-----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, Erd1a5g9bwx38Z1j+d3tv9frwXShediyFgMbdDywfEKpuA3y08fX0GyPyfA8LcBN NHWF+/2OqH64ztj8ce99yw== 0001047469-02-002897.txt : 20021113 0001047469-02-002897.hdr.sgml : 20021113 20021113165237 ACCESSION NUMBER: 0001047469-02-002897 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021113 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: 02820627 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 a2091855z10-q.txt FORM 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 September 30, 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 November 11, 2002, there were outstanding 44,933,703 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
PAGE ---- PART I: FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001 3 Consolidated Balance Sheets at September 30, 2002, December 31, 2001 and September 30, 2001 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 41 Item 4. Controls and Procedures 42 PART II: OTHER INFORMATION Item 1. Legal Proceedings 43 Item 6. Exhibits and Reports on Form 8-K 47 SIGNATURE 48 CERTIFICATION OF CHIEF EXECUTIVE OFFICER 49 CERTIFICATION OF CHIEF FINANCIAL OFFICER 51 EXHIBIT INDEX 53
PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS SOTHEBY'S HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- ---------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------- ---------------------- ---------------------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) REVENUES: Auction and related $ 36,130 $ 25,327 $ 184,270 $ 186,441 Other 12,230 13,044 36,569 38,799 - ------------------------------------------------------------------- ---------------------- ---------------------- TOTAL REVENUES 48,360 38,371 220,839 225,240 EXPENSES: Direct costs of services 7,107 8,137 35,604 43,837 Salaries and related costs 34,893 35,533 108,945 116,601 General and administrative 24,749 22,168 72,049 72,135 Depreciation and amortization 6,091 6,367 17,823 18,595 Retention costs 5,761 4,972 18,311 13,669 Net restructuring charges (98) 8,364 (1,533) 7,704 Special charges 20,872 751 19,153 2,622 - ------------------------------------------------------------------- ---------------------- ---------------------- TOTAL EXPENSES 99,375 86,292 270,352 275,163 - ------------------------------------------------------------------- ---------------------- ---------------------- Operating loss (51,015) (47,921) (49,513) (49,923) Interest income 24 784 1,934 4,058 Interest expense (5,379) (6,447) (17,079) (20,147) Other income (expense) 513 226 597 (270) - ------------------------------------------------------------------- ---------------------- ---------------------- Loss before taxes (55,857) (53,358) (64,061) (66,282) Income tax benefit 12,882 20,302 15,836 24,955 - ------------------------------------------------------------------- ---------------------- ---------------------- NET LOSS $ (42,975) $ (33,056) $ (48,225) $ (41,327) =================================================================== ====================== ====================== BASIC AND DILUTED LOSS PER SHARE $ (0.70) $ (0.54) $ (0.78) $ (0.68) =================================================================== ====================== ====================== BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (IN MILLIONS) 61.5 61.3 61.5 60.5 =================================================================== ====================== ======================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 SOTHEBY'S HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30, 2002 DECEMBER 31, 2001 (UNAUDITED) 2001 (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------------- (THOUSANDS OF DOLLARS) ASSETS CURRENT ASSETS Cash and cash equivalents $ 21,707 $ 107,586 $ 29,828 Accounts receivable, net of allowance for doubtful accounts of $8,346, $9,679 and $6,919 193,047 221,355 131,119 Notes receivable and consignor advances, net of allowance for credit losses of $1,321, $1,436 and $1,442 123,917 99,362 119,932 Inventory, net 7,005 11,546 11,057 Deferred income taxes 38,196 38,441 15,286 Prepaid expenses and other current assets 48,289 33,034 33,943 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 432,161 511,324 341,165 Notes receivable 5,036 2,210 8,819 Properties, less allowance for depreciation and amortization of $106,197, $85,465 and $84,108 241,290 250,343 253,080 Goodwill 17,488 17,266 18,169 Investments 31,132 31,924 31,951 Deferred income taxes 61,890 48,804 62,346 Other assets 1,747 2,240 2,498 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 790,744 $ 864,111 $ 718,028 ============================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Due to consignors $ 165,778 $ 197,348 $ 81,659 Short-term borrowings 150,000 130,000 130,000 Accounts payable and accrued liabilities 95,640 128,903 97,193 Deferred revenues 6,508 5,058 6,201 Accrued income taxes 10,037 13,517 5,266 Deferred income taxes - - 3,654 Short-term settlement liability 33,507 2,979 5,245 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 461,470 477,805 329,218 LONG-TERM LIABILITIES Long-term debt 99,449 99,398 99,382 Deferred income taxes - - 1,657 Long-term settlement liability 69,156 80,643 84,066 Other liabilities 15,586 20,395 16,023 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 645,661 678,241 530,346 SHAREHOLDERS' EQUITY Common Stock, $0.10 par value 6,148 6,131 6,134 Authorized shares - 125,000,000 of Class A and 75,000,000 of Class B issued and outstanding shares - 44,932,290, 44,756,146 and 44,754,733 of Class A and 16,549,650 of Class B, at September 30, 2002, December 31, 2001 and September 30, 2001, respectively Additional paid-in capital 202,177 199,645 199,555 Retained deficit (51,354) (3,129) (2,761) Accumulated other comprehensive loss (11,888) (16,777) (15,246) - ----------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 145,083 185,870 187,682 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 790,744 $ 864,111 $ 718,028 =============================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 CONSOLIDATED STATEMENTS OF CASH FLOWS SOTHEBY'S HOLDINGS, INC. (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 2001 - ------------------------------------------------------------------------------------------------------ (THOUSANDS OF DOLLARS) OPERATING ACTIVITIES: Net loss $ (48,225) $ (41,327) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 17,823 18,595 Loss on sale of Chicago Salesroom 191 - Deferred income taxes (12,843) (24,914) Tax benefit of stock option exercises 70 76 Asset provisions (1,369) (769) Asset write-off 75 3,396 Other 1,463 2,113 Changes in assets and liabilities: Decrease in accounts receivable 45,789 160,957 Settlement recovery - related party - 106,000 Decrease in inventory 4,504 2,514 Increase in prepaid expenses and other current assets (14,736) (3,106) Decrease in intangible and other long-term assets 503 73 Increase (decrease) in short-term and long-term settlement liabilities 17,072 (110,781) Decrease in due to consignors (47,122) (189,873) (Decrease) increase in accrued income taxes (3,720) 12,645 Decrease in accounts payable and accrued liabilities and other liabilities (35,640) (33,925) - ------------------------------------------------------------------------------------------------------ Net cash used by operating activities (76,165) (98,326) INVESTING ACTIVITIES: Funding of notes receivable and consignor advances (115,422) (71,892) Collections of notes receivable and consignor advances 88,942 155,862 Capital expenditures (11,018) (27,651) Proceeds from sale of Chicago Salesroom 2,566 - Decrease in investments 1,612 2,297 - ------------------------------------------------------------------------------------------------------ Net cash (used) provided by investing activities (33,320) 58,616 FINANCING ACTIVITIES: Proceeds from short-term borrowings 80,000 299,000 Repayments of short-term borrowings (60,000) (285,000) Proceeds from exercise of stock options 2,214 1,327 - ------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 22,214 15,327 Effect of exchange rate changes on cash 1,392 (414) - ------------------------------------------------------------------------------------------------------ DECREASE IN CASH AND CASH EQUIVALENTS (85,879) (24,797) Cash and cash equivalents at beginning of period 107,586 54,625 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 21,707 $ 29,828 ====================================================================================================== Income tax refunds $ (43) $ (17,608) ====================================================================================================== Interest paid (net of capitalized interest) $ 13,266 $ 19,738 ====================================================================================================== Non cash activities: Issuance of common stock related to Shareholder Litigation settlement $ - $ 40,000 ======================================================================================================
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 financial statements included herein, have been made. 2. SEASONALITY OF BUSINESS The worldwide art auction market has two principal selling seasons, spring and fall. Consequently, during the summer and winter, Auction Sales (as defined in Part I, Item 2 "Management's Discussion and Analysis of 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 For the three and nine months ended September 30, 2002 and 2001, revenues for the Company's operating segments are as follows (in thousands):
Three Months Ended Nine Months Ended ------------------------------- ------------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Auction $ 36,130 $ 25,327 $ 184,270 $ 186,441 Real Estate 9,851 9,794 28,658 25,695 Finance 1,675 2,162 4,539 9,411 Other 704 1,088 3,372 3,693 -------------- -------------- -------------- -------------- Total $ 48,360 $ 38,371 $ 220,839 $ 225,240 ============== ============== ============== ==============
For the three and nine months ended September 30, 2002 and 2001, profit or (loss) for the Company's operating segments are as follows (in thousands):
Three Months Ended Nine Months Ended ------------------------------- ------------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 -------------- -------------- --------------- -------------- Auction $ (30,520) $ (40,317) $ (31,126) $ (41,620) Real Estate 2,529 2,356 6,039 3,363 Finance (8) (164) (203) (564) Other (668) (358) (871) (1,201) -------------- -------------- --------------- -------------- Total $ (28,667) $ (38,483) $ (26,161) $ (40,022) ============== ============== ============== ==============
The following is a reconciliation of the loss reported for the Company's reportable operating segments to the applicable line items in the Consolidated Statements of Operations (in thousands): 7
Three Months Ended Nine Months Ended -------------------------------- -------------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Total loss for reportable segments $ (27,999) $ (38,125) $ (25,290) $ (38,821) Other loss (668) (358) (871) (1,201) Unallocated amounts: Special charges (see Note 9) (20,872) (751) (19,153) (2,622) Retention costs (see Note 11) (5,761) (4,972) (18,311) (13,669) Net restructuring charges (see Note 12) 98 (8,364) 1,533 (7,704) Amortization of discount related to Antitrust fine and Amazon settlement (see Note 12) (655) (788) (1,969) (2,265) -------------------------------------------------------------------- Consolidated loss before taxes $ (55,857) $ (53,358) $ (64,061) $ (66,282) ====================================================================
