mitchell
Zuckerman, incorporated by reference to Exhibit 10(b) to the Third
Quarter 10-Q for 2002.
10(p)* -- Employment Agreement between Sotheby's Holdings, Inc. and Stuart
Siegel, incorporated by reference to Exhibit 10(q) to the
Company's Annual Report on Form 10-K for the year ended December
31, 2002.
10(q)* -- Employment Agreement between Sotheby's Holdings, Inc. and William
F. Ruprecht, incorporated by reference to Exhibit 99.1 to the
Third Quarter 10-Q for 2003.
10(r)* -- Employment Agreement between Sotheby's Holdings, Inc. and William
S. Sheridan, incorporated by reference to Exhibit 99.1 to the
Third Quarter 10-Q for 2003.
10(s)* -- Sotheby's Holdings, Inc. 2003 Restricted Stock Plan, dated April
29, 2003.
21 -- Subsidiaries of the Registrant
23 -- Consent of Deloitte & Touche LLP
24 -- Powers of Attorney
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(15)(b) -- Current Report on Form 8-K: The Company filed a current report on
Form 8-K with the Securities and Exchange Commission on October
15, 2003.
Current Report on Form 8-K: The Company filed a current report on
Form 8-K with the Securities and Exchange Commission on November
13, 2003.
(15)(c) -- The list of exhibits filed with this report is set forth in
response to Item 15(a)(3). The required exhibit index has been
filed with the exhibits.
(15)(d) -- The financial statement schedule of the Company listed in response
to Item 15(a)(2) is filed pursuant to this Item 15(d).
</TABLE>
- ----------
* A compensatory agreement or plan required to be filed pursuant to Item
15(c) of Form 10-K
72
<PAGE>
SCHEDULE II
SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------- ----------------------- ---------- ---------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
Description(a) of Period Expenses Accounts Deductions Period
- -------------- ---------- ---------- ---------- ---------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Valuation reserve deducted in the balance sheet from the
asset to which it applies:
Receivables:
2003 Allowance for doubtful accounts and credit losses... $ 9,317 $2,510 $593 $ 4,768 $ 7,652
2002 Allowance for doubtful accounts and credit losses... $10,678 $1,791 $458 $ 3,610 $ 9,317
2001 Allowance for doubtful accounts and credit losses... $22,455 $2,548 $316 $14,641 $10,678
Inventory:
2003 Realizable value allowance.......................... $ 4,009 $2,779 $ -- $ 1,367 $ 5,421
2002 Realizable value allowance.......................... $ 6,044 $1,885 $ -- $ 3,920 $ 4,009
2001 Realizable value allowance.......................... $ 8,058 $1,947 $ 77 $ 4,038 $ 6,044
</TABLE>
(a) The schedule above relates only to the Company's continuing operations and
excludes amounts related to the Company's discontinued domestic real estate
brokerage business (see Note C of Notes to Consolidated Financial
Statements).
73
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOTHEBY'S HOLDINGS, INC.
By: /s/ WILLIAM F. RUPRECHT
--------------------------------------
William F. Ruprecht
Date: March 12, 2004 President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board March 12, 2004
- --------------------------------
Michael I. Sovern
* Vice Chairman of the Board March 12, 2004
- --------------------------------
Max M. Fisher
* Deputy Chairman of the Board March 12, 2004
- --------------------------------
Marquess Of Hartington
/s/ WILLIAM F. RUPRECHT President, Chief Executive Officer and March 12, 2004
- -------------------------------- Director
William F. Ruprecht
* Executive Vice President and Director March 12, 2004
- --------------------------------
Robin G. Woodhead
* Director March 12, 2004
- --------------------------------
Lord Black of Crossharbour
* Director March 12, 2004
- --------------------------------
Michael Blakenham
* Director March 12, 2004
- --------------------------------
Steven B. Dodge
* Director March 12, 2004
- --------------------------------
Jeffrey H. Miro
* Director March 12, 2004
- --------------------------------
Sharon Percy Rockefeller
* Director March 12, 2004
- --------------------------------
Donald M. Stewart
* Director March 12, 2004
- --------------------------------
Robert S. Taubman
/s/ WILLIAM S. SHERIDAN Executive Vice President and Chief March 12, 2004
- -------------------------------- Financial Officer
William S. Sheridan
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL L. GILLIS Senior Vice President, Controller and March 12, 2004
- -------------------------------- Chief Accounting Officer
Michael L. Gillis
/s/ WILLIAM S. SHERIDAN March 12, 2004
- --------------------------------
*William S. Sheridan
As Attorney-in-Fact
</TABLE>
75
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- --------- -----------
<S> <C>
3(a)-- Amended and Restated Articles of Incorporation of Sotheby's
Holdings, Inc., as amended, incorporated by reference to Exhibit
4(b) to Registration Statement No. 33-26008, SEC File No. 1-9750, on
file at the Washington, D.C. office of the Securities and Exchange
Commission.
3(b)-- Amended and Restated By-Laws of Sotheby's Holdings, Inc., as
amended, through August 3, 2000, incorporated by reference to
Exhibit 3(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
4(a)-- See Exhibits 3(a) and 3(b).
4(b)-- Indenture, dated as of February 5, 1999, between Sotheby's Holdings,
Inc. and The Chase Manhattan Bank as Trustee, incorporated by
reference to Exhibit 4(a) to the current report on Form 8-K, filed
on February 10, 1999 with the Securities and Exchange Commission.
4(c)-- Fixed Rate Note, dated February 5, 1999, made by Sotheby's Holdings,
Inc. in favor of Cede & Co., incorporated by reference to Exhibit
4(b) to the current report on Form 8-K, filed on February 10, 1999
with the Securities and Exchange Commission.
4(d)-- Instrument of resignation, appointment and acceptance, dated as of
December 23, 2002, by and among Sotheby's Holdings, Inc., JPMorgan
Chase Bank, as resigning trustee, and Wilmington Trust Company, as
successor trustee.
10(a)*-- Sotheby's, Inc. 1988 Benefit Equalization Plan, incorporated by
reference to Exhibit 10(t) to Registration Statement No. 33-17667.
10(b)*-- Sotheby's Holdings, Inc. 1987 Stock Option Plan as amended and
restated effective June 1, 1994 incorporated by reference to Exhibit
10(o) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
10(c)*-- Sotheby's Holdings, Inc. Performance Share Purchase Plan,
incorporated by reference to Exhibit 10(a) to the Second Quarter
Form 10-Q for 1996.
10(d)*-- Sotheby's Holdings, Inc. 1997 Stock Option Plan Composite Plan
Document, effective January 1, 2000, incorporated by reference to
Exhibit 10(k) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
10(e)-- Agreement of Partnership of Acquavella Modern Art, dated May 29,
1990, between Sotheby's Nevada, Inc. and Acquavella Contemporary
Art, Inc. incorporated by reference to Exhibit 10(b) to the Form
8-K, filed on June 7, 1990, SEC File No. 1-9750, on file at the
Washington, D.C. office of the Securities and Exchange Commission.
