-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OLxuoz8AXWsWIQDFtiTx13WRJfvCf0Z/J1F5erzzp9Sign51xYpZ+MFBtmpC6C66 gJXpp9O/Kq60Tmn5YVQyzw== 0000912057-02-020259.txt : 20020514 0000912057-02-020259.hdr.sgml : 20020514 ACCESSION NUMBER: 0000912057-02-020259 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09750 FILM NUMBER: 02646969 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 10-Q 1 a2079207z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2002 Commission File Number 1-9750 Sotheby's Holdings, Inc. ------------------------ (Exact name of registrant as specified in its charter) Michigan 38-2478409 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 38500 Woodward Avenue, Suite 100 Bloomfield Hills, Michigan 48304 - --------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (248) 646-2400 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/. No / /. As of May 1, 2002, there were outstanding 44,921,777 shares of Class A Limited Voting Common Stock, par value $0.10 per share, and 16,549,650 shares of Class B Common Stock, par value $0.10 per share, of the Registrant. Each share of Class B Common Stock is freely convertible into one share of Class A Limited Voting Common Stock. INDEX
PART I: FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements: Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001 3 Consolidated Balance Sheets at March 31, 2002, December 31, 2001 and March 31, 2001 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 PART II: OTHER INFORMATION Item 1. Legal Proceedings 34 Item 4. Submission of Matters to a Vote of Security Holders 38 Item 6. Exhibits and Reports on Form 8-K 39 EXHIBIT INDEX 40 SIGNATURE 41
PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF OPERATIONS SOTHEBY'S HOLDINGS, INC. (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, --------------------------- 2002 2001 - --------------------------------------------------------------------------------------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) REVENUES: Auction and related $ 35,611 $ 44,123 Other 9,820 13,367 - --------------------------------------------------------------------------------------- TOTAL REVENUES 45,431 57,490 EXPENSES: Direct costs of services 9,284 11,518 Salaries and related costs 35,461 39,374 General and administrative 22,871 25,699 Depreciation and amortization 5,796 5,879 Retention costs 6,250 3,675 Net restructuring charges (546) - Special charges (2,510) 842 - --------------------------------------------------------------------------------------- TOTAL EXPENSES 76,606 86,987 - --------------------------------------------------------------------------------------- Operating loss (31,175) (29,497) Interest income 1,120 1,383 Interest expense (5,768) (6,601) Other expense (279) (483) - --------------------------------------------------------------------------------------- Loss before taxes (36,102) (35,198) Income tax benefit 12,997 12,671 - --------------------------------------------------------------------------------------- NET LOSS $ (23,105) $(22,527) ======================================================================================= BASIC AND DILUTED LOSS PER SHARE $ (0.38) $ (0.38) ======================================================================================= BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (IN MILLIONS) 61.4 59.1 =======================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 CONSOLIDATED BALANCE SHEETS SOTHEBY'S HOLDINGS, INC.
MARCH 31, December 31, March 31, 2002 2001 2001 (UNAUDITED) (UNAUDITED) - ---------------------------------------------------------------------------------------------------------------------------------- (THOUSANDS OF DOLLARS) ASSETS CURRENT ASSETS Cash and cash equivalents $ 14,805 $107,586 $ 45,802 Receivables, net of allowance for doubtful accounts and credit losses of $10,575, $11,115 and $13,606 Accounts receivable 124,584 222,108 152,690 Notes receivable and consignor advances 107,084 98,609 114,090 Settlement recovery- related party - - 106,000 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RECEIVABLES, NET 231,668 320,717 372,780 Inventory, net 8,663 11,546 12,840 Income tax receivable - - 7,374 Deferred income taxes 38,463 38,441 28,677 Prepaid expenses and other current assets 31,355 33,034 29,917 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 324,954 511,324 497,390 Notes receivable 916 2,210 38,566 Properties, less allowance for depreciation and amortization of $90,270, $85,465 and $77,714 244,526 250,343 245,158 Goodwill 17,209 17,266 22,217 Investments 31,273 31,924 31,898 Deferred income taxes 62,192 48,804 38,588 Other assets 1,927 2,240 2,433 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $682,997 $864,111 $ 876,250 ================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Due to consignors $ 95,010 $197,348 $ 87,213 Short-term borrowings 130,000 130,000 155,000 Accounts payable and accrued liabilities 79,012 128,903 106,856 Deferred revenues 5,250 5,058 5,078 Accrued income taxes 13,401 13,517 - Deferred income taxes - - 3,639 Short-term settlement liability 5,603 2,979 144,049 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 328,276 477,805 501,835 LONG-TERM LIABILITIES Long-term debt 99,415 99,398 99,350 Deferred income taxes - - 528 Long-term settlement liability 75,677 80,643 73,819 Other liabilities 15,147 20,395 16,812 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 518,515 678,241 692,344 SHAREHOLDERS' EQUITY Common Stock, $0.10 par value 6,147 6,131 6,017 Authorized shares - 125,000,000 of Class A and 75,000,000 of Class B Issued and outstanding shares - 44,920,364, 44,756,146 and 43,618,365 of Class A and 16,549,650 of Class B, at March 31, 2002, December 31, 2001 and March 31, 2001, respectively Additional paid-in capital 201,889 199,645 179,096 Retained (deficit) earnings (26,235) (3,129) 16,040 Accumulated other comprehensive loss (17,319) (16,777) (17,247) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 164,482 185,870 183,906 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $682,997 $864,111 $ 876,250 ==================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 CONSOLIDATED STATEMENTS OF CASH FLOWS SOTHEBY'S HOLDINGS, INC. (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- (THOUSANDS OF DOLLARS) OPERATING ACTIVITIES: Net loss $ (23,105) $ (22,527) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 5,796 5,879 Deferred income taxes (13,403) (15,683) Tax benefit of stock option exercises 69 57 Asset provisions 182 244 Other 423 11 Changes in assets and liabilities: Decrease in accounts receivable 97,630 152,809 Decrease in inventory 2,775 839 Decrease in prepaid expenses and other current assets 1,604 550 Decrease in intangible and other long-term assets 320 98 Decrease in short-term and long-term settlement liabilities (3,000) (593) Decrease in due to consignors (102,537) (183,563) (Decrease) increase in accrued income taxes (108) 61 Decrease in accounts payable and accrued liabilities and other liabilities (51,773) (20,217) - ---------------------------------------------------------------------------------------------------------------------- Net cash used by operating activities (85,127) (82,035) INVESTING ACTIVITIES: Increase in notes receivable and consignor advances (39,548) (29,753) Collections of notes receivable and consignor advances 32,218 68,056 Capital expenditures (3,139) (6,683) Decrease in investments 995 2,143 - ---------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by investing activities (9,474) 33,763 FINANCING ACTIVITIES: Proceeds from issuance of short-term borrowings - 135,000 Payments of short-term borrowings - (96,000) Proceeds from exercise of stock options 1,942 1,014 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,942 40,014 Effect of exchange rate changes on cash (122) (565) - ---------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (92,781) (8,823) Cash and cash equivalents at beginning of period 107,586 54,625 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 14,805 $ 45,802 ====================================================================================================================== Income tax (refund)/payments $ (261) $ 333 ====================================================================================================================== Interest paid (net of capitalized interest) $ 4,515 $ 5,685 ====================================================================================================================== Non cash activities: Issuance of common stock related to Shareholder Litigation settlement $ - $ 20,000 ======================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements included herein have been prepared by Sotheby's Holdings, Inc. (together with its subsidiaries, the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto on Form 10-K for the year ended December 31, 2001. Certain amounts in the 2001 consolidated financial statements have been reclassified to conform to the current year presentation. In the opinion of the management of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial condition at March 31, 2002 and 2001, as well as its results of operations and cash flows for the three months ended March 31, 2002 and 2001, have been included. 2. SEASONALITY OF BUSINESS The worldwide art auction market has two principal selling seasons, spring and fall. Consequently, during the summer and winter, Auction Sales (as defined in Part I, Item 2 "Management's Discussion and Analysis of Results of Operations and Financial Condition") are considerably lower. The table below demonstrates that approximately 80% to 84% of the Company's Auction Sales are derived from the second and fourth quarters of the year.