Total assets for the Company's reportable operating segments are as follows (in thousands):
As of As of As of September 30, December 31, September 30, 2002 2001 2001 -------------- -------------- -------------- Auction $ 554,768 $ 648,637 $ 508,101 Real Estate 19,584 23,895 21,332 Finance 112,847 102,857 108,945 Other 3,459 1,477 2,018 -------------- -------------- -------------- Total $ 690,658 $ 776,866 $ 640,396 ============== ============== ==============
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): 8
As of As of As of September 30, December 31, September 30, 2002 2001 2001 -------------- -------------- -------------- Total assets for reportable segments $ 687,199 $ 775,389 $ 638,378 Other assets 3,459 1,477 2,018 Deferred tax assets 100,086 87,245 77,632 -------------- -------------- -------------- Consolidated assets $ 790,744 $ 864,111 $ 718,028 ============== ============== ==============
4. RECEIVABLES Receivables consist of the following (in thousands):
As of As of As of September 30, December 31, September 30, 2002 2001 2001 -------------- -------------- -------------- Accounts receivable $ 201,393 $ 231,034 $ 138,038 Allowance for doubtful accounts (8,346) (9,679) (6,919) -------------- -------------- -------------- Sub-total 193,047 221,355 131,119 -------------- -------------- -------------- Notes receivable and consignor advances 130,274 103,008 130,193 Allowance for credit losses (1,321) (1,436) (1,442) -------------- -------------- -------------- Sub-total 128,953 101,572 128,751 -------------- -------------- -------------- Total $ 322,000 $ 322,927 $ 259,870 ============== ============== ==============
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 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, 9 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 $19.7 million, $31.5 million and $30.8 million at September 30, 2002, December 31, 2001 and September 30, 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 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. At September 30, 2002, December 31, 2001 and September 30, 2001, the net total of all such unsecured loans was $13.5 million, $15.5 million and $14.7 million, respectively. These amounts are included in the total unsecured loan balances provided in the previous paragraph. The weighted average interest rates charged on net notes receivable and consignor advances were 5.3%, 7.9% and 8.3% at September 30, 2002, December 31, 2001 and September 30, 2001, respectively. Changes in the allowance for credit losses related to notes receivable and consignor advances for the nine months ended September 30, 2002 and 2001 are as follows (in thousands):
2002 2001 -------- --------- Allowance for credit losses at January 1, $ 1,436 $ 11,522 Provisions - - Write-offs (143) (10,066) Foreign currency exchange rate changes 28 (14) -------- --------- Allowance for credit losses at September 30, $ 1,321 $ 1,442 ======== =========
10 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. The Company has completed a transitional impairment test on its goodwill as of the date of adoption and determined that its goodwill was not impaired. The table below reconciles the net loss reported for the three and nine months ended September 30, 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 Nine Months Ended -------------------------------- -------------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Reported net loss $ (42,975) $ (33,056) $ (48,225) $ (41,327) Goodwill amortization (net of taxes) - 291 - 862 -------------- -------------- -------------- -------------- Adjusted net loss $ (42,975) $ (32,765) $ (48,225) $ (40,465) ============== ============== ============== ==============
The impact of goodwill amortization on basic and diluted loss per share for the three months ended September 30, 2001 is less than $0.01 per share. The impact of goodwill amortization on basic and diluted loss per share for the nine months ended September 30, 2001 is approximately $0.01 per share. Changes in the carrying amount of goodwill for the nine months ended September 30, 2002, by operating segment, are as follows:
Real Auction Estate Total ---------- ---------- ---------- Balance as of January 1, 2002 $ 13,955 $ 3,311 $ 17,266 Foreign currency exchange rate changes 222 - 222 ---------- ---------- ---------- Balance as of September 30, 2002 $ 14,177 $ 3,311 $ 17,488 ========== ========== ==========
11 6. CREDIT ARRANGEMENTS Short-term borrowings and long-term debt consist of the following (in thousands):
As of As of As of September 30, December 31, September 30, 2002 2001 2001 -------------- -------------- -------------- SHORT-TERM BORROWINGS: Borrowings under the Amended and Restated Credit Agreement $ 150,000 $ 130,000 $ 130,000 LONG-TERM DEBT: Long-term debt securities (net of unamortized discount of $551, $602 and $618) 99,449 99,398 99,382 -------------- -------------- -------------- Total $ 249,449 $ 229,398 $ 229,382 ============== ============== ==============