10(f)-- First Amendment to Agreement of Partnership dated December 31, 2000,
of Acquavella Modern Art, between Sotheby's Nevada, Inc. and
Acquavella Contemporary Art, Inc., incorporated by reference to
Exhibit 10(m) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
10(g)-- Second Amendment to Agreement of Partnership dated December 15,
2001, of Acquavella Modern Art, between Sotheby's Nevada, Inc. and
Acquavella Contemporary Art, Inc., incorporated by reference to
Exhibit 10(k) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
10(h)-- Third Amendment to Agreement of Partnership dated February 10, 2003,
of Acquavella Modern Art, between Sotheby's Nevada, Inc. and
Acquavella Contemporary Art, Inc.
10(i)-- Fourth Amendment to Agreement of Partnership dated January 13, 2004,
of Acquavella Modern Art, between Sotheby's Nevada, Inc. and
Acquavella Contemporary Art, Inc. incorporated by reference to
Exhibit 10(h) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
10(j)-- Amended and Restated Credit Agreement, dated as of February 7, 2003,
among Sotheby's Holdings, Inc., Sotheby's Inc., Oatshare Limited,
Sotheby's Global Trading GmbH, the Lenders named therein; and
JPMorgan Chase Bank, as administrative agent and collateral agent,
incorporated by reference to Exhibit 10(c) to the First Quarter 10-Q
for 2003.
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- --------- -----------
<S> <C>
10(k)-- Purchase and Sale Agreement between SIBS, LLC, as Seller and RFR
Holding Corp., as Purchaser; Dated: As of December 16, 2002;
Property: 1334 York Avenue, New York, New York 10021, incorporated
by reference to Exhibit 10(a) to the First Quarter 10-Q for 2003.
10(l)-- Lease between 1334 York Avenue L.P., "Landlord," and Sotheby's,
Inc., "Tenant," February 7, 2003; Premises: 1334 York Avenue, New
York, New York, incorporated by reference to Exhibit 10(b) to the
First Quarter 10-Q for 2003.
10(m)*-- Agreement between Sotheby's Holdings, Inc. and Robin Woodhead,
incorporated by reference to Exhibit 10(b) to the Third Quarter 10-Q
for 2001.
10(n)*-- Agreement between Sotheby's Holdings, Inc. and Donaldson C.
Pillsbury, incorporated by reference to Exhibit 10(b) to the
First Quarter 10-Q for 2002.
10(o)*-- Employment Agreement between Sotheby's, Inc. and Mitchell
Zuckerman, incorporated by reference to Exhibit 10(b) to the Third
Quarter 10-Q for 2002.
10(p)*-- Employment Agreement between Sotheby's Holdings, Inc. and Stuart
Siegel, incorporated by reference to Exhibit 10(q) to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
10(q)*-- Employment Agreement between Sotheby's Holdings, Inc. and William F.
Ruprecht, incorporated by reference to Exhibit 99.1 to the Third
Quarter 10-Q for 2003.
10(r)*-- Employment Agreement between Sotheby's Holdings, Inc. and William S.
Sheridan, incorporated by reference to Exhibit 99.1 to the Third
Quarter 10-Q for 2003.
10(s)*-- Sotheby's Holdings, Inc. 2003 Restricted Stock Plan, dated April 29,
2003.
21-- Subsidiaries of the Registrant
23-- Consent of Deloitte & Touche LLP
24-- Powers of Attorney
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
</TABLE>
* A compensatory agreement or plan required to be filed pursuant to Item
15(c) of Form 10-K
77
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>ex10-i.txt
<DESCRIPTION>EXHIBIT 10(I)
<TEXT>
<PAGE>
Exhibit 10(i)
SOTHEBY'S NEVADA, INC.
5600 Spring Mountain Road, Suite 104
Las Vegas, Nevada 89102
January 13, 2004
Acquavella Contemporary Art, Inc.
c/o Mr. William R. Acquavella
1400 South Virginia Street
Reno, Nevada 89502
Dear Bill:
This letter agreement amends the Agreement of Partnership (the "Partnership
Agreement") of Acquavella Modern Art, a Nevada general partnership, dated
May 29, 1990, between Sotheby's Nevada, Inc., a Nevada Corporation
("Sotheby's Partner"), and Acquavella Contemporary Art, Inc., a Nevada
Corporation ("Acquavella Partner").
By letters of amendment on December 1, 2000, December 15, 2001 and
February 10, 2003, we agreed to extend the term of the Partnership
Agreement through March 31, 2002, March 31, 2003 and March 31, 2004,
respectively. By this letter of amendment, we are agreeing to extend the
term of the Partnership Agreement for one additional year through March 13,
2005. Accordingly, each of the Sotheby's Partner and the Acquavella Partner
hereby agree to amend Section 1.5 (iii) of the Partnership Agreement to
delete the reference to December 31, 2000 (subsequently amended to March 31,
2002, March 31, 2003 and March 31, 2004), and substitute therefore the date
of "March 31, 2005."
Except as amended hereby, the Partnership Agreement shall remain in full
force and effect and is hereby ratified and confirmed.
Please sign this letter agreement in the space provided below. Upon execution
on behalf of the Acquavella Partner, this letter agreement shall be effective
as of the date of this letter.
SOTHEBY'S NEVADA, INC.
By: /s/ William F. Ruprecht
------------------------------
William F. Ruprecht, President
AGREED AND ACCEPTED
ACQUAVELLA CONTEMPORARY ART, INC.
By: /s/ William R. Acquavella
------------------------------
William R. Acquavella, President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>ex10-s.txt
<DESCRIPTION>EXHIBIT 10(S)
<TEXT>
<Page>
Exhibit 10(s)
SOTHEBY'S HOLDINGS, INC.
2003 RESTRICTED STOCK PLAN
<Page>
SOTHEBY'S HOLDINGS, INC.