Percentage of Annual Auction Sales -------------------- 2001 2000 1999 ----- ----- ----- January - March 13% 9% 11% April - June 45% 45% 35% July - September 7% 7% 6% October - December 35% 39% 48% ----- ----- ----- 100% 100% 100% ===== ===== =====
6 3. SEGMENT REPORTING Revenues and profit or (loss) before taxes for the Company's operating segments are as follows (in thousands):
Profit (loss) Revenues before taxes ------------------------------------- ------------------------------------ Three Months Ended March 31, Three Months Ended March 31, ---------------------------- ---------------------------- 2002 2001 2002 2001 --------------- --------------- -------------- --------------- Auction $35,611 $44,123 $(31,780) $(29,948) Real Estate 7,436 7,973 (40) 575 Finance 1,445 4,019 (93) (153) Other 939 1,375 (337) (520) --------------- --------------- -------------- --------------- Total $45,431 $57,490 $(32,250) $(30,046) =============== =============== ============== ===============
The following is a reconciliation of loss before taxes for the Company's reportable operating segments to the applicable line items in the Consolidated Statements of Operations (in thousands):
Three Months Ended March 31, ------------------ 2002 2001 ------------- -------------- Total loss before taxes for reportable operating segments $(31,913) $(29,526) Other loss before taxes (337) (520) Unallocated amounts: Special charges (see Note 9) 2,510 (842) Retention costs (see Note 11) (6,250) (3,675) Net restructuring charges (see Note 12) 546 - Amortization of discount related to Antitrust fine (658) (483) Amortization of discount related to Amazon settlement - (152) ------------- -------------- Consolidated loss before taxes $(36,102) $(35,198) ============= ==============
Total assets for the Company's reportable operating segments are as follows (in thousands):
As of ------------------------------------------------------------- March 31, December 31, March 31, 2002 2001 2001 --------------- ------------------- ---------------- Auction $476,199 $648,990 $510,220 Real Estate 20,571 23,542 18,803 Finance 83,654 102,857 164,854 Other 1,918 1,477 1,734 --------------- ------------------- ---------------- Total $582,342 $776,866 $695,611 =============== =================== ================
7 The following is a reconciliation of assets for the Company's reportable operating segments to the applicable line items in the Consolidated Balance Sheets (in thousands):
As of ------------------------------------------------------------ March 31, December 31, March 31, 2002 2001 2001 --------------- -------------------- ---------------- Total assets for reportable segments $580,424 $775,389 $693,877 Other assets 1,918 1,477 1,734 Unallocated amounts: Settlement recovery - related party - - 106,000 Other unallocated amounts 100,655 87,245 74,639 --------------- -------------------- ---------------- Consolidated assets $682,997 $864,111 $876,250 =============== ==================== ================
The other unallocated amounts consist primarily of deferred tax assets. 4. RECEIVABLES Receivables consist of the following (in thousands):
As of --------------------------------------------------------- March 31, December 31, March 31, 2002 2001 2001 -------------- --------------- -------------- Accounts and other receivables $133,725 $231,787 $163,803 Allowance for doubtful accounts (9,141) (9,679) (11,113) -------------- --------------- -------------- Sub-total 124,584 222,108 152,690 -------------- --------------- -------------- Notes receivable and consignor advances 109,434 102,255 155,149 Allowance for credit losses (1,434) (1,436) (2,493) -------------- --------------- -------------- Sub-total 108,000 100,819 152,656 -------------- --------------- -------------- Total $232,584 $322,927 $305,346 ============== =============== ==============
The Company provides collectors and dealers with financing generally secured by works of art that the Company either has in its possession or permits the borrower to possess. The Company generally makes two types of secured loans: (1) advances secured by consigned property to borrowers who are contractually committed, in the near term, to sell the property at auction (a "consignor advance"); and (2) general purpose loans to collectors or dealers secured by property not presently intended for sale. The consignor advance allows a consignor to receive funds shortly after consignment for an auction that will occur several weeks or months in the future, while preserving for the benefit of the consignor the potential of the auction process. The 8 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. Included in net notes receivable and consignor advances are unsecured loans totaling $17.0 million, $26.8 million and $41.4 million at March 31, 2002, December 31, 2001 and March 31, 2001, respectively. 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%. In certain of these 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. During the fourth quarter of 2000, the Company recorded a $9.0 million provision related to one such unsecured loan. This loan was written off against the reserve during the first quarter of 2001. The net total of all such unsecured loans was $10.4 million, $10.9 million and $21.6 million at March 31, 2002, December 31, 2001 and March 31, 2001, respectively. The weighted average interest rates charged on net notes receivable and consignor advances were 5.1%, 8.4% and 9.3% at March 31, 2002, December 31, 2001 and March 31, 2001, respectively. Changes in the allowance for credit losses related to notes receivable and consignor advances for the three months ended March 31, 2002 and 2001 are as follows (in thousands):
2002 2001 -------- ---------- Allowance for credit losses at January 1, $1,436 $11,522 Write-offs - (9,000) Foreign currency exchange rate changes (2) (29) -------- ---------- Allowance for credit losses at March 31, $1,434 $ 2,493 ======== ==========
9 5. GOODWILL On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Intangible Assets." SFAS No. 142 eliminates the amortization of goodwill and instead requires that goodwill be tested for impairment on at least an annual basis. As required by SFAS No. 142, the Company will complete a transitional impairment test on its goodwill balances by June 30, 2002. The table below reconciles the net loss reported for the three months ended March 31, 2001 to the adjusted net loss, which is presented as if the Company adopted SFAS No. 142 on January 1, 2001. The table below also compares the adjusted prior year amounts to current year results.
Three Months Ended March 31, ------------------ 2002 2001 -------------- -------------- Reported net loss $(23,105) $(22,527) Goodwill amortization (net of taxes) - 275 -------------- -------------- Adjusted net loss $(23,105) $(22,252) ============== ==============
The impact of goodwill amortization on basic and diluted loss per share for the three months ended March 31, 2001 is less than $0.01 per share. Changes in the carrying amount of goodwill for the three months ended March 31, 2002, by operating segment, are as follows:
Real Auction Estate Total ------------------ ------------------- ------------------ Balance as of January 1, 2002 $14,308 $2,958 $17,266 Foreign currency exchange rate changes (57) - (57) ------------------ ------------------- ------------------ Balance as of March 31, 2002 $14,251 $2,958 $17,209 ================== =================== ==================
10 6. CREDIT ARRANGEMENTS Short-term borrowings and long-term debt consist of the following (in thousands):
As of ----------------------------------------------------------------- March 31, December 31, March 31, 2002 2001 2001 ------------------ ------------------ ---------------- SHORT-TERM BORROWINGS: Borrowings under the Amended and Restated Credit Agreement $130,000 $130,000 $155,000 LONG-TERM DEBT: Long-term debt securities (net of unamortized discount of $585, $602 and $650) 99,415 99,398 99,350 ------------------ ------------------ ---------------- Total $229,415 $229,398 $254,350 ================== ================== ================
BANK CREDIT FACILITIES - The Company's existing credit agreement (the "Amended and Restated Credit Agreement") provides for two separate credit facilities consisting of: (1) a senior secured term facility (the "Term Facility") of $130 million with repayment due on August 11, 2002 and (2) a senior secured revolving credit facility (the "Revolving Facility") of up to $120 million available through July 10, 2002. The Company incurred arrangement and origination fees of $5.3 million in connection with the Amended and Restated Credit Agreement, which are being amortized over the terms of the respective commitments. Commitment fees are determined based on the aggregate amount of unused commitments under the Amended and Restated Credit Agreement and are charged quarterly in arrears. The Company's obligations under the Amended and Restated Credit Agreement are secured by substantially all of the assets of the Company and its domestic subsidiaries, including a mortgage on the Company's headquarters at 1334 York Avenue in New York (the "York Property"). In addition, any borrowings by the Company's United Kingdom ("U.K.") affiliates and Swiss affiliate are secured by their respective loan portfolios. Borrowings under the Amended and Restated Credit Agreement may be used for general corporate purposes and generally bear interest equal to LIBOR plus three percent. The Amended and Restated Credit Agreement also contains certain financial covenants, including covenants requiring the Company to maintain a minimum net worth and to meet certain leverage ratio and interest coverage ratio tests. Additionally, the 11 Amended and Restated Credit Agreement has a covenant that requires the Company to limit dividend payments. The Company was in compliance with these covenants as of March 31, 2002. As discussed above, the Term Facility and Revolving Facility under the Company's Amended and Restated Credit Agreement are available through August 11, 2002 and July 10, 2002, respectively. On these dates, the Term Facility and the Revolving Facility will expire and any outstanding borrowings will be due and payable to the Company's existing banking group. In order to fund the repayment of any such outstanding borrowings and to provide for the Company's long-term operating needs and capital requirements, as well as to fund the remaining payments due under the Company's antitrust fine (see Part II, Item 1 "Legal Proceedings"), the redemption of Discount Certificates to be distributed as part of the U.S. Antitrust Litigation settlement (see Note 10), payments due under the Company's retention programs (see Note 11) and interest payments related to the Company's long-term debt securities, an extension, amendment or refinancing of the Amended and Restated Credit Agreement will be necessary to supplement operating cash flows. Alternatively, the Company believes that it has other options available for capital resources, including, but not limited to, various types of debt instruments with varying maturities including convertible debt, a sale-leaseback of the York Property, the sale of certain other corporate assets or operating units and the collection of client loans. Some of the above alternatives would come at a higher cost than an extension, amendment or refinancing of the Amended and Restated Credit Agreement or would limit the Company's operating flexibility. Additionally, any convertible debt issuance may be dilutive. The Company currently believes it will secure adequate long-term funding or satisfy its liquidity needs pursuant to one of the other options stated above prior to the expiration of the Amended and Restated Credit Agreement. If the Company were unable to obtain such funding, this would have a material adverse effect on the Company's business, results of operations and/or financial condition. As of March 31, 2002, the Company had outstanding short-term borrowings of $130 million under the Term Facility at a weighted average interest rate of 4.9%. As of March 31, 2002, the Company had no outstanding borrowings under the Revolving Facility. 12 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 SEC, for an aggregate offering price of $100 million. The ten-year Notes have an effective interest rate of 6.98% payable semi-annually in February and August. The Notes have covenants that impose limitations on the Company from placing liens on property and entering into sale-leaseback transactions, excluding the York Property. The Company was in compliance with these covenants as of March 31, 2002. An event of default related to the Amended and Restated 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 Amended and Restated Credit Agreement provide that the obligations under the Notes shall be secured equally and ratably with that portion of the obligations under the Amended and Restated Credit Agreement that exceed the permitted exceptions contained in the Indenture. 7. DERIVATIVE INSTRUMENTS The Company utilizes forward exchange contracts to manage exposures related to foreign currency risks, which primarily arise from foreign currency denominated intercompany balances. Generally, such intercompany balances are centrally funded and settled through the Company's global treasury function. The Company's primary 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 foreign currency denominated intercompany balances. Such 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," and are recorded in the Company's Consolidated Balance Sheets at their fair value with the changes in the fair value of the derivative being recognized currently in earnings. Such changes in fair value are generally 13 offset by the revaluation of the underlying intercompany balance in accordance with SFAS No. 52, "Foreign Currency Translation." As a result, upon settlement, the net impact on the Company's earnings of such derivative instruments represents the transaction costs related to the derivatives. For the three months ended March 31, 2002 and 2001, such costs, which are reflected in other expense, were not material to the Company's results of operations. The Company's Consolidated Balance Sheet at March 31, 2002 includes a nominal liability recorded within accounts payable and accrued liabilities reflecting the fair value of the Company's forward exchange contracts. The Company's Consolidated Balance Sheet at March 31, 2001 includes an asset of approximately $0.2 million recorded within other current assets reflecting the fair value of the Company's forward exchange contracts. The adoption of SFAS No. 133 on January 1, 2001, resulted in a cumulative pre-tax decrease to other comprehensive income of $0.3 million ($0.2 million after-tax) during the first quarter of 2001. Substantially this entire amount was reclassified into earnings as other expense during the first quarter of 2001. The remaining amount was reclassified into earnings during the second quarter of 2001. 8. COMPREHENSIVE LOSS The Company's comprehensive loss includes the net loss for the period, as well as other comprehensive loss, which consists of the change in the foreign currency translation adjustment account during the period. For the three months ended March 31, 2002 and 2001, comprehensive loss is as follows (in thousands):