BANK CREDIT FACILITIES - In July 2002, the Company extended the maturity date of the senior secured revolving credit facility (the "Revolving Facility") under its credit agreement ("the Amended and Restated Credit Agreement") from July 10, 2002 to August 11, 2002 and reduced the borrowing capacity from $120 million to $100 million. In August 2002, the maturity date of the Revolving Facility was extended to February 11, 2003. In August 2002, the maturity date of the senior secured term facility (the "Term Facility") under the Amended and Restated Credit Agreement was extended from August 11, 2002 to February 11, 2003 and the borrowing capacity was reduced from $130 million to $100 million. The Company paid fees of $2.0 million in connection with the August 2002 extension of the Amended and Restated Credit Agreement, which are being amortized to interest expense over the extended term of the agreement. 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 12 Restated Credit Agreement may be used for general corporate purposes. Borrowings under the Term Facility bear interest equal to LIBOR plus 3.5%. Borrowings under the Revolving Facility generally bear interest equal to: (i) LIBOR plus 3.5% or (ii) the Prime Rate plus 2.5%. 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 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 September 30, 2002. At September 30, 2002, the Company had outstanding short-term borrowings of $100 million under the Term Facility at an interest rate of 5.2%. At September 30, 2002, the Company had outstanding short-term borrowings of $50 million under the Revolving Facility at a weighted average interest rate of 6.1%. As discussed above, the Term Facility and Revolving Facility under the Company's Amended and Restated Credit Agreement are available through February 11, 2003. On this date, the Term Facility and the Revolving Facility will expire and any outstanding borrowings will be due and payable to the Company's existing lender 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 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 and Part II, Item 1 "Legal Proceedings"), payments due under the Company's retention programs (see Note 11) and interest payments related to the Company's long-term debt securities, additional funding will be necessary to supplement operating cash flows. As previously disclosed, management has been exploring a sale-leaseback transaction involving the York Property as a means of additional funding and is currently focusing on such a transaction. It is management's intention that any such sale-leaseback transaction would be done in conjunction with an extension, amendment or refinancing of the Revolving Facility under the Amended and Restated Credit Agreement. A portion of the proceeds 13 from a sale-leaseback transaction would be used to repay the outstanding borrowings under the Term Facility due on February 11, 2003. Any remaining proceeds, together with amounts available under an extended, amended, or refinanced Revolving Facility, would be available for the Company's other funding needs described above. If consummated, management currently believes that a sale-leaseback transaction in conjunction with an extension, amendment or refinancing of the Revolving Facility under the Amended and Restated Credit Agreement would be in place by February 11, 2003 and would be priced at market rates that reflect the Company's current credit rating. Management currently believes that there are other potential financing options that may be available to the Company as an alternative to a sale-leaseback transaction including an extension, amendment or refinancing of both the Term Facility and the Revolving Facility under the Amended and Restated Credit Agreement, as well as any one or a combination of one or more of the following in conjunction with an extension, amendment or refinancing of the Revolving Facility under the Amended and Restated Credit Agreement: a long-term mortgage on the York Property, the sale of certain other corporate assets or operating units, or the collection of client loans. If necessary, management would also explore other financing options such as the issuance of various types of debt instruments with varying maturities, including convertible debt, and the issuance of additional equity securities. However, there can be no assurances that the Company would be successful in securing funding from one of the options outlined above and some of the above alternatives might come at a high cost or could limit the Company's operating flexibility. Additionally, any convertible debt or equity security issuance may be dilutive. On June 3, 2002, A. Alfred Taubman, the controlling shareholder of the Company, filed with the SEC an amended Schedule 13D in which he announced his intention to work in cooperation with the Company to explore a possible sale or merger of the Company or the sale of his stake in the Company (a "Transaction"). Management believes that, if a sale or merger is consummated by February 11, 2003, any new controlling shareholder would provide, arrange or facilitate the financing necessary to conduct the Company's business. If the Company were unable to secure adequate long-term funding or satisfy its liquidity needs through a sale-leaseback transaction in conjunction with an extension, amendment or refinancing of the Revolving Facility under the Amended and Restated Credit Agreement or pursuant to one of the other options stated above, or in 14 conjunction with a Transaction, prior to the expiration of the Amended and Restated Credit Agreement, this would have a material adverse effect on the Company's business, results of operations, financial condition and/or ability to operate. 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 September 30, 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 15 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 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 and nine months ended September 30, 2002 and 2001, such costs, which are reflected in other income (expense), were not material to the Company's results of operations. The Company's Consolidated Balance Sheet at September 30, 2002 includes an asset of approximately $0.1 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 income (loss), which consists of the change in the foreign currency translation adjustment account during the period. For the three and nine months ended September 30, 2002, the Company's other comprehensive income is primarily attributable to the weakening of the U.S. Dollar against the U.K. Pound Sterling and the Euro during those periods. For the three and nine months ended September 30, 2002 and 2001, comprehensive loss is as follows (in thousands): 16