2003 RESTRICTED STOCK PLAN
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
<S> <C> <C>
ARTICLE 1 PURPOSE OF THE PLAN, ADOPTION AND TERM...................... 1
1.1 Purpose of the Plan......................................... 1
1.2 Adoption and Term........................................... 1
ARTICLE 2 DEFINITIONS................................................. 1
ARTICLE 3 ADMINISTRATION.............................................. 4
3.1 Administration.............................................. 4
3.2 Expenses of Administration.................................. 4
3.3 Indemnification............................................. 4
ARTICLE 4 SHARES OF COMMON STOCK SUBJECT TO THE PLAN.................. 5
4.1 Shares Subject to the Plan.................................. 5
4.2 Restricted Stock Subject to Forfeited or Terminated
Awards.................................................... 5
4.3 Exchange of Options for Restricted Stock.................... 5
ARTICLE 5 PARTICIPATION............................................... 5
ARTICLE 6 RESTRICTED STOCK............................................ 5
6.1 Grant of Restricted Stock................................... 5
6.2 Restrictions................................................ 6
6.3 Restricted Stock Shares Certificates........................ 6
6.4 Voting and Dividend Rights.................................. 6
ARTICLE 7 TERMS AND CONDITIONS OF RESTRICTED STOCK.................... 6
7.1 Award Agreements............................................ 6
7.2 Plan Provisions Control Terms............................... 6
7.3 Vesting..................................................... 6
7.4 Acceleration of Vesting..................................... 7
7.5 Taxes and Withholding....................................... 7
7.6 Surrender of Restrictions................................... 7
7.7 Restrictions on Ownership of Class B Common Stock;
Incorporation by Reference of Articles of Incorporation... 7
7.8 Issuance of Class A Common Stock............................ 7
ARTICLE 8 AMENDMENT AND TERMINATION OF THE PLAN; REORGANIZATIONS AND
RECAPITALIZATIONS OF THE CORPORATION...................... 8
8.1 Amendment of the Plan....................................... 8
8.2 Termination of the Plan..................................... 8
8.3 Reorganizations and Recapitalizations of the Corporation.... 8
ARTICLE 9 COMPLIANCE WITH OTHER LAWS AND REGULATIONS.................. 8
9.1 Registration or Qualification of Securities................. 8
9.2 Representation.............................................. 8
9.3 Exchange of Certificates.................................... 9
ARTICLE 10 RESTRICTIONS ON TRANSFER.................................... 9
</Table>
i
<Page>
<Table>
<Caption>
PAGE
----
<S> <C> <C>
ARTICLE 11 GENERAL PROVISIONS.......................................... 9
11.1 No Right to Continued Employment............................ 9
11.2 Beneficiaries or Representatives of a Participant........... 9
11.3 Elimination of Fractional Shares............................ 9
11.4 Inspection of Records....................................... 9
11.5 Word Meanings............................................... 9
11.6 Section Titles.............................................. 9
11.7 Severability................................................ 10
11.8 Compliance with Section 16(b) of the Securities Exchange
Act....................................................... 10
11.9 Compliance with Code Section 162(m)......................... 10
11.10 Strict Construction......................................... 10
11.11 Choice of Law............................................... 10
</Table>
ii
<Page>
SOTHEBY'S HOLDINGS, INC.
2003 RESTRICTED STOCK PLAN
ARTICLE 1
PURPOSE OF THE PLAN, ADOPTION AND TERM
1.1 Purpose of the Plan. The Plan shall be called the Sotheby's Holdings,
Inc. 2003 Restricted Stock Plan (the 'Plan'). The purpose of the Plan is to
promote the interests of the Company and its shareholders by (i) providing
certain Employees of the Corporation with additional incentives to continue and
increase their efforts with respect to achieving success in the business of the
Corporation and its Subsidiaries, (ii) attracting and retaining the best
available personnel to participate in the ongoing business operations of the
Corporation and its Subsidiaries, and (iii) issuing shares of the Corporation's
Class B Common Stock in exchange for the cancellation of certain stock options
previously granted under the Sotheby's Holdings, Inc. 1987 and 1997 Stock Option
Plans.
1.2 Adoption and Term. The Plan has been approved by the Board of Directors
of the Corporation and, subject to the approval of a majority of the voting
power of the shareholders of the Corporation, is effective May 1, 2003. The Plan
will remain in effect until terminated or abandoned by action of the Board of
Directors.
ARTICLE 2
DEFINITIONS
In the Plan, whenever the context so indicates, the singular or plural
number, and the masculine, feminine or neuter gender shall each be deemed to
include the other, the terms 'he,' 'his,' and 'him' shall refer to a
Participant, and the capitalized terms shall have the following meanings:
2.1 'Articles of Incorporation' means the Amended and Restated Articles of
Incorporation of the Corporation, as the same may be amended from time to time.
2.2 'Award' means individually or collectively, a grant of Restricted Stock
under this Plan.
2.3 'Award Agreement' means an agreement entered into by each Participant
and the Corporation, setting forth the terms and provisions applicable to Awards
granted to Participants under the Plan.
2.4 'Beneficiary' means (i) an individual, trust, or estate, who or which,
by will or by operation of the laws of descent and distribution, succeeds to the
rights and obligations of a Participant under the Plan upon the Participant's
death; or (ii) an individual who, as a result of designation by a Participant,
succeeds to the rights and obligations of such Participant under the Plan and
the Award Agreement upon such Participant's death.
2.5 'Board of Directors' means the Board of Directors of the Corporation or
the Executive Committee of the Board.
2.6 'Business Day' means any Day on which the New York Stock Exchange is
open for trading.
2.7 'Class A Common Stock' means the Class A Limited Voting Common Stock of
the Corporation, par value $0.10 per share, entitling every holder thereof, on
all matters submitted to a vote of the shareholders of the Corporation, to cast
one vote for each share standing in his name.
2.8 'Class B Common Stock' means the Class B Common Stock of the
Corporation, par value $0.10 per share, entitling every holder thereof, on all
matters submitted to a vote of the shareholders of the Corporation, to cast 10
votes for each share standing in his name.
2.9 'Code' means the Internal Revenue Code of 1986, as amended from time to
time (or any corresponding provisions of succeeding law).
2.10 'Common Stock' means the Class A Common Stock and the Class B Common
Stock.
2.11 'Compensation Committee' or 'Committee' means the Compensation
Committee established by the Board of Directors, or such other committee as the
Board may establish and assign the responsibility of administering this Plan.
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2.12 'Confidential Information' means, with respect to the Corporation and
its Subsidiaries, any confidential information regarding the financial situation
and particular needs of the Corporation and its Subsidiaries as well as of, or
relating to, their customers and clients (including, without limitation,
consignors, buyers and principals), the identity of such Persons, client lists,
documents and information regarding the Corporation's and any Subsidiary's sales
data, marketing, operational and appraisal techniques, contracts, pricing, costs
and profits, and any other information maintained as proprietary or as trade
secrets or as confidential.
2.13 'Corporation' means Sotheby's Holdings, Inc., a Michigan corporation,
and any successor in interest to the business of the Corporation that has, by
agreement, adopted the Plan.
2.14 'Date of Grant', with respect to an Award, means the date on which the
Compensation Committee grants such Award pursuant to the Plan.
2.15 'Day' means each calendar day, including Saturdays, Sundays, and legal
holidays; provided, however, that if the Day on which a period of time for
consent or approval or other action ends is not a Business Day, such period
shall end on the next Business Day.