Three Months Ended March 31, ------------------ 2002 2001 ---------------- ---------------- Net loss $(23,105) $(22,527) Other comprehensive loss (net of taxes) (542) (2,404) ---------------- ---------------- Comprehensive loss $(23,647) $(24,931) ================ ================
14 9. SPECIAL CHARGES For the three months ended March 31, 2002 and 2001, the Company recorded the following amounts in the Consolidated Statements of Operations related to the investigation by the Antitrust Division of the United States Department of Justice (the "DOJ") and other related matters, as discussed in Part II, Item 1 "Legal Proceedings" (in thousands):
Three Months Ended March 31, ------------------ 2002 2001 -------------- --------------- Settlement with former Chief Executive Officer $(3,250) $ - Legal and other professional fees 740 842 -------------- --------------- Total $(2,510) $ 842 ============== ===============
In the first quarter of 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 agreed to pay the Company $3.25 million. Of this amount, $2.05 million is being paid by her relinquishment of vested benefits under the Company's Benefits Equalization Plan and the remaining $1.2 million will be paid in cash. As a result, the Company recorded in special charges a reduction of accrued compensation cost of approximately $2.05 million and a recovery of $1.2 million in the first quarter of 2002. Amounts charged to the Company's settlement liabilities related to the DOJ investigation and other related matters during the first quarter of 2002 were as follows (in thousands):
U.S. Antitrust Antitrust Fine Litigation (net) Total ----------------- ------------------ ------------------ Liability at December 31, 2001 $50,000 $33,622 $83,622 Cash payment to DOJ - (3,000) (3,000) Amortization of discount - 658 658 ----------------- ------------------ ------------------ Liability at March 31, 2002 $50,000 $31,280 $81,280 ================= ================== ==================
15 10. COMMITMENTS AND CONTINGENCIES COMMITMENTS -- As of March 31, 2002, the Company had outstanding letters of credit of approximately $5.5 million primarily relating to rental obligations in Europe and the United States. In conjunction with the retention programs approved during 2001 (see Note 11), the Company entered into employment agreements with a group of certain key employees, which expire at various dates through December 31, 2003. Such agreements provide, among other benefits, for minimum salary levels and incentive bonuses which are payable if specified Company and individual goals are attained, as well as cash awards in conjunction with the Company's retention programs. The aggregate commitment for future salaries at March 31, 2002, excluding incentive bonuses and cash awards in conjunction with the Company's retention programs, was approximately $4.5 million. LEGAL ACTIONS -- The European Commission is conducting an investigation regarding commissions charged by the Company and Christie's for auction services and other trading terms. Although the outcome of this investigation cannot presently be determined, any loss resulting from this investigation is likely to have a material impact on the Company's financial condition, liquidity and/or results of operations. The amount of any such loss is not currently estimatable. (See Part II, Item 1 "Legal Proceedings" for further information regarding the investigation by the European Commission.) Certain class members have filed notices of appeal of the court's order approving the settlement of the U.S. Antitrust Litigation. The U.S. Court of Appeals for the Second Circuit will hear the appeal. One of the parties that opted out of the class action settlement in the U.S. Antitrust Litigation has threatened to commence a lawsuit against the Company and Christie's alleging antitrust violations and is seeking approximately $19 million in damages. The parties have agreed to enter into non-binding mediation to attempt to resolve this claim. Although there were other opt-outs from the settlement of the U.S. Antitrust Litigation, no other claims have been asserted to date. The Company believes that its maximum potential exposure in this matter is substantially less than the amount of the claim; however, the amount of any potential loss is not currently estimatable. 16 On January 30, 2001, the U.S. District Court for the Southern District of New York granted the Company's motion to dismiss the International Antitrust Litigation (as defined in Part II, Item 1 "Legal Proceedings"). Plaintiffs appealed the court's decision to the U.S. Court of Appeals for the Second Circuit. On March 13, 2002, a three-judge panel of the Second Circuit Court of Appeals reversed the District Court's ruling that it lacked jurisdiction over auctions held by the Company, its subsidiaries and Christie's outside of the U.S. and remanded the case to the District Court to consider whether the International Antitrust Litigation should be dismissed on other grounds. On March 27, 2002, the Company filed a Motion for Rehearing of the decision. The Company is awaiting a decision on this motion. (See Part II, Item 1 "Legal Proceedings" for further information regarding the International Antitrust Litigation.) The Company also becomes involved, from time to time, in various claims and lawsuits incidental to the ordinary course of its business. The Company does not believe that the outcome of any such pending claims or proceedings will have a material effect upon its business or financial condition. LENDING AND OTHER CONTINGENCIES -- The Company enters into 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 4). However, potential consignor advances related to such arrangements are subject to certain limitations and conditions. Unfunded commitments to extend additional credit were approximately $13.2 million at March 31, 2002. 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 or if the property does not sell, the amount of the guarantee must be paid. At May 13, 2002, the Company had outstanding guarantees totaling approximately $23.7 million, which covers auction property having a mid-estimate sales price of approximately $29.2 million. Under certain guarantees, the Company participates in a share of the proceeds if the property under guarantee sells above a minimum price. In addition, the Company is obligated under the terms of certain guarantees to fund a portion of the guaranteed amount prior to the auction. As of May 17 13, 2002, $9.9 million had been funded in connection with outstanding guarantees. The vendor's commission discount certificates (the "Discount Certificates") to be distributed as part of the U.S. Antitrust Litigation settlement (see Part II, Item 1 "Legal Proceedings") will expire five years after the date they are first issued. However, the face value of any unused Discount Certificates may be redeemed for cash at the end of four years. The Court determined that the $62.5 million face value of the Discount Certificates had a fair market value of not less than $50 million, which equals the value of the Discount Certificates that the Company has recorded in the Consolidated Balance Sheets within the long-term settlement liability. The Discount Certificates are currently expected to be printed and issued to the class of plaintiffs sometime in 2003. The Company expects to incur costs for printing, issuing and redeeming the Discount Certificates. These costs have not been expensed since they are currently not estimatable due to the expected timing of when the Discount Certificates will be printed and issued. In the opinion of management, the commitments and contingencies described above currently are not expected to have a material adverse effect on the Company's financial condition, liquidity and/or results of operations, with the exception of the resolution of the investigation by the European Commission regarding commissions charged by the Company and Christie's for auction services and other trading terms and the resolution of the threatened litigation by one of the parties that opted out of the class action settlement in the U.S. Antitrust Litigation, and the possible exception of the cash redemption of any unused Discount Certificates, the costs for printing, issuing and redeeming the Discount Certificates and the resolution of the International Antitrust Litigation. (See Note 11 for other contingencies.) 11. RETENTION PROGRAMS During 2000, the Compensation Committee of the Board of Directors (the "Compensation Committee") approved cash awards for the retention of certain key employees. During 2001, the Compensation Committee approved plans providing for further cash awards for the retention of certain key employees. Employees granted such cash awards will receive cash payments upon fulfillment of full-time employment through certain dates in 2002 and 2003. An employee granted a cash award under any of the foregoing arrangements who 18 leaves the Company prior to such date will, generally, forfeit his or her right to payment. Under all of the foregoing arrangements, up to $7.2 million is payable in September 2002, up to $4.0 million is payable in December 2002, up to $11.6 million is payable in January 2003 and up to $3.0 million is payable in December 2003. Certain employees granted such awards received cash payments of approximately $21.5 million in the first quarter of 2002 upon the fulfillment of full-time employment through certain dates. All amounts related to the above retention programs are being amortized over the contractual service period. The Company has recognized expense of approximately $6.3 million and $3.7 million related to such programs for the three months ended March 31, 2002 and 2001, respectively. 12. NET RESTRUCTURING CHARGES The Company recorded the following net restructuring charges related to the restructuring plans described below during the three months ended March 31, 2002 (in thousands): 2000 Restructuring Plan $(372) 2001 Restructuring Plan (174) ------- Total $(546) =======
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 Company's Auction segment in December 2000. The liability related to the 2000 Restructuring Plan is recorded within accounts payable and accrued liabilities in the Company's Consolidated Balance Sheets. Amounts charged to the restructuring liability through March 31, 2002 were as follows (in thousands): 19
Severance Lease and and Contract Termination Termination Asset Other Benefits Costs Provisions Costs Total --------------- ------------- -------------- ---------- ---------- 2000 Provision $ 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 (5,281) (277) - (447) (6,005) Reversal of liability (589) (42) - (99) (730) --------------- ------------- -------------- ---------- ---------- Liability at December 31, 2001 1,257 798 - - 2,055 Cash payments (535) (335) - - (870) Reversal of liability (1) (371) - - (372) --------------- ------------- -------------- ---------- ---------- Liability at March 31, 2002 $ 721 $ 92 $ - $ - $ 813 =============== ============= ============== ========== ==========
In the first quarter of 2002, the Company reversed $0.4 million of the liability related to the 2000 Restructuring Plan primarily due to a change in estimate for lease and contract termination costs resulting from the favorable completion of negotiations with certain vendors. The remaining terminations under the 2000 Restructuring Plan will take place and substantially all of the related liability for severance and termination benefits will be settled during the second quarter of 2002. The balance of the restructuring liability for the 2000 Restructuring Plan relates to lease and contract termination costs primarily associated with certain exit activities in the U.K., which are currently in the final stages of completion. 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 its Finance and Real Estate segments and certain corporate departments. During 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. In the first quarter of 2002, the Company recorded restructuring charges of $0.2 million for severance and employee termination benefits related to the 2001 Restructuring Plan. Additionally, the Company reversed $0.4 million of the liability related to the 2001 Restructuring Plan primarily due to unanticipated employee redeployment and a change in estimate for severance and employee 20 termination benefits expected to be paid as a result of the 2001 Restructuring Plan. The liability related to the 2001 Restructuring Plan is recorded within accounts payable and accrued liabilities in the Company's Consolidated Balance Sheets. Amounts charged to the restructuring liability through March 31, 2002 were as follows (in thousands):