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- -------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Net loss $ (42,975) $ (33,056) $ (48,225) $ (41,327) Other comprehensive income (loss) - net of taxes 472 2,290 4,889 (403) -------------- -------------- -------------- -------------- Comprehensive loss $ (42,503) $ (30,766) $ (43,336) $ (41,730) ============== ============== ============== ==============
9. SPECIAL CHARGES For the three and nine months ended September 30, 2002 and 2001, the Company recorded the following charges 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 Nine Months Ended September 30, September 30, ------------------------------- -------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- European Commission fine $ 20,072 $ - $ 20,072 $ - Settlement with former Chief Executive Officer - - (3,250) - Legal and other professional fees 800 751 2,331 2,622 -------------- -------------- -------------- -------------- Total $ 20,872 $ 751 $ 19,153 $ 2,622 ============== ============== ============== ==============
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 paid the Company $3.25 million. Of this amount, $2.05 million was paid by her relinquishment of vested benefits under the Company's Benefit Equalization Plan and the remaining $1.2 million was paid in cash. As a result, the Company recorded in special charges a reduction of accrued compensation cost of approximately $2.05 million and a recovery of $1.2 million in the first quarter of 2002. 17 On October 30, 2002, the European Commission issued a decision in which it determined that the Company and Christie's had breached the competition provisions of the Treaty Establishing the European Community by agreeing to fix selling commissions and other trading terms in connection with auctions held in the European Union between 1993 and 2000. Pursuant to this decision, the European Commission imposed a fine of approximately $20.1 million on the Company, payable on February 8, 2003. As a result, the Company recorded this amount in special charges in the third quarter of 2002. (See Part II, Item 1 "Legal Proceedings.") Settlement liabilities related to the DOJ investigation and other related matters consist of the following (in thousands):
As of As of As of September 30, December 31, September 30, 2002 2001 2001 --------------- -------------- --------------- CURRENT: European Commission fine $ 20,072 $ - $ - U.S. Antitrust Litigation 7,600 - - Antitrust fine (net) 5,835 2,979 2,917 Amazon settlement (net) - - 2,328 --------------- -------------- --------------- Sub-total 33,507 2,979 5,245 --------------- -------------- --------------- LONG-TERM: U.S. Antitrust Litigation 42,400 50,000 50,000 Antitrust fine (net) 26,756 30,643 30,044 Amazon settlement (net) - - 4,022 --------------- -------------- --------------- Sub-total 69,156 80,643 84,066 --------------- -------------- --------------- Total $ 102,663 $ 83,622 $ 89,311 =============== ============== ===============
The settlement liability for the U.S. Antitrust Litigation relates to the vendor's commission discount certificates (the "Discount Certificates") that will be distributed as part of the U.S. Antitrust Litigation settlement. The Discount Certificates 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 is recorded in the Company's Consolidated Balance Sheets within the current and long-term settlement liabilities. The current portion of the liability for the Discount Certificates is based on management's estimate of redemptions expected during the twelve-month period after the balance sheet date. The Discount Certificates are currently expected to be printed and issued to the class of plaintiffs during the second quarter of 2003. 18 The Company expects to incur administrative costs for printing and issuing the Discount Certificates, as well as for processing any redemptions of the Discount Certificates. These costs have not been expensed because they are currently not reasonably estimatable due to continuing negotiations with the potential Discount Certificate administrator. Amounts charged to the Company's settlement liabilities related to the DOJ investigation and other related matters during the nine months ended September 30, 2002 were as follows (in thousands):
U.S. Antitrust European Antitrust Fine Commission Litigation (net) Fine Total ------------- ----------- ------------- ----------- Liability at January 1, 2002 $ 50,000 $ 33,622 $ - $ 83,622 Cash payment to DOJ - (3,000) - (3,000) Amortization of discount - 1,969 - 1,969 European Commission fine - - 20,072 20,072 ------------- ----------- ------------- ----------- Liability at September 30, 2002 $ 50,000 $ 32,591 $ 20,072 $ 102,663 ============= =========== ============= ===========