2.16 'Disability' or 'Disabled' means, with respect to an Employee, a
physical or mental condition resulting from any medically determinable physical
or mental impairment that renders such Employee incapable of engaging in any
substantial gainful employment and that can be expected to result in death or
that has lasted or can be expected to last for a continuous period of not less
than three hundred sixty-five (365) Days. Certain conditions are excluded from
the definition of Disability. The Disability of an Employee and the date upon
which an Employee ceases to be employed by reason of Disability shall be
determined by the Compensation Committee in accordance with uniform principles
consistently applied, upon the basis of such evidence as the Compensation
Committee deems necessary and desirable, and its good faith determination shall
be conclusive for all purposes of this Plan and the relevant Award Agreement.
2.17 'Eligible Options' means those Options previously granted under the
Stock Option Plan which are eligible for exchange under an Exchange Offer.
2.18 'Employee' means an individual who is and continues to be employed
(within the meaning of section 3401 of the Code and the regulations promulgated
thereunder) by the Corporation or a Subsidiary (while a corporation continues to
be a Subsidiary) including officers (whether or not they may also be directors)
of the Corporation or a Subsidiary. An Employee shall cease to be an Employee
upon the voluntary or involuntary termination of his employment with the
Corporation or a Subsidiary for any reason, including death, Disability,
Retirement, or with or without cause. Whether an authorized leave of absence, or
an absence due to military or government service, Disability, or any other
reason, constitutes a cessation of employment shall be determined by the
Compensation Committee, in its sole discretion.
2.19 'Exchange Act' means the Securities Exchange Act of 1934, as amended.
2.20 'Exchange Offer' means an offer to exchange underwater Options for
shares of Restricted Stock pursuant to such terms and conditions as the
Compensation Committee may approve.
2.21 'Fair Market Value' means the value of each share of Restricted Stock,
determined for a particular date as follows:
(a) if the Class B Common Stock is listed or admitted for trading on any
United States national securities exchange, the value of each share of
Restricted Stock shall be the closing price per share of Class B Common
Stock on such exchange (or, if listed on more than one United States
exchange, the principal said exchange) on the relevant Valuation Date
hereunder;
(b) if the Class B Common Stock is not traded on any United States
national securities exchange, but is quoted on the National Association of
Securities Dealers, Inc. Automated Quotation System (the 'NASDAQ System') or
any similar system of automated dissemination of quotations of prices in
common use, the value of each share of Restricted Stock shall be the price
per share equal to the mean between the closing high bid and the low asked
quotations on such system on the relevant Valuation Date hereunder;
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(c) if neither clause (a) nor clause (b) of this definition is
applicable with respect to the Class B Common Stock, but either clause (a)
or clause (b) is applicable with respect to the Class A Common Stock, the
value of each share of Restricted Stock shall be the closing price as
described in clause (a) above or the mean between the closing high bid and
the low asked quotations as described in clause (b) above, respectively, of
the Class A Common Stock, as the case may be; or
(d) if neither paragraph (a) nor paragraph (b) nor paragraph (c) of this
definition is applicable, the value of each share of Restricted Stock shall
be the fair market value as determined by the Committee, in good faith and
in accordance with uniform principles consistently applied, on the last day
of the relevant Fiscal Year immediately preceding the relevant date
hereunder.
(e) for purposes of determining taxation of the Restricted Stock issued
to U.K. employees, the definition of Fair Market Value may be adjusted as
required by the Shares Valuation Division of the U.K. Inland Revenue.
2.22 'Fiscal Year' means the fiscal year of the Corporation.
2.23 'Fractional Share' means a portion of, or less than the whole of, a
share of Common Stock.
2.24 'Option' means an Option granted under the Stock Option Plan.
2.25 'Optionee' means an individual who has outstanding Option grants under
the Stock Option Plan.
2.26 'Participant' means an Employee who has an outstanding Award granted
under this Plan.
2.27 'Period of Restriction' means the period during which the transfer of
shares of Restricted Stock is limited in some way (based on the passage of time,
the achievement of performance goals, or upon the occurrence of other events as
determined by the Compensation Committee, in its discretion), and the shares are
subject to substantial risk of forfeiture, as provided in Sections 6.2 and/or
7.3.
2.28 'Person' or 'Persons' means an individual, a partnership (general or
limited), corporation, joint venture, business trust, cooperative, association,
or other form of business organization, whether or not regarded as a legal
entity under applicable law, a trust (inter vivos or testamentary), an estate of
a deceased, insane, or incompetent person, a quasi-governmental entity, a
government or any agency, authority, political subdivision, or other
instrumentality thereof, or any other entity.
2.29 'Plan' means the Sotheby's Holdings, Inc. 2003 Restricted Stock Plan,
as amended from time to time.
2.30 'Reporting Person' means any and all Employees subject to Section 16 of
the Exchange Act.
2.31 'Restricted Stock' means those shares of Class B Common Stock made the
subject of any Award granted pursuant to the Plan.
2.32 'Retirement' means the termination of employment by an Employee after
the attainment of the age of sixty-five (65) years or upon such earlier date as
required by local law or as otherwise determined or approved by the Compensation
Committee.
2.33 'Section 162(m) Subcommittee' shall be a Subcommittee of the
Compensation Committee comprised solely of two or more members of the Board, as
determined by the Board from time to time, each of whom shall be (i) a
'disinterested person' as that term is defined and interpreted pursuant to Rule
16b-3 promulgated under Section 16 of the Exchange Act and (ii) an 'outside
director' as that term is defined and interpreted pursuant to section 162(m) of
the Code and the regulations thereunder. The purpose of the Section 162(m)
Subcommittee is to approve Restricted Stock Awards to covered employees (as
defined in Code Section 162(m)) so that the Restricted Stock can qualify as
performanced-based compensation under Code Section 162(m).
2.34 'Securities Act' means the Securities Act of 1933, as amended.
2.35 'Stock Option Plan' means the Sotheby's Holdings, Inc. 1987 and 1997
Stock Option Plans.
2.36 'Subsidiary' means any corporation at least 50% of the total combined
voting power of which is owned by the Corporation or another Subsidiary.
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2.37 'Transfer' means any assignment, sale, transfer, conveyance, mortgage
or other encumbrance, pledge, or other disposition or act of alienation, whether
voluntary or involuntary, or by operation of law.
2.38 'Valuation Date' means, with respect to an Award of Restricted Stock,
the Business Day immediately preceding either the Date of Grant of such Award,
or the vesting date or other event applicable to such Award. The Valuation Date
for the issuance of Restricted Stock in connection with an Exchange Offer shall
be the date specified in the Exchange Offer documents. Whenever reference is
made to a Valuation Date, it shall mean, with respect to the Common Stock, the
value at the close of trading on such Valuation Date, and with respect to any
other item, midnight in Detroit, Michigan at the end of such Valuation Date.