Severance and Contract Termination Termination Asset Other Benefits Costs Provisions Costs Total --------------- ------------- -------------- ---------- ---------- 2001 Provision $ 6,048 $ 5,385 $ 6,327 $ 449 $ 18,209 Asset write-offs - - (5,890) - (5,890) Cash payments (1,264) (5,235) - (164) (6,663) Reversal of liability (187) (100) - - (287) --------------- ------------- -------------- ---------- ---------- Liability at December 31, 2001 4,597 50 437 285 5,369 2002 Provision 210 - - - 210 Cash payments (993) (7) - (76) (1,076) Asset write-offs - - (437) - (437) Reversal of liability (320) - - (64) (384) --------------- ------------- -------------- ---------- ---------- Liability at March 31, 2002 $ 3,494 $ 43 $ - $ 145 $ 3,682 =============== ============= ============== ========== ==========
The remaining cash expenditures related to the 2001 Restructuring Plan are expected to be approximately $3.7 million and are expected to be substantially completed by the end of the third quarter of 2002. 13. RELATED PARTY TRANSACTIONS During the three months ended March 31, 2002 and 2001, the Company recognized approximately $0.1 million and $2.1 million of commission revenue related to the sales of property consigned by a significant shareholder of the Company. During the three months ended March 31, 2001, the Company recognized approximately $0.2 million of commission revenue related to the purchase of property by a significant shareholder of the Company. Approximately $13.1 million of the cash retention awards remaining to be paid by the Company is guaranteed by A. Alfred Taubman, a principal shareholder of the Company. (See Note 11 for additional information on the Company's retention programs.) 21 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 - Note 3 of Notes to Consolidated Financial Statements ("Segment Reporting") should be read in conjunction with this discussion. The worldwide auction business is highly seasonal in nature, with 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 2 of Notes to Consolidated Financial Statements for additional information.) The aggregate hammer price of property sold at auction by the Company ("Auction Sales"), which includes buyer's premium, totaled $190.1 million during the quarter ended March 31, 2002, a decrease of $26.7 million, or 12%, compared to the first quarter of 2001. Excluding the impact of unfavorable foreign currency translations, Auction Sales decreased 11%. The decrease in worldwide Auction Sales reflects a 31% decrease in the number of lots sold in the first quarter of 2002 as compared to the same period in 2001, partially offset by a 28% increase in the average selling price per lot sold. The following is a geographical breakdown of Auction Sales for the three months ended March 31, 2002 and 2001 (in thousands):
Three Months Ended March 31, --------------------------------------- 2002 2001 ---------------- ----------------- North America $ 96,255 $ 119,473 Europe 93,804 97,273 ---------------- ----------------- Total $ 190,059 $ 216,746 ================ =================
Auction Sales in North America decreased $23.2 million, or 19%, during the first quarter of 2002 as compared to the same period in 2001. The decrease in North America was primarily due to decreased sales of Books (as prior year results include the January 2001 single-owner sale of the Magnificent Scientific Library of Joseph A. Freilich), Old Master Paintings, Watches & Clocks and American Paintings, as well as lower Internet Auction Sales. The sales decreases discussed above were partially offset by increased Auction Sales of Americana. 22 Auction Sales in Europe decreased $3.5 million, or 4%, during the first quarter of 2002 as compared to the same period in 2001. Excluding the impact of unfavorable foreign currency translations, Auction Sales in Europe decreased 1%. The decrease in Europe was primarily attributable to lower results from the winter Impressionist and Contemporary sales in London almost entirely offset by a significant increase in Auction Sales of single-owner collections, especially in Paris where the Company began selling activities in October 2001. Worldwide auction and related revenues decreased $8.5 million, or 19%, in the first quarter of 2002 as compared to the same period in 2001. Excluding the impact of unfavorable foreign currency translations, worldwide auction and related revenues decreased 18%. The decrease was principally due to lower private treaty revenues, as well as decreased buyer's premium and seller's commission revenues. The decrease in buyer's premium revenues was primarily due to the lower level of Auction Sales during the first quarter of 2002, as discussed above. The decrease in seller's commission revenues was primarily due to lower commission rates resulting from the competitive environment for consignments, as well as the decrease in Auction Sales discussed above. Other revenues decreased $3.5 million, or 27%, in the first quarter of 2002 as compared to the same period in 2001. The decrease was primarily due to lower revenues in the Company's Finance segment resulting from a decrease in the average outstanding balance of notes receivable and consignor advances and lower interest rates earned on notes receivable and consignor advances. For the three months ended March 31, 2002, other revenues were not materially affected by the translation to U.S. Dollars. Direct costs of services (consisting largely of corporate marketing and sale marketing expenses, as well as catalogue production and distribution costs) totaled $9.3 million in the first quarter of 2002, a decrease of $2.2 million, or 19%, when compared to the same period in 2001. The decrease was principally due to savings achieved in Internet related marketing costs primarily as a result of the Company's restructuring plans (as discussed below and in Note 12 of Notes to Consolidated Financial Statements) and other cost containment efforts, as well as lower live auction direct costs primarily resulting from a decrease in sales volume during the period. Also contributing to the decrease is lower freight and transportation costs resulting from the consolidation of the Company's New York auction operations into the York Property in April 2001. For the three months ended March 31, 2002, direct costs of services were not materially affected by the translation to U.S. Dollars. 23 Excluding costs related to the Company's retention programs, special charges and net restructuring charges, all other operating expenses consisted of the following for the three months ended March 31, 2002 and 2001 (in thousands):
Three Months Ended March 31, -------------------------------- 2002 2001 ------------ -------------- Salaries and related costs $ 35,461 $ 39,374 General and administrative expenses 22,871 25,699 Depreciation and amortization expense 5,796 5,879 ------------ -------------- Total $ 64,128 $ 70,952 ============ ==============
Salaries and related costs decreased $3.9 million, or 10%, during the first quarter of 2002 as compared to the same period in 2001 primarily due to savings achieved in the Auction segment as a result of the Company's restructuring plans and other cost containment efforts. For the three months ended March 31, 2002, salaries and related costs were not materially affected by the translation to U.S. Dollars. General and administrative expenses decreased $2.8 million, or 11%, during the first quarter of 2002 as compared to the same period in 2001. The decrease is primarily due to savings in professional fees and travel and entertainment expenses primarily as a result of the Company's restructuring plans and other cost containment efforts, as well as lower rent expense primarily resulting from the consolidation of the Company's New York auction operations into the York Property in April 2001. These savings are partially offset by increased insurance costs in the Auction segment. For the three months ended March 31, 2002, general and administrative expenses were not materially affected by the translation to U.S. Dollars. Depreciation and amortization expense decreased $0.1 million, or 1%, during the first quarter of 2002 as compared to the same period in 2001. The decrease is primarily attributable 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, Inc., as well as the ceasing of goodwill amortization as a result of the adoption of SFAS No. 142 on January 1, 2002 (see Note 5 of Notes to Consolidated Financial Statements). This decrease was almost entirely offset by depreciation expense associated with the final phase of the York Property, which was placed in service in April 2001, and other capital projects placed in service subsequent to the first quarter of 2001. For the three months ended March 31, 2002, depreciation and amortization expense was not materially affected by the translation to U.S. Dollars. 24 For the three months ended March 31, 2002 and 2001, the Company recognized expense of approximately $6.3 million and $3.7 million related to the retention programs for key employees discussed in Note 11 of Notes to Consolidated Financial Statements. Internet related operating expenses totaled $3.1 million and $7.8 million for the three months ended March 31, 2002 and 2001. The significant decrease is principally due to savings achieved in salaries and related costs, general and administrative expenses and marketing costs as a result of the Company's restructuring plans and other cost containment efforts. NET RESTRUCTURING CHARGES - Total estimated net annual cost savings following the full implementation of the Company's restructuring plans is expected to be approximately $60 million. These savings were initiated during 2001, primarily in the Internet, and are currently expected to be fully realized by the end of 2002. Most of the anticipated savings are expected to be achieved through lower salaries and related expenses resulting from terminations and attrition, as well as reductions in direct costs of services and general and administrative expenses. (See Note 12 of Notes to Consolidated Financial Statements for additional information on the Company's restructuring plans.) (With respect to all statements made herein regarding the Company's restructuring plans, see statement on Forward Looking Statements.) SPECIAL CHARGES - See Note 9 of Notes to Consolidated Financial Statements for information on special charges. NET INTEREST EXPENSE - Net interest expense decreased $0.6 million for the three months ended March 31, 2002 as compared to the same period in 2001. The decrease was primarily due to lower outstanding borrowings, as well as a lower average cost of borrowing related to the Company's existing credit facility (see Note 6 of Notes to Consolidated Financial Statements). INCOME TAX BENEFIT - The consolidated effective tax rate was 36% for both the first quarter of 2002 and 2001. NET LOSS AND LOSS PER SHARE - For the first quarter of 2002, net loss increased to ($23.1) million from ($22.5) million in the first quarter of 2001. Diluted loss per share for the first quarter of 2002 and 2001 was ($0.38) per share. 25 The impact on diluted loss per share related to the Company's Internet operating loss was ($0.02) per share and ($0.06) per share for the three months ended March 31, 2002 and 2001, respectively. OTHER MATTERS - Effective April 1, 2002, the Company revised and simplified its buyer's premium and seller's commission rate structures. Additionally, the Company increased the amount charged to sellers for insurance on consigned property. The Company expects these revisions to result in an increase in operating revenues. (See statement on Forward Looking Statements.) CONTINGENCIES -- See Note 10 of Notes to Consolidated Financial Statements for information on contingencies and Note 11 of Notes to Consolidated Financial Statements for information on the Company's employee retention programs. (See statement on Forward Looking Statements.) FINANCIAL CONDITION AS OF MARCH 31, 2002 -- During the first quarter of 2002, total cash and cash equivalents decreased $92.8 million from December 31, 2001 primarily due to the factors discussed below. Net cash used by operations was $85.1 million during the first quarter of 2002 and was primarily the result of a net loss from operations, payments to consignors and retention payments to key employees (see Note 11 of Notes to Consolidated Financial Statements). These cash outflows from operations were partially offset by collections of accounts receivable during the quarter. Net cash used by investing activities was $9.5 million during the first quarter of 2002 and was primarily due to the funding of $30.8 million in auction guarantees (see Note 10 of Notes to Consolidated Financial Statements) and capital expenditures of $3.1 million. These cash outflows from investing activities were partially offset by the collection of maturing client loans during the quarter. Net cash provided by financing activities was $1.9 million during the first quarter of 2002 and was the result of proceeds received from the exercise of stock options. 26 COMMITMENTS AS OF MARCH 31, 2002 -- The table below summarizes the Company's material contractual obligations and commitments as of March 31, 2002.