10. COMMITMENTS AND CONTINGENCIES COMMITMENTS - In conjunction with its retention programs (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 September 30, 2002, excluding incentive bonuses and cash awards in conjunction with the Company's retention programs, was approximately $2.4 million. LEGAL ACTIONS - 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 $20 million in damages. The parties have agreed to enter into non-binding mediation to attempt to resolve this claim, and the mediation process is underway. 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 19 amount of the claim; however, the amount of any potential loss is not currently estimatable. On January 30, 2001, the United States 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 United States Court of Appeals for the Second Circuit. On March 13, 2002, 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 United States and remanded the case to the District Court to consider whether the International Antitrust Litigation should be dismissed on other grounds. The Company and Christie's have filed a petition for certiorari seeking review of the Court of Appeals' decision by the United States Supreme Court. (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 $12.5 million at September 30, 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 November 13, 2002, the Company had outstanding guarantees totaling approximately $9.0 million. This outstanding guarantee amount consists of approximately $15.4 million in gross auction guarantees less partner shares and prefunded amounts and covers auction property having a mid-estimate sales price of approximately $20.4 million. Under certain guarantees, the Company participates in a share of the proceeds if 20 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 November 13, 2002, $2.5 million had been funded in connection with outstanding guarantees. In the opinion of management, the contingencies described here in Note 10 and in Note 9 are not currently 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 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 (see Note 9), the administrative costs for printing and issuing the Discount Certificates (see Note 9), as well as the administrative costs for processing any redemptions of the Discount Certificates (see Note 9) and the resolution of the International Antitrust Litigation. (See Notes 9 and 11 for other commitments and contingencies.) 11. RETENTION PROGRAMS The Company maintains retention programs that provide cash awards for the retention of a group of 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 who leaves the Company prior to such date will, generally, forfeit his or her right to payment. Under the retention programs, up to $4.0 million is payable in December 2002, up to $12.3 million is payable in January 2003, up to $0.2 million is payable in March 2003, up to $0.1 million is payable in April 2003 and up to $3.0 million is payable in December 2003. The group of key employees granted such awards received cash payments of approximately $28.7 million during the nine months ended September 30, 2002 upon the fulfillment of full-time employment through certain dates. All amounts related to the retention programs discussed above are being amortized over the contractual service period. For the three months ended September 30, 2002 and 2001, the Company recorded charges of $5.8 million and $5.0 million, respectively, related to its retention programs. For the nine months ended September 30, 21 2002 and 2001, the Company recorded charges of $18.3 million and $13.7 million, respectively, related to its retention programs. (See Note 13, Related Party Transactions.) 12. NET RESTRUCTURING CHARGES The Company recorded the following amounts related to the restructuring plans described below during the three and nine months ended September 30, 2002 and 2001 (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------------ 2002 2001 2002 2001 ------------ ------------ ------------- ------------ 1998 Restructuring Plan $ - $ - $ - $ (660) 2000 Restructuring Plan (213) (730) (1,024) (730) 2001 Restructuring Plan 115 9,094 (509) 9,094 ------------ ------------ ------------- ------------ Total $ (98) $ 8,364 $ (1,533) $ 7,704 ============ ============ ============= ============
1998 RESTRUCTURING PLAN During the second quarter of 2001, the Company reversed the remaining 1998 restructuring liability related to the consolidation and integration of its New York operations into the York Property. As the consolidation and integration was completed in the second quarter of 2001, the Company determined that this liability was no longer necessary. 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 September 30, 2002 were as follows (in thousands): 22
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 (5,389) (323) - (243) (5,955) Reversal of liability (589) (42) - (99) (730) Foreign exchange impact (34) (11) - (3) (48) --------------- -------------- -------------- ---------- ---------- Liability at December 31, 2001 1,115 741 - 201 2,057 Cash payments (336) (328) - (119) (783) Reversal of liability (440) (371) - - (811) Foreign exchange impact 14 (2) - 2 14 --------------- -------------- -------------- ---------- ---------- Liability at September 30, 2002 $ 353 $ 40 $ - $ 84 $ 477 =============== ============== ============== ========== ==========
For the three months ended September 30, 2002, the Company recorded a favorable adjustment of $0.2 million to restructuring charges resulting from the final sale of assets related to certain activities that were exited in conjunction with the 2000 Restructuring Plan. For the nine months ended September 30, 2002, the Company recorded a favorable adjustment of $1.0 million to restructuring charges primarily due to the reversal of a portion of the remaining liability related to the 2000 Restructuring Plan that was no longer necessary. The remaining cash expenditures related to the 2000 Restructuring Plan, expected to be approximately $0.5 million, are expected to be substantially paid by the end of 2002. 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. 23 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 September 30, 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 (1,229) (5,235) - (160) (6,624) Reversal of liability (187) (100) - - (287) Foreign exchange impact (35) - - (4) (39) --------------- ------------- -------------- ---------- ---------- Liability at December 31, 2001 4,597 50 437 285 5,369 2002 Provision 210 - - - 210 Cash payments (1,799) - - (132) (1,931) Asset write-offs - - (437) - (437) Reversal of liability (795) (50) - (64) (909) Foreign exchange impact 104 - - 5 109 --------------- ------------- -------------- ---------- ---------- Liability at September 30, 2002 $ 2,317 $ - $ - $ 94 $ 2,411 =============== ============= ============== ========== ==========