ARTICLE 3
ADMINISTRATION
3.1 Administration. The Plan shall be administered by the Committee in
accordance with this Article 3. Subject to the terms and conditions of the Plan,
the Committee or the Section 162(m) Subcommittee as applicable shall have the
sole discretionary authority:
(a) to authorize the granting of Restricted Stock Awards;
(b) to select any Reporting Persons who are to be granted Restricted
Stock under the Plan and to determine, subject to the limitations provided
in Section 6.1 hereof, the number of shares of Restricted Stock to be
granted to each Reporting Person;
(c) to construe and interpret the Plan;
(d) to establish and modify administrative rules for the Plan;
(e) to impose such conditions and restrictions with respect to the
Restricted Stock Awards, not inconsistent with the terms of the Plan, as it
determines appropriate;
(f) to execute or cause to be executed Award Agreements; and
(g) generally, to exercise such power and perform such other acts in
connection with the Plan and the Awards and to make all determinations under
the Plan as it may deem necessary or advisable or as required, provided or
contemplated hereunder.
Action taken or not taken by the Compensation Committee on one or more
occasions shall be without obligation to take or not take such action on any
other occasion(s).
The Committee may delegate to one or more Persons any of its powers, other
than its power to authorize the granting of Awards, hereinbefore or hereinafter
provided or conferred, or designate one or more Persons to do or perform those
matters to be done or performed by the Compensation Committee, including
administration of the Plan. Notwithstanding the foregoing, the Committee may not
delegate a power if the delegation of such power would cause the Plan to fail to
satisfy the plan administration requirements set forth in Rule 16b-3(c)
promulgated under the Exchange Act or section 162(m) of the Code and the
regulations promulgated thereunder. Any Person or Persons delegated or
designated by the Committee shall be subject to the same obligations and
requirements imposed on the Committee and its members under the Plan.
3.2 Expenses of Administration. The Corporation shall pay all costs and
expenses of administering the Plan.
3.3 Indemnification. The Committee, members of the Committee, and each
Person or Persons designated or delegated by the Committee, and the
shareholders, directors and officers of the Corporation, shall be entitled to
indemnification and reimbursement from the Corporation for any action or any
failure to act in connection with services performed by or on behalf of the
Committee for the benefit of the Corporation to the fullest extent provided or
permitted by the Corporation's Articles of Incorporation and by any insurance
policy or other agreement intended for the benefit of the Committee as a
committee of the Board of Directors or otherwise, or by any applicable law.
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ARTICLE 4
SHARES OF COMMON STOCK SUBJECT TO THE PLAN
4.1 Shares Subject to the Plan. The Restricted Stock to be made the subject
of Awards granted under the Plan shall be shares of the Corporation's authorized
but unissued or reacquired Class B Common Stock. Subject to adjustment as
provided in Section 8.3 hereof, the aggregate number of shares of Class B Common
Stock that may be issued by the Corporation under the Plan is 2,000,000 shares
of Class B Common Stock. The aggregate number of shares of Restricted Stock
outstanding at any time shall not exceed the relevant number of shares of Class
B Common Stock remaining available for issuance under the Plan.
4.2 Restricted Stock Subject to Forfeited or Terminated Awards. In the event
that any Restricted Stock with respect to an outstanding Award is forfeited,
surrendered, expires or is terminated for any reason before the Period of
Restriction has been satisfied, all shares of Restricted Stock allocable to the
forfeited or terminated portion of such Award shall again be available for
Awards subsequently granted under the Plan.
4.3 Exchange of Options for Restricted Stock. Employees who were previously
granted certain Options under the Stock Option Plan may have a choice to
exchange those Options for Restricted Stock under the Plan pursuant to a
pre-determined conversion ratio as approved by the Compensation Committee (the
'Exchange Offer'). Options eligible for the exchange ('Eligible Options') will
also be determined by the Compensation Committee prior to the Date of Grant.
Only those Optionees who satisfy the following criteria are eligible for the
exchange:
(a) Optionee must be actively employed by the Corporation or a
Subsidiary (or on an approved leave of absence) on the Date of Grant and
must not either have given notice of termination of employment or received
notice of termination of employment as of the Date of Grant; and
(b) Optionee must hold a certain number of Eligible Options which are
unexercised and outstanding (i.e., have not expired). The number shall be
determined by the Compensation Committee.
An Optionee who satisfies the criteria under this Section 4.3 may have a
choice to exchange all Eligible Options; no partial exchange is permitted. The
number of Eligible Options and the number of shares of Restricted Stock granted
in exchange for cancellation of the Eligible Options will be set forth in the
Award Agreement for each Participant. Any Options which are exchanged for
Restricted Stock pursuant to this Section 4.3 shall be cancelled. Restricted
Stock granted in exchange for the cancelled Options shall be subject to all of
the terms and conditions of this Plan.
ARTICLE 5
PARTICIPATION
Plan Participants shall be such Employees as the Compensation Committee may
select (who may include officers). In making such selections, the Committee may
take into account the nature of the services rendered by such Employees, their
present and potential contributions to the Corporation's success, and such other
factors as the Committee in its discretion shall deem relevant.
ARTICLE 6
RESTRICTED STOCK
6.1 Grant of Restricted Stock. The Compensation Committee will cause the
Corporation to issue Restricted Stock under the Plan in connection with an
Exchange Offer described in Article 4. The Compensation Committee may also from
time to time cause the Corporation to issue additional shares of Restricted
Stock under the Plan, subject to such restrictions, conditions and other terms
as the Compensation Committee may determine in addition to those set forth
herein. The maximum aggregate number of shares of Restricted Stock which may be
granted to any one Employee during a Fiscal Year shall be limited to 200,000
shares. For purposes of calculating the maximum number of shares of
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Restricted Stock granted in any Fiscal Year to an Employee who is subject to
Code Section 162(m), any shares that are granted and subsequently cancelled or
surrendered during such Fiscal Year shall continue to be counted against the
maximum number of shares which may be granted to such Employee pursuant to the
Plan during such Fiscal Year. Notwithstanding the foregoing, to the extent an
adjustment is made to the Common Stock to reflect a change in the corporate
capitalization of the Corporation, the additional shares of Restricted Stock, if
any, shall not be counted against the maximum number of shares which may be
granted to the Participant.
6.2 Restrictions. The Restricted Stock issued in connection with an Exchange
Offer shall be subject to the vesting schedule under Section 7.3 or such other
vesting schedule as the Compensation Committee determines. Restricted Stock
grants other than those made pursuant to an Exchange Offer, if any, will also be
subject to vesting under Section 7.3 unless the Compensation Committee
establishes a different Period of Restriction applicable to such Restricted
Stock. Each grant of Restricted Stock may be subject to a different Period of
Restriction as specified in the Award Agreement. The Compensation Committee may,
in its sole discretion, at the time a grant is made, prescribe restrictions in
addition to or other than the expiration of the Period of Restriction, including
the satisfaction of corporate or individual performance objectives, which shall
be applicable to all or any portion of the Restricted Stock. Such restrictions
shall be set forth in the Participant's Award Agreement.