Payments Due by Period ----------------------------------------------------------------------------- Less Than 1 to 3 3 to 5 After Total One Year Years Years 5 Years ----- -------- ------ ------ ------- (Thousands of dollars) Principal payments on borrowings: Short-term borrowings - principal (1) $ 130,000 $ 130,000 - - - Long-term debt - principal (2) 100,000 - - - 100,000 ------------- ------------- ------------- ------------- ------------- Sub-total 230,000 130,000 - - 100,000 ------------- ------------- ------------- ------------- ------------- Interest payments on borrowings: Short-term borrowings - interest (1) 4,371 4,371 - - - Long-term debt -- interest (2) 46,979 6,875 13,750 13,750 12,604 ------------- ------------- ------------- ------------- ------------- Sub-total 51,350 11,246 13,750 13,750 12,604 ------------- ------------- ------------- ------------- ------------- Other commitments: Operating lease obligations 119,679 13,939 23,799 20,319 61,622 Retention programs(3) 25,800 22,800 3,000 - - Antitrust fine(4) 39,000 6,000 18,000 15,000 - Guarantees to consignors (5) 17,750 17,750 - - - Employment agreements (6) 4,517 850 3,667 - - ------------- ------------- ------------- ------------- ------------- Sub-total 206,746 61,339 48,466 35,319 61,622 ------------- ------------- ------------- ------------- ------------- Total $ 488,096 $ 202,585 $ 62,216 $ 49,069 $ 174,226 ============= ============= ============= ============= =============
(1) Represents the outstanding principal and approximate interest payments due under the Amended and Restated Credit Agreement, as discussed below and in Note 6 of Notes to Consolidated Financial Statements. (2) Represents the outstanding principal and semi-annual interest payments due on the Company's long-term debt. (See Note 6 of Notes to Consolidated Financial Statements.) (3) See Note 11 of Notes to Consolidated Financial Statements. (4) See Part II, Item 1 "Legal Proceedings." (5) On certain occasions, the Company guarantees 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 (or if the property does not sell, the amount of the guarantee must be paid). (See Note 10 of Notes to Consolidated Financial Statements.) 27 (6) Represents the aggregate commitment for future salaries related to employment agreements with certain key employees, excluding incentive bonuses and awards in conjunction with the Company's retention programs. (See Note 10 of Notes to Consolidated Financial Statements.) The Discount Certificates to be distributed as part of the U.S. Antitrust Litigation settlement (see Note 10 of Notes to Consolidated Financial Statements and Part II, Item 1 "Legal Proceedings") will expire five years after the date they are first issued. However, the face value of any unused Discount Certificates may be redeemed for cash at the end of four years. The Court determined that the $62.5 million face value of the Discount Certificates had a fair market value of not less than $50 million, which equals the value of the Discount Certificates that the Company has recorded in the Consolidated Balance Sheets within the long-term settlement liability. The Discount Certificates are currently expected to be printed and issued to the class of plaintiffs sometime in 2003. 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 $13.2 million as of March 31, 2002. (See Notes 4 and 10 of Notes to Consolidated Financial Statements.) LIQUIDITY AND CAPITAL RESOURCES -- The Company generally relies on operating cash flows supplemented by borrowings to meet its financing requirements. The Company's existing credit agreement (the "Amended and Restated Credit Agreement") provides for two separate credit facilities consisting of: (1) a senior secured term facility of $130 million with repayment due on August 11, 2002 (the "Term Facility") and (2) a senior secured revolving credit facility of up to $120 million available through July 10, 2002 (the "Revolving Facility"). At March 31, 2002, the Company had outstanding short-term borrowings of $130 million under the Term Facility. At March 31, 2002, the Company had no outstanding borrowings under the Revolving Facility. (See Note 6 of Notes to Consolidated Financial Statements.) The Company's obligations under the Amended and Restated Credit Agreement are secured by substantially all of the assets of the Company and its domestic subsidiaries, including a mortgage on the York Property. In addition, borrowings by the Company's U.K. affiliates and Swiss affiliate are secured by their respective loan portfolios. Borrowings under the Amended and Restated Credit Agreement may be used for general corporate purposes and generally bear interest equal to LIBOR plus three percent. The Amended and Restated Credit Agreement also contains certain financial covenants, including covenants requiring the 28 Company to maintain a minimum net worth and to meet certain quarterly leverage ratio and interest coverage ratio tests. Additionally, the Amended and Restated Credit Agreement has a covenant that requires the Company to limit dividend payments. The Company was in compliance with these financial covenants as of March 31, 2002. The Company currently believes that operating cash flows, current cash balances and borrowings under the Amended and Restated Credit Agreement will be adequate to meet its operating needs and capital requirements through August 11, 2002. Such 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 program, capital expenditures and severance payments related to the Company's restructuring plans (see Note 12 of Notes to Consolidated Financial Statements), as well as the short-term commitments detailed above. The Term Facility and Revolving Facility under the Company's Amended and Restated Credit Agreement are available through August 11, 2002 and July 10, 2002, respectively. On these dates, the Term Facility and the Revolving Facility will expire and any outstanding borrowings will be due and payable to the Company's existing banking group. In order to fund the repayment of any such outstanding borrowings and to provide for the Company's long-term operating needs and capital requirements, as well as to fund the long-term commitments detailed above including the remaining payments due under the Company's Antitrust fine (see Part II, Item 1 "Legal Proceedings"), the redemption of Discount Certificates to be distributed as part of the U.S. Antitrust Litigation settlement (see Note 10 of Notes to Consolidated Financial Statements and Part II, Item 1 "Legal Proceedings"), payments due under the Company's retention programs (see Note 11 of Notes to Consolidated Financial Statements) and interest payments related to the Company's long-term debt securities, an extension, amendment or refinancing of the Amended and Restated Credit Agreement will be necessary to supplement operating cash flows. Alternatively, the Company believes that it has other options available for capital resources, including, but not limited to, various types of debt instruments including convertible debt, a sale-leaseback of the York Property, the sale of certain other corporate assets or operating units and the collection of client loans. Some of the above alternatives would come at a higher cost than an extension, amendment or refinancing of the Amended and Restated Credit Agreement or would limit the Company's operating flexibility. Additionally, any convertible debt issuance may be dilutive. The Company currently believes it will secure adequate long-term funding or satisfy its liquidity needs pursuant to one of the other options stated above prior to the expiration of the Amended and Restated Credit Agreement. If the 29 Company were unable to obtain such funding, this would have a material adverse effect on the Company's business, results of operations and/or financial condition. (See statement on Forward Looking Statements.) RISK FACTORS AFFECTING OPERATING REVENUES AND LIQUIDITY -- Operating revenues from the Company's Auction, Finance and Real Estate operating segments, as well as the Company's liquidity, are significantly influenced by a number of factors not within the Company's control, including: (1) The overall strength of the international economy and financial markets and, in particular, the economies of the United States, the U.K., and the major countries or territories of Continental Europe and Asia (principally Japan and Hong Kong); (2) Interest rates; (3) Political conditions in various nations; (4) The presence of export and exchange controls; (5) Competition with other auctioneers and art dealers; (6) The amount of quality property being consigned to art auction houses (and, in particular, the number of single-owner sales consignments); (7) The level of guarantees or the terms of other financial arrangements offered by other auction houses; (8) The success of the Company in attracting and retaining qualified personnel; (9) The demand for art-related financing; and (10) The demand for luxury residential real estate. EUROPEAN MONETARY UNION -- The European Monetary Unit (the "euro") was introduced on January 1, 1999 as a wholesale currency. The eleven participating European Monetary Union member countries established fixed conversion rates between their existing currencies and the euro. On January 1, 2002, the existing currencies of European Monetary Union member countries were cancelled and euro bills and coins are now being used for cash transactions in the participating countries. 30 The Company's financial and cash management operations affected by the euro conversion were adequately prepared for its introduction. The Company's management will continue to analyze the potential business implications of converting to a common currency. The Company is currently unable to determine the ultimate impact, if any, of the euro conversion on its operations given that the impact will be dependent upon the competitive situations that exist in the various regional markets in which the Company participates. (See statement on Forward Looking Statements.) FORWARD LOOKING STATEMENTS -- This form 10-Q 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 following, which are not ranked in any particular order: (1) The factors listed under "Risk Factors Affecting Operating Revenues and Liquidity" above; (2) The Company's business is seasonal, with peak revenues and operating income primarily occurring in the second and fourth quarters of each year as a result of the traditional spring and fall art auction season; (3) The final resolution of various antitrust matters including the appeal of the settlement of the U.S. Antitrust Litigation, the ultimate outcome of the International Antitrust Litigation, the threatened litigation by one of the parties that opted out of the class action settlement in the U.S. Antitrust Litigation, and the European Commission investigation regarding commissions charged by the Company and Christie's for auction services and other trading terms; (4) The Company's success in developing and implementing its Internet auction strategy; (5) The effects of market risk; (6) The extension or refinancing of the Amended and Restated Credit Agreement or the ability to obtain other long-term funding; 31 (7) The successful implementation of the Company's restructuring plans; (8) Market acceptance of the proposed revisions to the Company's existing commission rates and structures; and (9) The outcome of discussions the Company has been having with representatives of the Taubman family regarding the possible sale of the Company. 32 ITEM 3: 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, notes receivable, consignor advances, short-term borrowings and long-term debt. At March 31, 2002, a hypothetical 10% strengthening or weakening of the United States dollar relative to all other currencies would result in a decrease or increase in cash flow of approximately $1.9 million. Excluding the potential impact of this hypothetical strengthening or weakening of the United States dollar, the market risk of the Company's financial instruments has not changed significantly as of March 31, 2002 from that set forth in the Company's Form 10-K for the year ended December 31, 2001. At March 31, 2002, the Company had $23.8 million of notional value forward currency exchange contracts outstanding. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under such contracts. The Company's Consolidated Balance Sheet at March 31, 2002 includes a nominal liability recorded within accounts payable and accrued liabilities reflecting the fair value of the Company's forward exchange contracts. See Note 7 of Notes to Consolidated Financial Statements for additional information on the Company's use of derivative instruments. 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 March 31, 2002, all of the Company's forward exchange contracts were with one counterparty. 33 PART II: OTHER INFORMATION ITEM 1: 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. 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 $6 million of the fine payable to the DOJ in accordance with the plea, and the remaining $39 million of the fine is payable as follows: (a) $6 million due February 6, 2003, (b) $6 million due February 6, 2004, (c) $12 million due February 6, 2005 and (d) $15 million due February 6, 2006. The European Commission and the Canadian Competition Bureau are also conducting investigations regarding commissions charged by the Company and Christie's for auction services, and the Company is cooperating with such investigations. On April 19, 2002 the European Commission sent a Statement of Objections to the Company and Christie's setting out its preliminary conclusion that the Company and Christie's breached European Union competition rules by colluding to fix commission fees and other trading terms in connection with auctions in the European Union. The Company and Christie's have six weeks to respond in writing to the allegations set forth in the Statement of Objections and have the right to request a formal hearing. The Commission has confirmed that the Company is regarded as cooperating with its investigation and may be entitled to a degree of leniency. (See Note 10 of Notes to Consolidated Financial Statements.) 