For the three months ended September 30, 2002, the Company recorded an unfavorable adjustment of $0.1 million to restructuring charges primarily resulting from the final sale of the Chicago auction salesroom in conjunction with the 2001 Restructuring Plan. For the nine months ended September 30, 2002, the Company recorded a favorable adjustment of $0.5 million to restructuring charges primarily due to the reversal of $0.9 million of the remaining liability related to the 2001 Restructuring Plan that was no longer necessary. This favorable adjustment was partially offset by $0.2 million in severance and termination benefits recorded during the first quarter of 2002, as well as an unfavorable adjustment related to the sale of the Chicago auction salesroom. The remaining cash expenditures related to the 2001 Restructuring Plan are expected to be approximately $2.4 million, of which one payment of approximately $0.8 million was made on October 1, 2002. All other cash expenditures are expected to be substantially paid by the end of 2002. 24 13. RELATED PARTY TRANSACTIONS For the nine months ended September 30, 2002 and 2001, the Company recognized approximately $0.6 million and $3.0 million, respectively, of auction commission revenue related to transactions with related parties. Approximately $9.6 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.) 14. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 will supersede Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, with early application encouraged. 25 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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.) AUCTION SALES FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 - The aggregate hammer price of property sold at auction by the Company ("Auction Sales"), which includes buyer's premium, totaled $208.6 million for the three months ended September 30, 2002, an increase of 79% compared to the same period in 2001. Excluding the impact of favorable foreign currency translations, Auction Sales increased 65%. The increase in Auction Sales reflects a 20% increase in the number of lots sold in the third quarter of 2002 when compared to the same period in 2001, as well as a 37% increase in the average selling price per lot sold. As discussed below, Auction Sales for the third quarter of 2002 include the sale of Rubens' "The Massacre of the Innocents" for $77 million. Excluding the Rubens sale and the impact of favorable foreign currency translations, Auction Sales decreased 1% when compared to the same period in 2001. This decrease in Auction Sales reflects an 18% decrease in the average selling price per lot sold in the third quarter of 2002 when compared to the same period in 2001, partially offset by a 20% increase in the number of lots sold. The following is a geographical breakdown of Auction Sales for the three months ended September 30, 2002 and 2001 (in thousands):
Three Months Ended September 30, -------------------------------- 2002 2001 -------------- -------------- North America $ 22,539 $ 14,297 Europe 179,423 91,439 Asia 6,588 10,956 -------------- -------------- Total $ 208,550 $ 116,692 ============== ==============
26 Auction Sales in North America increased $8.2 million, or 58%, for the three months ended September 30, 2002 when compared to the same period in 2001. The increase in North America was primarily the result of the July 2002 sale of The 1933 Double Eagle Coin for $7.6 million for which there was no comparable sale in the third quarter of 2001. Also favorably impacting the comparison to the prior year is the timing of the Asia Week sales. Such sales, which took place in September in 2002 and resulted in $4.9 million in Auction Sales, were held in the fourth quarter in 2001 as a result of the September 11th terrorist attacks. These increases were partially offset by a change in the timing between 2001 and 2002 of certain sales in the autumn auction season from the third quarter to the fourth quarter. Also unfavorably impacting the comparison to the prior year is the closure of the Chicago auction salesroom in the third quarter of 2001 as part of the 2001 Restructuring Plan (see Note 12 of Notes to Consolidated Financial Statements). During the third quarter of 2001, the Chicago auction salesroom generated approximately $1.6 million in Auction Sales. Auction Sales in Europe increased $88.0 million, or 96%, for the three months ended September 30, 2002 when compared to the same period in 2001. Excluding the impact of favorable foreign currency translations, Auction Sales in Europe increased 79%. The increase in Europe was primarily the result of the successful July 2002 Old Master Paintings sale in London, which included the sale of Rubens' "The Massacre of the Innocents" for $77 million. Auction Sales in Asia decreased $4.4 million, or 40%, for the three months ended September 30, 2002 when compared to the same period in 2001. The decrease in Asia was primarily due to the timing of the sales of Tribal Art, which occurred in the second quarter of 2002 as opposed to the third quarter of 2001, and Southeast Asian Paintings, which occurred in October 2002 as opposed to the third quarter of 2001. For the three months ended September 30, 2002, Auction Sales in Asia were not materially affected by the translation to U.S. Dollars. AUCTION SALES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 - For the nine months ended September 30, 2002, Auction Sales totaled $1.1 billion, an increase of 2% compared to