Except with respect to grants of Restricted Stock intended to qualify as
performance based compensation for purposes of Section 162(m) of the Code, the
Compensation Committee may also, in its sole discretion, shorten or terminate
the Period of Restriction or waive any other restrictions applicable to all or a
portion of such Restricted Stock. None of the Restricted Stock may be sold,
transferred, assigned, pledged or otherwise encumbered or disposed of prior to
the date on which such Restricted Stock vests in accordance with Section 7.3.
6.3 Restricted Stock Share Certificates. Restricted Stock awarded to a
Participant may be held under the Participant's name in a book entry account
maintained by or on behalf of the Corporation. Upon vesting of the Restricted
Stock, the Corporation will establish procedures regarding the delivery of share
certificates or the transfer of shares in book entry form.
6.4 Voting and Dividend Rights. Except as otherwise determined by the
Committee either at the time Restricted Stock is awarded or at any time
thereafter prior to the lapse of the restrictions, holders of Restricted Stock
shall have the right to vote such shares and the right to receive any dividends
with respect to such shares, whether or not the shares of Restricted Stock are
vested. All distributions, if any, received by an Employee with respect to
Restricted Stock as a result of any stock split, stock distributions,
combination of shares, or other similar transaction shall be subject to the
restrictions of the Plan.
ARTICLE 7
TERMS AND CONDITIONS OF RESTRICTED STOCK
7.1 Award Agreements. The terms of the Restricted Stock granted under the
Plan shall be as set forth in a written agreement (an 'Award Agreement') in such
form as the Committee shall from time to time determine. Each Award Agreement
shall comply with and be subject to the terms and conditions of the Plan and
such other terms and conditions as the Committee may deem appropriate. No Person
shall have any rights under the Plan unless and until the Corporation and the
Participant have executed an Award Agreement setting forth the grant and the
terms and conditions of the Restricted Stock.
7.2 Plan Provisions Control Terms. The terms of the Plan shall govern all
Restricted Stock granted under the Plan. In the event that any provision of an
Award Agreement shall conflict with any term in the Plan as constituted on the
Date of Grant, the term in the Plan constituted on the Date of Grant of such
Option shall control.
7.3 Vesting. Except in the case of the death, Disability, or Retirement of a
Participant, and subject to the provisions of Section 7.4 hereof, the Restricted
Stock Granted under the Plan will vest in accordance with the following
schedule:
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<Table>
<Caption>
COMPLETED YEARS OF EMPLOYMENT CUMULATIVE
FROM DATE OF GRANT VESTING PERCENTAGE
------------------ ------------------
<S> <C>
1 25%
2 50%
3 75%
4 or more 100%
</Table>
Except as provided in this Section 7.3, in the event a Participant
terminates employment prior to 100% vesting, any shares of Restricted Stock
which are not vested shall be forfeited immediately and permanently. A
Participant shall be 100% vested in his Restricted Stock in the event he
terminates employment by reason of death, Disability, or Retirement, or in the
event of a Change in Control as described in Section 7.4.
For purposes of this Section 7.3, account shall be taken of any adjustments
made to the shares of Restricted Stock as described in Section 8.3 hereof after
the Date of Grant of the Restricted Stock, such that the number of shares of
Restricted Stock with respect to which a Participant is vested shall be
redetermined at the time of an adjustment.
7.4 Acceleration of Vesting.
(a) Notwithstanding anything to the contrary in the Plan, including
Sections 7.3, the Compensation Committee, in its discretion, may accelerate,
in whole or in part the vesting schedule applicable to a grant of Restricted
Stock.
(b) In the event of a Change in Control (as defined in the Sotheby's
Holdings, Inc. 1997 Stock Option Plan), Restricted Stock granted under the
Plan shall become 100% vested on the date of the Change in Control.
7.5 Taxes and Withholding. When a Participant incurs tax liability in
connection with the lapse of a restriction which tax liability is subject to tax
withholding under applicable tax laws, and the Participant is obligated to pay
an amount required to be withheld under applicable tax laws, the withholding tax
obligation will be satisfied by withholding from shares to be issued upon lapse
of such restriction that number of shares of Common Stock having a Fair Market
Value equal to the minimum amount required to be withheld (but in no event any
more than the minimum amount required to be withheld). The Corporation will
establish the procedures for selling shares needed to satisfy the tax
withholding liability, which procedures may include selling shares on the open
market or the Corporation's purchase of such shares or such other procedures as
the Corporation deems desirable. The Participant also has the option to make
payment in cash in United States dollars in lieu of the share withholding
described above pursuant to procedures established by the Corporation. The
amount of any such withholding shall be determined by the Corporation.
7.6 Surrender of Restricted Stock. Any Restricted Stock granted under the
Plan may be surrendered to the Corporation for cancellation on such terms as the
Committee and the Participant agree.
7.7 Restrictions on Ownership of Class B Common Stock; Incorporation by
Reference of Articles of Incorporation. Ownership of Class B Common Stock is
subject to all of the restrictions contained in the Articles of Incorporation,
including the automatic conversion of Class B Common Stock to Class A Common
Stock. The relevant provisions of the Articles of Incorporation are hereby
incorporated by reference.
7.8 Issuance of Class A Common Stock. This Section 7.8 applies if at any
time that shares of any class of the Corporation's capital stock are listed on a
national securities exchange, the rules of such exchange or of any governmental
agency of the United States of America require the delisting of such shares if
the Corporation issues shares of Class B Common Stock. In that event, the
Corporation shall deliver the same number of shares of Class A Common Stock as
the number of shares of Class B Common Stock that is the subject of the
Restricted Stock.
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ARTICLE 8
AMENDMENT AND TERMINATION OF THE PLAN; REORGANIZATIONS AND
RECAPITALIZATIONS OF THE CORPORATION
8.1 Amendment of the Plan. The Compensation Committee may from time to time
suspend or discontinue the Plan or revise or amend the Plan in any respect
whatsoever; provided, however, that to the extent necessary and desirable to
comply with Rule 16b-3 under the Exchange Act and with section 162(m) of the
Code (or any other applicable law or regulation, including the requirements of
any stock exchange on which the Common Stock is listed or quoted), shareholder
approval of any plan amendment shall be obtained in such a manner and to such a
degree as is required by the applicable law or regulation. In the event of a
revision or amendment to the Plan, all outstanding Restricted Stock shall be
adjusted to be consistent with the terms and provisions of the Plan, as revised
or amended, and in such manner as the Compensation Committee may deem equitable
or as may be required pursuant to applicable law; provided, however, that except
with the written consent of a Participant or as otherwise specifically provided
herein with respect to a replacement plan, no amendment, suspension, termination
or modification of the Plan shall alter or impair the rights of a Participant
under any Award previously granted under the Plan.