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. 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"). And a number of shareholder derivative suits were filed against the directors of the Company based on allegations related to the foregoing lawsuits and 34 investigations. The Shareholder Litigation and all of the shareholder derivative suits have been settled pursuant to non-appealable court-approved settlement agreements that have been fully funded. Included in the lawsuits described above are more than fifty purported class action lawsuits that were filed against the Company and/or its wholly-owned subsidiary, Sotheby's, Inc., beginning January 30, 2000, alleging violations of the federal antitrust laws in connection with auctions in the U.S. (the "U.S. Antitrust Litigation"). Christie's International, PLC and Christie's, Inc. (collectively "Christie's") were also named as defendants in these actions. All of these federal antitrust actions were filed in or later transferred to the U.S. District Court for the Southern District of New York. On February 23, 2000, the U.S. District Court for the Southern District of New York entered an order consolidating all of the actions theretofore filed in that court. Pursuant to the court's consolidation Order, plaintiffs filed a consolidated complaint on March 15, 2000, captioned In Re Auction Houses Antitrust Litigation, No. 00 Civ. 0648. The consolidated complaint was brought on behalf of individuals that purchased and/or sold items auctioned by defendants during the period of January 1, 1993 through February 7, 2000. On September 24, 2000, the Company agreed to settle the U.S. Antitrust Litigation, subject to court approval. On April 20, 2001, the Court approved an amended settlement agreement (the "Amended Settlement Agreement"). Under the Amended Settlement Agreement, the Company has deposited into an escrow account for the benefit of members of the class (a) $206 million in cash and (b) a global vendor's commission discount certificate with a face value of $62.5 million. The court determined that the $62.5 million face value of the global vendor's commission discount certificate had a fair market value of not less than $50 million. Of these amounts, $156 million in cash was funded by A. Alfred Taubman, holder of approximately 13.2 million shares of the Company's Class B Common Stock, the Company's former Chairman and a co-defendant in the U.S. Antitrust Litigation. The vendor's commission discount certificates may be used to pay vendor's commissions and certain other sale charges at the Company or Christie's during the five years after their distribution to members of the class and are redeemable for cash at the end of four years. The Company entered into the Amended Settlement Agreement without any admission of liability. Certain class members have filed notices of appeal of the court's order approving the settlement. The U.S. Court of Appeals for the Second Circuit will hear the appeal in the U.S. Antitrust Litigation. One of the parties that opted out of the class action settlement in the U.S. Antitrust Litigation has threatened to commence a lawsuit against 35 the Company and Christie's alleging antitrust violations and seeking approximately $19 million in damages. The Company believes that its maximum potential exposure in this matter is substantially less than the amount of the claim. The parties have agreed to enter into non-binding mediation to attempt to resolve this claim. 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 along with several current or former directors and/or officers of both the Company and Christie's. The complaints in these actions (the "International Antitrust Litigation") contained allegations identical to the complaints in the U.S. Antitrust Litigation, but were considered separately from the U.S. Antitrust Litigation. On October 30, 2000, plaintiffs filed a consolidated amended complaint in the International Antitrust Litigation. On January 30, 2001, the court granted the Company's motion to dismiss the International Antitrust Litigation on the grounds of lack of jurisdiction over auctions held by the Company and its subsidiaries outside of the U.S. Plaintiffs appealed the court's decision to the U.S. Court of Appeals for the Second Circuit. On March 13, 2002, a three-judge panel of the Second Circuit Court of Appeals reversed the District Court's ruling that it lacked jurisdiction over auctions held by the Company, its subsidiaries and Christie's outside of the U.S. and remanded the case to the District Court to consider whether the International Antitrust Litigation should be dismissed on other grounds - namely, the plaintiffs' lack of standing or the fact that New York is an improper venue for consideration of this matter. On March 27, 2002, the Company and Christie's filed a Motion for Rehearing EN BANC of the decision by the three-judge panel by the full panel of active judges sitting on the Second Circuit Court of Appeals. The Company is awaiting a decision on this motion. In addition to the federal actions, six indirect purchaser class action lawsuits have been filed against the Company, its subsidiary, Sotheby's, Inc. and Christie's in the Superior Court of the State of California, alleging violations of the Cartwright Act, California's antitrust statute, and the California Unfair Competition Act. The complaints in these lawsuits purport to be brought on behalf of individuals that indirectly purchased items in California from one or more of the defendants. The complaints generally allege, among other things, that the Company along with Christie's conspired to fix and raise the 36 commissions charged to buyers and sellers of art and other items at auction, and that, as a result, such indirect purchasers paid more for art and other items than they otherwise would have paid in the absence of defendants' conduct. The complaints seek, among other things, treble damages in unspecified amounts, interest, disgorgement of gains, equitable relief, attorneys' fees and costs. On May 3, 2002, the Company agreed, subject to court approval, to pay $192,500 to settle all of these lawsuits. The Company entered into this agreement without any admission of liability. The Company's agreement with A. Alfred Taubman, pursuant to which Mr. Taubman provided funding for the settlements of the U.S. Antitrust Litigation and the Shareholder Litigation, also provided for mutual releases by the Company and Mr. Taubman of claims against each other relating to the DOJ investigation and related investigations and civil litigation. In addition, the agreement provides for the Company to bear all liability and to indemnify Mr. Taubman for damages in connection with any civil proceeding relating to any antitrust claim asserted by buyers or sellers at auctions conducted outside of the U.S., including the International Antitrust Litigation, and for legal fees and expenses incurred by Mr. Taubman after April 12, 2001 in connection with any such proceeding. In Canada, a purported class action has been commenced in the Superior Court of Ontario against the Company, Sotheby's (Canada) Limited, Christie's and other defendants claiming damages in the amount of approximately $14 million plus costs for alleged anticompetitive activities. It is anticipated that a Statement of Defense will be filed denying any liability with respect to the claim. The Company is also aware of a governmental investigation in Italy arising from certain allegations of improper conduct by current and former Company employees. These allegations arose from an early 1997 television program aired in the U.K. as well as the publication of a related book. The Company has been in contact during the past several years with, and is continuing to work with, the relevant authorities. The Company also becomes involved, from time to time, in various claims and lawsuits incidental to the ordinary course of its business. The Company does not believe that the outcome of any such pending claims or proceedings will have a material effect upon its business or financial condition. (See statement on Forward Looking Statements.) 37 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 23, 2002, the Company held its annual meeting of shareholders. The matters on which the shareholders voted were: (i) the election of four directors by the holders of Class A Common Stock; (ii) the election of eleven directors by the holders of Class B Common Stock; and (iii) the ratification of the appointment of Deloitte & Touche LLP as the Company's independent auditors for the year ended December 31, 2002. All nominees were elected, and all proposals passed. The results of the voting are shown below: ELECTION OF CLASS A DIRECTORS
NOMINEES FOR AGAINST WITHHELD George S. Blumenthal 39,906,090 0 325,673 Steven B. Dodge 39,939,959 0 291,804 Dr. Henry G. Jarecki 36,264,041 0 3,967,722 Brian S. Posner 39,938,445 0 293,318
ELECTION OF CLASS B DIRECTORS
NOMINEES FOR AGAINST WITHHELD Lord Black of Crossharbour PC(C), OC, KCSG 165,126,330 0 0 Michael Blakenham 165,126,330 0 0 Max M. Fisher 165,126,330 0 0 The Marquess of Hartington 165,126,330 0 0 Henry R. Kravis 165,126,330 0 0 Jeffrey H. Miro 165,126,330 0 0 Sharon Percy Rockefeller 165,126,330 0 0 William F. Ruprecht 165,126,330 0 0 Michael I. Sovern 165,126,330 0 0 Robert S. Taubman 165,126,330 0 0 Robin Woodhead 165,126,330 0 0
RATIFICATION OF INDEPENDENT AUDITORS 205,358,093 Votes were cast; 204,295,792 Votes were cast for the Resolution; 1,030,402 Votes were cast against the Resolution; and 31,899 Votes abstained
38 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10(a) - Amended Employment Agreement between Sotheby's Holdings, Inc. and William F. Ruprecht 10(b) - Agreement between Sotheby's Holdings, Inc. and Donaldson Pillsbury (b) Reports on Form 8-K None 39 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 10(a) Amended Employment Agreement between Sotheby's Holdings, Inc. and William F. Ruprecht 10(b) Agreement between Sotheby's Holdings, Inc. and Donaldson Pillsbury 40 SOTHEBY'S HOLDINGS, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed this the 14th day of May, 2002, on its behalf by the undersigned, thereunto duly authorized and in the capacity indicated. SOTHEBY'S HOLDINGS, INC. By: /s/ Michael L. Gillis Michael L. Gillis Senior Vice President, Controller and Chief Accounting Officer 41 EX-10.A 3 a2079207zex-10_a.txt EXHIBIT 10(A) EXHIBIT 10 (a) EMPLOYMENT AGREEMENT AGREEMENT (the "Agreement") dated as of March 20, 2002 amending and restating the Agreement dated as of July 10, 2001 (the "Original Agreement") by and between Sotheby's Holdings, Inc. (the "Company") or ("Sotheby's") and William F. Ruprecht (the "Executive"). W I T N E S S E T H : WHEREAS, the Company entered into the Original Agreement to specify the terms and conditions on which the Executive would be employed by the Company; and WHEREAS, the Company and the Executive desire to amend certain provisions of the Original Agreement as further specified herein. NOW, THEREFORE, in consideration of the mutual promises and conditions herein set forth, the parties hereto agree to amend the Original Agreement and to restate the Original Agreement as so amended to read in its entirety as follows: 1. TERM. The term of this Agreement (the "Term") shall commence on January 1, 2001 and shall continue, unless terminated in accordance with Paragraph 4 herein or as otherwise provided in this Agreement, until December 31, 2003. 2. DUTIES AND AUTHORITY. During the Term, the Executive agrees to continue to serve the Company, and the Company agrees to continue to employ the Executive, as Chief Executive Officer and President and to continue to nominate him as a member of the Board of Directors of the Company and support, in good faith, his election as a member of the Board of Directors of the Company. In serving in the aforementioned positions, the Executive shall have such authority and responsibility as are customarily attendant to such positions and as may be specified from time to time by the Board of Directors of the Company. The Executive shall report directly to the Board of Directors of the Company. Except as otherwise permitted by the Company, the Executive shall devote substantially all of his business time (excluding periods of vacation and sick leave) and efforts to the performance of his functions and responsibilities for the Company and its affiliates. 