8.2 Termination of the Plan. The Compensation Committee, with the approval
or at the direction of the Board of Directors, and the Board of Directors shall
have the right and power to terminate the Plan at any time, and no Restricted
Stock shall be granted under the Plan after the termination of the Plan. The
termination of the Plan shall not have any other effect, and any outstanding
Restricted Stock shall be subject to the same terms and conditions, as provided
in Article 7 hereof, that would have applied to such Restricted Stock if the
Plan had not been terminated.
8.3 Reorganizations and Recapitalizations of the Corporation.
(a) The existence of this Plan and Restricted Stock granted hereunder
shall not affect in any way the right or power of the Corporation or its
shareholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Corporation's capital structure or
its business, or any merger or consolidation of the Corporation, or any
issue of bonds, debentures, preferred or prior preference stocks ahead of or
affecting the shares or the rights thereof, or the dissolution or
liquidation of the Corporation, or any sale or transfer of all or any part
of its assets or business, or any other corporate act or proceeding, whether
of a similar character or otherwise.
(b) The issue by the Corporation of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or
property, or for labor or services, either upon direct sale or upon exercise
of rights or warrants to subscribe therefor, or upon conversion of shares or
obligations of the Corporation convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be
made with respect to, the number of shares subject to Restricted Stock
granted hereunder.
ARTICLE 9
COMPLIANCE WITH OTHER LAWS AND REGULATIONS
9.1 Registration or Qualification of Securities. The Plan and the grant of
Restricted Stock under the Plan shall be subject to all applicable federal and
state laws, rules, and regulations and to such approvals by any government or
regulatory agency as may be required. Each share of Restricted Stock shall be
subject to the requirement that if at any time the Compensation Committee shall
determine, in its discretion, that the listing, registration or qualification of
the shares covered thereby under any securities exchange or under any state or
federal law or the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of, or in connection with, the granting of
such Restricted Stock, the Restricted Stock shall comply with any registration,
qualification, consent or approval requirements as imposed by the Compensation
Committee.
9.2 Representation. The Compensation Committee may require that any Person
who is granted Restricted Stock under the Plan represent and agree in writing
that if the shares of Common Stock
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made subject to the Restricted Stock are issuable under an exemption from
registration requirements, the shares will be 'restricted' securities which may
be resold only in compliance with the applicable securities laws, and that such
Person is acquiring the shares issued for investment purposes and not with a
view toward distribution.
9.3 Exchange of Certificates. If, in the opinion of the Corporation and its
counsel, any legend placed on a stock certificate representing shares of Class B
Common Stock sold under the Plan is no longer required, the holder of such
certificate shall be entitled to exchange such certificate for a certificate
representing the same number of such shares but lacking such legend.
ARTICLE 10
RESTRICTIONS ON TRANSFER
A Participant's rights and interests under the Plan may not be assigned or
transferred other than by will or the laws of descent and distribution, and
during the lifetime of a Participant, only the Participant personally (or the
Participant's personal representative) may exercise his rights under the Plan.
No purported assignment, pledge or transfer of Restricted Stock granted under
the Plan, whether voluntary or involuntary, by operation of law or otherwise,
shall vest in the purported transferee or assignee any interest or right therein
whatsoever but immediately upon any such purported assignment or transfer, or
any attempt to make the same, such Restricted Stock thereunder shall terminate
and become of no further effect.
ARTICLE 11
GENERAL PROVISIONS
11.1 No Right to Continued Employment. No Employee or any other Person shall
have any claim or right to be issued Restricted Stock under the Plan. Neither
the adoption and maintenance of the Plan nor the granting of Restricted Stock
pursuant to the Plan shall be deemed to constitute a contract of employment
between the Corporation and any Employee or to be a condition of the employment
of any Person. The Plan and any Restricted Stock granted under the Plan shall
not confer upon any Participant any right with respect to continued employment
by the Corporation, nor shall they interfere in any way with the right of the
Corporation to terminate the employment of any Participant at any time, and for
any reason, with or without cause, it being acknowledged, unless expressly
provided otherwise in writing, that the employment of a Participant is and
continues to be 'at will.'
11.2 Beneficiaries or Representatives of a Participant. The Compensation
Committee's determination of death or Disability and of the right of any Person
other than a Participant under the Plan shall be conclusive. The Compensation
Committee, in its discretion, may require from any Person, other than an a
Participant such security and indemnity as the Compensation Committee, in its
discretion, deems necessary or advisable.
11.3 Elimination of Fractional Shares. If under any provision of the Plan
that requires a computation of the number of shares of Restricted Stock the
number so computed is not a whole number of shares of Restricted Stock, such
number of shares of Restricted Stock shall be rounded down to the next whole
number.
11.4 Inspection of Records. Copies of the Plan, records reflecting each
Participant's Awards, and any other documents and records that a Participant is
entitled by law to inspect shall be open to inspection by the Participant and
his duly authorized representative(s) at the office of the Corporation at any
reasonable business hour.
11.5 Word Meanings. The words such as 'herein,' 'hereinafter,' 'hereof,' and
'hereunder' refer to this Plan as a whole and not merely to a subdivision in
which such words appear unless the context otherwise requires.
11.6 Section Titles. Section titles are for descriptive purposes only and
shall not control or alter the meaning of the Plan as set forth in the text.
9
<Page>
11.7 Severability. Whenever possible, each provision in the Plan and all
Restricted Stock granted under the Plan shall be interpreted in such a manner as
to be effective and valid under applicable law, but if any provision of the Plan
or any Restricted Stock at any time granted under the Plan shall be held to be
prohibited or invalid under applicable law, then, (i) such provision shall be
deemed amended to accomplish the objectives of the provision as originally
written to the fullest extent permitted by law, and (ii) all other provisions of
the Plan and all other Restricted Stock at any time granted under the Plan shall
remain in full force and effect.
11.8 Compliance with Section 16(b) of the Securities Exchange Act. With
respect to Reporting Persons, transactions under this Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act and in all events the Plan shall be construed in accordance with
Rule 16b-3. To the extent any provision of the Plan or action by the
Compensation Committee fails to so comply, it shall be deemed null and void to
the extent permitted by law and deemed advisable by the Compensation Committee.
The Compensation Committee, in its absolute discretion, may bifurcate the Plan
so as to restrict, limit or condition the use of any provision of the Plan to
participants who are officers or directors of the Corporation, subject to
Section 16 of the Exchange Act without so restricting, limiting or conditioning
the Plan with respect to other participants.
11.9 Compliance with Code Section 162(m). This Plan is intended to comply
with all applicable provisions of section 162(m) of the Code. To the extent any
provision of the Plan or action by the Compensation Committee fails to so
comply, it shall be deemed null and void to the extent permitted by law and
deemed advisable by the Compensation Committee.
11.10 Strict Construction. No rule of strict construction shall be implied
against the Compensation Committee, the Corporation or any other Person in the
interpretation of any of the terms of the Plan, any Restricted Stock granted
under the Plan or any rule or procedure established by the Compensation
Committee.
11.11 Choice of Law. All determinations made and actions taken pursuant to
the Plan shall be governed by the internal laws of the State of Michigan and
construed in accordance therewith.
To record the adoption of the Plan, the Corporation has caused the execution
hereof as of this 29th day of April, 2003.
SOTHEBY'S HOLDINGS, INC.,
a Michigan corporation
By: /s/ WILLIAM F. RUPRECHT
----------------------------
William F. Ruprecht
President and Chief Executive Officer
10
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>5
<FILENAME>ex21.txt
<DESCRIPTION>EXHIBIT 21
<TEXT>
<PAGE>
Exhibit 21
SUBSIDIARIES OF SOTHEBY'S HOLDINGS, INC.
As of December 31, 2003, the significant subsidiaries of Sotheby's
Holdings, Inc. which are wholly owned except where indicated are as
follows:
<Table>
<Caption>
JURISDICTION OF
INCORPORATION
---------------
<S> <C>
Sotheby's Holdings, Inc. Michigan
Sotheby's Financial Services, Inc. Nevada
SPTC, Inc. Nevada
Sotheby's Fine Art Holdings, Inc. Delaware
Fine Art Insurance Ltd. Bermuda
Sotheby's, Inc. New York
Sotheby's International Realty, Inc. Michigan
Datshare Limited United Kingdom
Sotheby's United Kingdom
Sotheby's Global Trading Company GmbH Switzerland
</Table>
Other than the subsidiaries listed above, the Registrant has 22 directly and
indirectly controlled domestic subsidiaries and 35 directly and indirectly
controlled foreign subsidiaries.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>6
<FILENAME>ex23.txt
<DESCRIPTION>EXHIBIT 23
<TEXT>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-26008 of Sotheby's Holdings, Inc. on Form S-8, Registration Statement No.
33-54057 of Sotheby's Holdings, Inc. on Form S-8, Registration Statement No.
333-02315 of Sotheby's Holdings, Inc. on Form S-8, Registration Statement No.
333-28007 of Sotheby's Holdings, Inc. on Form S-8, Registration Statement No.
333-34621 of Sotheby's Holdings, Inc. on Form S-8, Registration Statement No.
333-34623 of Sotheby's Holdings, Inc. on Form S-8, Registration Statement No.
333-92193 of Sotheby's Holdings, Inc. on Form S-8, and Registration Statement
No. 333-55995 of Sotheby's Holdings, Inc. on Form S-3, of our report dated March
12, 2004 (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the Company's change in method of accounting
for goodwill to conform to Statement of Financial Accounting Standards No. 142
on January 1, 2002), appearing in Item 8, "Financial Statements and
Supplementary Data," in this annual report on Form 10-K of Sotheby's Holdings,
Inc. for the year ended December 31, 2003.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New York
March 12, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>7
<FILENAME>ex24.txt
<DESCRIPTION>EXHIBIT 24
<TEXT>
<PAGE>
Exhibit 24
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 2nd day of March, 2004.
/s/ Conrad Black
---------------------
CONRAD BLACK
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 17th day of February, 2004.
/s/ Blakenham
---------------------
BLAKENHAM
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 24th day of February, 2004.
/s/ Steven B. Dodge
---------------------
STEVEN B. DODGE
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 14th day of February, 2004.
/s/ Max M. Fisher
---------------------
MAX M. FISHER
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 17th day of February, 2004.
/s/ Hartington
---------------------
Lord Hartington
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 17th day of February, 2004.
/s/ Jeffrey Miro
---------------------
Jeffrey Miro
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 12th day of February, 2004.
/s/ Sharon Percy Rockefeller
----------------------------
Sharon Percy Rockefeller
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 11th day of February, 2004.
/s/ Michael I. Sovern
---------------------
Michael I. Sovern
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 17th day of February, 2004.
/s/ Donald M. Stewart
---------------------
Donald M. Stewart
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 16th day of February, 2004.
/s/ Robin Woodhead
---------------------
Robin Woodhead
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan
corporation (the "Company"), does hereby constitute and appoint each of
William F. Ruprecht and William S. Sheridan with full power of substitution,
as his or her true and lawful attorney and agent to execute in his or her
name and on his or her behalf, as a Director of the Company, the Company's
Annual Report on Form 10-K, and any and all amendments thereto to be filed
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Each such attorney or agent shall have,
and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his or
her signature this 1st day of March, 2004.
/s/ Robert S. Taubman
---------------------
Robert S. Taubman
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>8
<FILENAME>ex31-1.txt
<DESCRIPTION>EXHIBIT 31.1
<TEXT>
<PAGE>
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, William F. Ruprecht, President and Chief Executive Officer of Sotheby's
Holdings, Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-K for the period ended
December 31, 2003 of the Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company
and have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Company's
internal control over financial reporting that occurred
during the Company's most recent fiscal quarter (the
Company's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the Company's internal control
over financial reporting; and
<PAGE>
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial
reporting, to the Company's auditors and the audit committee of the
Company's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the Company's ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal control over financial reporting.
/s/ William F. Ruprecht
- ---------------------------------------------------------
William F. Ruprecht
President and
Chief Executive Officer
Sotheby's Holdings, Inc.
March 12, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>9
<FILENAME>ex31-2.txt
<DESCRIPTION>EXHIBIT 31.2
<TEXT>
<PAGE>
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, William S. Sheridan, Executive Vice President and Chief Financial Officer of
Sotheby's Holdings, Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-K for the period ended
December 31, 2003 of the Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company
and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the
Company's most recent fiscal quarter (the Company's fourth fiscal
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting; and
<PAGE>
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial
reporting, to the Company's auditors and the audit committee of the
Company's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Company's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal control over financial reporting.
/s/ William S. Sheridan
- ---------------------------------------------------------
William S. Sheridan
Executive Vice President and
Chief Financial Officer
Sotheby's Holdings, Inc.
March 12, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>10
<FILENAME>ex32-1.txt
<DESCRIPTION>EXHIBIT 32.1
<TEXT>
<PAGE>
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Sotheby's Holdings, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, William
F. Ruprecht, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. 'SS' 1350, as adopted pursuant to 'SS' 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ William F. Ruprecht
----------------------------------------------
William F. Ruprecht
President and
Chief Executive Officer
Sotheby's Holdings, Inc.
March 12, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>11
<FILENAME>ex32-2.txt
<DESCRIPTION>EXHIBIT 32.2
<TEXT>
<PAGE>
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Sotheby's Holdings, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, William
S. Sheridan, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. 'SS' 1350, as adopted pursuant to
'SS' 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ William S. Sheridan
-----------------------------------------------------
William S. Sheridan
Executive Vice President and
Chief Financial Officer
Sotheby's Holdings, Inc.
March 12, 2004
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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