3. COMPENSATION AND BENEFITS. In full consideration for all services rendered by the Executive during the Term, the Executive will receive the following compensation and benefits: 1 (a) BASE SALARY. The Executive shall receive an annual base salary of not less than five hundred thousand dollars ($500,000) (the "Base Salary") payable in accordance with the customary payroll practices of the Company. During the Term, the Executive's Base Salary will be reviewed by the Compensation Committee of the Board of Directors of the Company and may be adjusted upward (but not downward) to reflect the Executive's performance and responsibilities. (b) ANNUAL INCENTIVE COMPENSATION. During the Term, the Executive shall be eligible to receive annual incentive compensation ("Annual Incentive Compensation"). The Executive's annual incentive target shall be one hundred percent (100%) of the Executive's Base Salary during the year in which the compensation is accrued, payable at such times as such Annual Incentive Compensation is paid to other executives of the Company as determined by the Compensation Committee in its sole discretion. (c) RETENTION BONUS. The Executive shall receive retention bonuses ("Retention Bonus") in the aggregate amount of seven million dollars ($7,000,000) payable as follows: (i) five hundred thousand dollars ($500,000) on February 1, 2002; (ii) five hundred thousand dollars ($500,000) on September 1, 2002; (iii) three million dollars ($3,000,000) on December 31, 2002; and (iv) three million dollars ($3,000,000) on December 31, 2003, provided, however, that Executive remains continuously employed by the Company at the date each such payment is to be made or is entitled to such payment or payments pursuant to Section 5(a)(6) or Section 5(c). These Retention Bonuses shall not be subject to renewal after the Term nor shall be included in any calculation pursuant Subparagraph 3(k) or Paragraph 5 (except as set forth in this subparagraph). (d) STOCK OPTIONS. For 2002 and 2003, the Executive shall be granted options pursuant to the Company's Stock Option Plan (the "Stock Option Plan") in accordance with the Company's annual practice. If a Change of Control occurs before the Executive's 250,000 options issued in February 2001 or the stock options granted during 2002 or 2003 (if any) have become exercisable under the Stock Option Plan, then the Executive shall be paid in cash the difference between the exercise price of any such options and the price per share for Sotheby's shares in the Change of Control transaction. (e) EXPENSE REIMBURSEMENT. The Company will reimburse the Executive for ordinary and necessary business and travel expenses incurred in the performance of the Executive's duties in accordance with the Company's standard procedures in effect for the senior most executives of the Company. (f) BENEFITS. The Executive shall be eligible to continue to participate in all benefit plans now or hereafter maintained by or on behalf of the Company for its most senior executives or in which such senior executives participate and shall receive all fringe benefits and vacations, for which the Executive's level of employment makes him eligible in accordance with 2 the Company's policies and the terms of such plans. Such benefits shall not be reduced, unless they are reduced in the same manner for all other senior executives of the Company. (g) SPECIAL PAYMENT. The Executive shall be eligible to continue to receive the special payment made to him on September 1, 2000 if it is determined by the Company, in its sole discretion, to continue it and for as long thereafter as the Company decides is appropriate. (h) BUSINESS DEVELOPMENT ALLOWANCE. The Executive will be eligible for a business development allowance of at least $25,000 for each calendar year during the Term. (i) CAR ALLOWANCE. During the Term, the Company will pay for the Executive's use of a car and driver for business purposes. (j) CONFIDENTIALITY AGREEMENT; SOTHEBY'S RULES AND POLICIES. As a condition to the Executive's continued employment by the Company, he shall continue to be bound by the Company's Confidentiality Agreement, Auction Rules, Compliance Policy, and the Conflict of Interest Policy and House Rules (collectively, the "Rules and Policies"). The Executive acknowledges that he has read, understood and signed each of the foregoing. Nevertheless, if any provision of the Rules or Policies expressly contradicts any provision in this Agreement, the provisions of this Agreement shall govern. (k) SOTHEBY'S, INC. SEVERANCE PLAN. In the event that the Executive is terminated under such conditions that make him eligible for benefits under the Sotheby's, Inc. Severance Plan, such benefits shall be paid under the terms of that plan in effect on the execution date of this Agreement regardless of whether that plan is modified during the Term of this Agreement unless the modification results in an enhanced benefit to the Executive, in which case he would receive the enhanced benefit. (l) MISCELLANEOUS. All bonus payments set forth in Subparagraphs 3(c), 3(g), 3(h), and 3(k) and all termination payments made pursuant to Paragraph 5 shall not be included for benefit contribution purposes under any qualified or non-qualified retirement plan including but not limited to the 401(k) plan or Benefit Equalization Plan. These bonus and termination payments are also not part of the bonus calculation in the event the Executive is entitled to benefits under the Sotheby's, Inc. Severance Plan. 4. TERMINATION OF THE EXECUTIVE'S EMPLOYMENT. (a) DEATH. Executive's employment shall terminate immediately upon his death. (b) DISABILITY. Executive's employment shall terminate upon Executive's "Disability." For purposes of this Agreement, "Disability" means a determination by the Company in accordance with applicable law that, as a result of a physical or mental illness, the 3 Executive is unable to perform the essential functions of his job with or without reasonable accommodation that does not present an undue burden on the Company. (c) BY THE COMPANY. The Board of Directors of the Company may terminate the Executive's employment at any time during the Term, with or without "Cause" (as defined below), upon written notice by the Company to the Executive, and the Executive's employment will terminate on the date notice is given or, if specified in the notice, within sixty days after the date notice is given. For purposes of this Agreement, "Cause" means: (1) the Executive's fraud, willful malfeasance or gross negligence in the performance of his duties which is materially injurious to the Company; or (2) the Executive's conviction of felony crime; The Executive shall have thirty (30) days following the receipt of notice from the Company of the existence of circumstances constituting Cause to correct such circumstances. Any notice of termination for Cause must be given within sixty (60) days following the Chairman of the Board of Directors learning of circumstances constituting Cause. (d) BY THE EXECUTIVE. The Executive may terminate his employment with the Company at any time during the Term, with or without "Good Reason" (as defined below), upon thirty (30) days prior written notice to the Company. For purposes of this Agreement, "Good Reason" means: (1) a material breach of this Agreement by the Company; (2) the Company's assignment of duties to the Executive which are a material diminution of his duties; (3) the Company's removal of the Executive from his positions of Chief Executive Officer and/or President and/or the Company's removal of the Executive or failure to nominate the Executive, and support in good faith the Executive's election, as a member of the Board of Directors of the Company; (4) the Company's requirement that the Executive relocate the Executive's office or perform more than one third of his duties during any calendar year 4 more than thirty-five (35) miles outside of New York, New York without the Executive's prior written consent; (5) the Company's failure to provide timely the Executive with compensation and the benefits at the levels required herein; or (6) termination of the Executive's employment within twelve (12) months of a Change of Control (as defined in the Stock Option Plan) but not earlier than six (6) months after the Change of Control. provided, however, that the Company shall have thirty (30) days following the receipt of notice from the Executive of the existence of circumstances constituting Good Reason to correct such circumstances. Any notice of termination for Good Reason must be given within thirty (30) days following the Executive learning of circumstances constituting Good Reason. 5. SEVERANCE PAYMENT. (a) WITHOUT CAUSE AND GOOD REASON TERMINATION. If during the Term the Company terminates the Executive's employment without Cause or the Executive terminates his employment for Good Reason, all compensation payable to the Executive under Paragraph 3 hereof will cease as of the effective date of notice of such termination (the "Termination Date") and the Executive will be entitled to the following: (1) All accrued but unpaid Base Salary through the Termination Date plus the Executive's then current Base Salary through December 31, 2003, payable in a lump sum; (2) Annual Incentive Compensation payable in a lump sum, as if the Executive remained employed through December 31, 2003, in an annualized amount equal to his annual incentive target as most recently determined pursuant to Subparagraph 3(a) prior to the Termination Date; (3) All previously earned and accrued (but unpaid) entitlements and benefits from the Company, including any such entitlements and benefits as an Executive under this Agreement or under the Company's pension, disability and life insurance plans, policies and programs, if any; 5 (4) Full benefit coverage for the Executive, his spouse and other eligible dependents under all of the Company's life insurance, disability, accidental death and dismemberment and other Executive welfare programs, plans and policies (including, but not limited to, health and dental insurance plans and policies but excluding the benefits provided pursuant to Subparagraphs 3(h) and (i)) through December 31, 2003 provided that if the Company Health and Welfare Programs do not permit continuation of coverage through December 31, 2003, the Company will reimburse the Executive, on an after tax basis, for the cost of obtaining comparable coverage; (5) Immediate vesting of all outstanding unvested stock options. To the extent the Executive is prohibited from exercising the stock options granted in February 2001 or during 2002 and 2003 (if any) under the Stock Option Plan, he shall be paid cash in lieu of exercising such options; and (6) On, or within fifteen (15) days following the Termination Date, payment of any portion of the Retention Bonuses described in Paragraph 3(c) not paid as of the Termination Date. The amounts set forth in Paragraph 5(a)(1)-(4) above are in addition to any payments to which the Executive may be entitled pursuant to the Company's Severance Plan, if applicable. (b) TERMINATION FOR CAUSE OR TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON. If the Executive's employment is terminated by the Company for Cause or by Executive without Good Reason, Executive shall receive Base Salary through the date of termination to the extent not theretofore paid, all benefits accrued to the date of termination that are not forfeited under the terms of the plans, and (i) if the Executive terminates his employment without Good Reason, unpaid Annual Incentive Compensation accrued during the calendar year prior to the calendar year in which the termination is effective or (ii) if the Executive's employment is terminated by the Company for Cause and the actions(s) or occurrence(s) constituting Cause took place in the year in which the termination is effective, unpaid Annual Incentive Compensation accrued during the calendar year prior to the calendar year in which the termination is effective. 6 (c) TERMINATION DUE TO DEATH OR DISABILITY. In the event of the Executive's death or Disability during the Term, Executive's employment will terminate as of the date of the Executive's death or Disability and he (or his Estate or beneficiaries as applicable) will receive (i) the sums set forth in paragraphs 5(a)(3) and (5) and (ii) all compensation and benefits that the Executive would have been paid, or to which he would have been entitled, had he remained employed for one (1) year after the Termination Date, regardless of whether the end of the one year period is subsequent to December 31, 2003. (d) EXPIRATION OF THE TERM. If the Company does not offer to renew this Agreement at least six (6) months prior to the expiration of the Term on terms at least as favorable as those in the final year of the Executive's employment except that its Term need be no longer than two (2) years and such agreement need not include the retention bonus in Paragraph 3(c). The Executive shall, upon the expiration of the Term, be entitled to receive benefits under the Company's Severance Plan as if he were entitled to receive such benefits under the terms of the Plan. (e) CHANGE OF CONTROL. If a "Change of Control" (as defined in the Stock Option Plan) occurs and the Executive terminates his employment no earlier than six (6) months following the Change of Control and no later than twelve (12) months following the Change of Control, the Executive shall receive compensation and benefits as if his employment was terminated by him for Good Reason. (f) RELEASE. Any payments payable pursuant to this Paragraph 5 other than unpaid compensation shall only be payable if the Executive delivers to the Company a release, as required under the Sotheby's, Inc. Severance Plan, of all his claims (except with regard to claims for payments or benefits specifically payable or providable hereunder which are not yet paid as of the effective date of the release, claims for vested accrued benefits, claims under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") or claims relating to any rights of indemnification under Paragraph 8(e)), occurring up to the release date with regard to the Company and its respective past or present officers, directors and employees in such form as reasonably requested by the Company. 6. NON-COMPETE AND NON-SOLICITATION AGREEMENT. (a) Because of the importance of stability and confidentiality during this time of uncertainty for the Company, and because the Executive has specialized, unique confidential knowledge vital to the Company, the Executive agrees that, during the Restricted Period (defined below), he will not, without the consent of the Company, in New York, California, England, France or Switzerland engage directly or indirectly in the live or on-line Art Auction Business or in any other business in which the Company is actively engaged or is actively seeking to become engaged as of the time the Executive's employment terminates (a "Competing Business"), whether such engagement by the Executive is as an officer, director, proprietor, employee, partner, owner, consultant, advisor, agent, sales representative or other 7 participation. For purposes of this Agreement, the Art Auction Business involves auctions of property in the collecting categories that the Company offers for sale in its core business at the time of termination. For purposes of this Agreement, the "Restricted Period" is during the course of the Executive's employment and the earlier of (i) six (6) months after the end of the Term or (ii) twelve (12) months after the termination of the Executive's employment. (b) In addition to the foregoing, during the Restricted Period, the Executive agrees that he will not, either alone or in concert with others, and will not cause another to in any such case directly or indirectly, (1) recruit, solicit or induce any Sotheby's employees to terminate their employment with Sotheby's; (2) solicit the business of, do business with, or seek to do business with, any Client of the Company (as defined herein); (3) encourage or assist any Competing Business to solicit or service any Client of the Company; or (4) otherwise induce any Client of the Company to cease doing business with, or lessen its business with, the Company. (c) The term "Client" shall not include clients of Sotheby's with whom the Executive had no dealings on behalf of Sotheby's, or clients he developed and maintained without any support or assistance, whether financial or otherwise, from Sotheby's, but shall include any person who has or has had business with the Company with whom the Executive did have dealings as well as, insofar as property that was at any time owned by such person is concerned, that person's estate, heirs and/or immediate family. (d) If at any time there is a judicial determination by any court of competent jurisdiction that the time period, geographical scope, or any other restriction contained in this Paragraph 6 is unenforceable against the Executive, the provisions of this Paragraph 6 shall not be deemed void but shall be deemed amended to apply as to such maximum time period, geographical scope and to such other maximum extent as the court may judicially determine or indicate to be enforceable. 7. LEGAL AND EQUITABLE REMEDIES. Sotheby's shall be entitled to enjoin a violation by the Executive of any provision hereof. Moreover, the parties hereto acknowledge that the damages suffered by Sotheby's as a result of any violation of this Agreement may be difficult to ascertain. Accordingly, the parties agree that in the event of a breach of this 8 Agreement by the Executive, Sotheby's shall be entitled to specific enforcement by injunctive relief of the Executive's obligations to Sotheby's. The remedies referred to above shall not be deemed to be exclusive of any other remedies available to Sotheby's, including to enforce the performance or observation of the covenants and agreements contained in this Agreement. 8. MISCELLANEOUS. (a) NOTICE. Whenever notice is required hereunder, it shall be given in writing and addressed to the Company at the main business office, and to the Executive at the address reflected in the payroll records of the Company. (b) ENTIRE AGREEMENT. This Agreement supersedes any and all existing agreements between the Executive and the Company relating to the terms and conditions of the Executive's employment. (c) AMENDMENTS AND WAIVERS. No provisions of this Agreement may be amended, modified, waived or discharged except as agreed to in writing by the Executive and the Company. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion will not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Executive and the Company and its successors and permitted assigns. Neither this Agreement nor any of the rights of the parties hereunder may be assigned by either party hereto except that the Company may assign its rights and obligations hereunder to a corporation or other entity that acquires substantially all of its assets. Any assignment or transfer of this Agreement in violation of the foregoing provisions will be void. (e) INDEMNIFICATION. The Executive shall be indemnified and held harmless by the Company, or its successors or assigns, from and against any losses, claims, damages, liabilities or actions, to the fullest extent permitted by law. (f) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and/or to be performed in that State, without regard to any choice of law provisions thereof. (g) ARBITRATION. Any dispute, controversy or claim arising out of or relating to this Agreement, or breach thereof (other than an action or proceeding for an injunction or other equitable relief pursuant to Paragraph 7 hereof), shall be settled by arbitration in New York City in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association by a single arbitrator. The arbitrator's award shall be final and binding upon both parties, and judgment upon the award may be entered in any court of 9 competent jurisdiction in any state of the United States or country or application may be made to such court for a judicial acceptance of the award and an enforcement as the law of such jurisdiction may require or allow. The losing party in such arbitration shall be liable for any costs, including attorneys' fees. If there is a dispute as to which party lost, costs and fees shall be allocated by the arbitrator. (h) TAX GROSS-UP. Notwithstanding anything herein to the contrary, if it is determined by the Company on or prior to the date the applicable payments and/or benefits are paid or thereafter by the Internal Revenue Service (the "IRS") pursuant to an IRS audit of the Executive's federal income tax return(s) (an "Audit"), that any payment or benefit provided to the Executive under this Agreement would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any interest or penalties with respect to such excise tax (such excise tax, together with any interest or penalties thereon, is herein referred to as the "Excise Tax"), then the Company shall pay (either directly to the IRS as tax withholdings or to the Executive as a reimbursement of any amount of taxes, interest and penalties paid by the Executive to the IRS) both the Excise Tax and an additional cash payment (a "Gross-Up Payment") in an amount that will place the Executive in the same after-tax economic position that the Executive would have enjoyed if the payment or benefit had not been subject to the Excise Tax. The amount of the Gross-Up Payment shall be calculated by the Company's regular independent auditors based on the amount of the Excise Tax paid by the Company as determined by the Company or the IRS. If the amount of the Excise Tax determined by the IRS is greater than an amount previously determined by the Company, the Company's auditors shall recalculate the amount of the Gross-Up Payment. The Executive shall promptly notify the Company of any IRS assertion during an Audit that an Excise Tax is due with respect to any payment or benefit, but the Executive shall be under no obligation to defend against such claim by the IRS unless the Company requests, in writing, that the Executive undertake the defense of such IRS claim on behalf of the Company and at the Company's sole expense. In such event, the Company may elect to control the conduct to a final determination through counsel of it own choosing and at its sole expense, of any audit, administrative or judicial proceeding involving an asserted liability relating to the Excise Tax, and the Executive shall not settle, compromise or concede such asserted Excise Tax and the Executive shall cooperate with the Company in each phase of any contest. (i) MITIGATION. The Executive shall have no duty to mitigate any amounts payable or benefits provided under this Agreement. (j) WITHHOLDINGS. The Company is authorized to withhold from any benefit provided or payment due hereunder the amount of withholding taxes due any federal, state, or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such withholding taxes. 10 (k) SEVERABILITY. If any provision of this Agreement is invalid or unenforceable, the balance of this Agreement will remain in effect, and if such provision is inapplicable to any person or circumstance, it will nevertheless remain applicable to all other persons and circumstances. (l) ATTORNEYS' FEES. At the request of the Executive, the Company shall pay the Executive's reasonable attorneys' fees incurred by the Executive in connection with preparation, execution and delivery of this Agreement. (m) EFFECTIVENESS. All of the provisions hereof that were part of the Original Agreement became effective on and as of the date of the Original Agreement, and all amendments to the Original Agreement contained herein shall be effective on and as of January 1, 2002. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. /s/ William F. Ruprecht ---------------------------- WILLIAM F. RUPRECHT SOTHEBY'S HOLDINGS, INC. By: /s/ Michael I. Sovern ------------------------- Name: Michael I. Sovern Title: Chairman of the Board 11 EX-10.B 4 a2079207zex-10_b.txt EXHIBIT 10(B) EXHIBIT 10 (b) Donaldson Pillsbury Sotheby's Holdings, Inc. 1334 York Avenue New York, NY 10021 Dear Don: Sotheby's Holdings, Inc. ("the Company") hereby agrees with you as follows: 1. If your employment by the Company (i) is terminated by you not less than six (6) nor more than twelve (12) months after a Change of Control (as defined in the Sotheby's Holdings, Inc. 1997 Stock Option Plan), or (ii) is terminated at any time by the Company without Cause (including by reason of death or disability), then (w) the Leadership Incentive Bonus payable to you in two installments on February 28, 2002 and September 30, 2002 pursuant to my letter to you dated October 16, 2000, shall be paid to you on the date of such termination, (x) the Company will pay you the difference between the vested amount of your Retirement Savings Benefits under the 1988 Benefit Equalization Plan of Sotheby's, Inc. on the date of such termination and the amount you would be entitled to receive under such plan if your Retirement Savings Benefits were then fully vested, (y) the Company will pay you the difference between the vested amount of your Employer Matching Contribution Account and your Employer Standard Contribution Account (collectively, the "Accounts") under the Sotheby's, Inc. Retirement Savings Plan on the date of such termination and the full amount then credited to the Accounts and (z) you shall be entitled to be paid upon such termination the full benefits to which you are entitled under Sotheby's Severance Plan. For the purpose of this Agreement, such benefits shall be paid under the terms of the Severance Plan as in effect on the date of execution of this Agreement, regardless of whether that plan is modified during the term of this Agreement, unless the modification results in an enhanced benefit, in which case you will be entitled to such enhanced benefit. 2. For purposes hereof, "Cause" shall mean (i) your fraud or gross negligence in the performance of your duties which is materially injurious to the Company or (ii) your conviction of a felony crime. The President and Chief Executive Officer shall determine in his sole discretion whether the occurrence or non-occurrence of an event constitutes Cause. You shall have thirty (30) days following the receipt of notice from the Company of the existence of circumstances constituting Cause to correct such circumstances. Any notice of termination of Cause must be given within sixty (60) days following the President and Chief Executive Officer learning of circumstances constituting Cause. 3. Pursuant to the Sotheby's 1997 Stock Option Plan, an option to purchase 50,000 shares will be provided to you upon your execution of this Agreement. 4. (a) Because of the importance of stability and confidentiality during this time of uncertainty for the Company, and because you have specialized, unique confidential knowledge vital to the Company, you agree that during the Restricted Period (defined below) you will not, without the consent of the Company, directly or indirectly, in New York, California, England, France or Switzerland engage directly or indirectly in the live or on-line Art Auction Business or in any other business in which the Company is engaged or is actively seeking to be engaged as of the time that your employment terminates, whether such engagement by you is as an officer, director, proprietor, employee, partner, owner, consultant, advisor, agent, sales representative or other participation. For purposes of this agreement, the Art Auction Business involves auctions of the property in the collecting categories that the Company offers for sale in its core business at the time of termination. For purposes of this Agreement, the "Restricted Period" is during the course of your employment and any further period during which you are subject to restrictions pursuant to your Notice and Non-Compete Agreement with the Company dated October 18, 2000. (b) In addition to the foregoing, during the Restricted Period, you agree that you will not, either alone or in concert with others, and will not cause another to in any such case, directly or indirectly, hire, recruit, solicit or induce any of the Company's employees to terminate their employment with the Company. (c) If at any time there is a judicial determination by any court of competent jurisdiction that the time period, geographical scope, or any other restriction contained in the foregoing is unenforceable against you, the provisions of this paragraph shall not be deemed null and void but shall be deemed amended to apply as to such maximum time period, geographical scope and to such other maximum extent as the court may judicially determine or indicate to be enforceable. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York irrespective of the principles of conflicts of law, and you consent to the jurisdiction of the state and federal courts situated in New York City for the purpose of adjudicating any dispute relating to this Agreement. This Agreement shall remain in effect and binding upon any successor or assign of Sotheby's including any entity that (whether directly or indirectly, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation or otherwise) is the survivor of the Company or that acquires the Company and/or substantially all of the assets of the Company in accordance with the operation of law, and such successor entity shall be deemed the "Company" for purposes of this Agreement. In the situations set forth in this paragraph, if the Agreement is not assumed as a matter as a matter of law, the Company will require its assumption by the successor entity. If you are in agreement with the foregoing arrangements, please confirm your agreement by signing in the space indicated below, whereupon this Agreement shall become effective as of September 28, 2001. Very truly yours, SOTHEBY'S HOLDINGS, INC. /s/ William F. Ruprecht ---------------------------------- William F. Ruprecht President and Chief Executive Officer ACCEPTED AND AGREED: /s/ Donaldson Pillsbury - ---------------------------------- Donaldson Pillsbury -----END PRIVACY-ENHANCED MESSAGE-----