the same period in 2001. Excluding the impact of favorable foreign currency translations, Auction Sales were essentially unchanged when compared to the prior year. Worldwide Auction Sales for the first nine months of 2002 reflects a 15% decrease in the number of lots sold when compared to the same period in 2001, offset by an 18% increase in the average selling price per lot sold. 27 As previously discussed, Auction Sales for the nine months ended September 30, 2002 include the sale of Rubens' "The Massacre of the Innocents" for $77 million. Excluding the Rubens sale and the impact of favorable foreign currency translations, Auction Sales decreased 8% when compared to the same period in 2001. This decrease in Auction Sales reflects a 15% decrease in the number of lots sold when compared to the same period in 2001, partially offset by a 9% increase in the average selling price per lot sold. The following is a geographical breakdown of Auction Sales for the nine months ended September 30, 2002 and 2001 (in thousands):
Nine Months Ended September 30, -------------------------------- 2002 2001 -------------- -------------- North America $ 486,049 $ 536,704 Europe 542,246 472,109 Asia 54,310 50,813 -------------- -------------- Total $ 1,082,605 $ 1,059,626 ============== ==============
Auction Sales in North America decreased $50.7 million, or 9%, for the nine months ended September 30, 2002 when compared to the same period in 2001. The decrease in North America was primarily the result of a $65.4 million, or 54%, decrease in Auction Sales attributable to single-owner collections. Specifically, the first nine months of 2001 included the single-owner sale of Works from the Collection of Stanley J. Seeger for which there was no comparable sale in the first nine months of 2002. Also unfavorably impacting the comparison to the prior year are decreased sales of Old Master Paintings, Jewelry and Contemporary Art. These decreases were partially offset by increased sales of Impressionist Art and American Paintings. Auction Sales in Europe increased $70.1 million, or 15%, for the nine months ended September 30, 2002 when compared to the same period in 2001. Excluding the impact of favorable foreign currency translations, Auction Sales in Europe increased 9%. The increase in Europe was primarily the result of the successful July 2002 Old Master Paintings sale in London, which included the sale of Rubens' "The Massacre of the Innocents" for $77 million, as well as better results from the spring Impressionist and Contemporary sales. These increases were partially offset by decreased jewelry sales in Switzerland and lower sales of British Pictures, as well as reduced results in the winter Impressionist sales. 28 Auction Sales in Asia increased $3.5 million, or 7%, for the nine months ended September 30, 2002 when compared to the same period in 2001. The increase in Asia was primarily due to the successful spring sales in Hong Kong of Chinese Ceramics and Western Jewelry partially offset by the timing of the Southeast Asian Paintings sale, which occurred in the fourth quarter of 2002 as opposed to the third quarter of 2001. For the nine months ended September 30, 2002, Auction Sales in Asia were not materially affected by the translation to U.S. Dollars. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 - Note 3 of Notes to Consolidated Financial Statements ("Segment Reporting") should be read in conjunction with this discussion. Worldwide auction and related revenues increased $10.8 million, or 43%, for the three months ended September 30, 2002 when compared to the same period in 2001. Excluding the impact of favorable foreign currency translations, worldwide auction and related revenues increased 32%. This increase was principally due to approximately $9 million in auction commissions earned from the sale of Rubens' "The Massacre of the Innocents," as discussed above. Worldwide auction and related revenues decreased $2.2 million, or 1%, for the nine months ended September 30, 2002 when compared to the same period in 2001. Excluding the impact of favorable foreign currency translations, worldwide auction and related revenues decreased 4%. Excluding auction commissions attributable to the Rubens sale discussed above and the impact of favorable foreign currency translations, worldwide auction and related revenues decreased 8%. This decrease was primarily due to lower buyer's premium and seller's commission revenues principally resulting from decreased Auction Sales. Also unfavorably impacting the comparison to the prior year are lower private treaty revenues, as well as margin erosion primarily resulting from the competitive environment for consignments (as discussed below) and commissions shared with partners who participated in the Company's auction guarantee transactions (see Note 10 of Notes to Consolidated Financial Statements) in order to reduce the Company's principal risk. These decreases were partially offset by the favorable impact of the new buyer's premium rate structure that became effective on April 1, 2002, as well as increased principal activities primarily due to successful auction guarantees in the spring Impressionist and Contemporary sales in New York. Other revenues decreased $0.8 million, or 6%, for the three months ended September 30, 2002 when compared to the same period in 2001. The decrease was principally due to a $0.5 million, or 23%, decrease in revenues from the Finance segment primarily due to a lower average loan portfolio balance and lower interest rates. For the three months ended September 30, 2002, other revenues were not materially affected by the translation to U.S. Dollars. 29 Other revenues decreased $2.2 million, or 6%, for the nine months ended September 30, 2002 when compared to the same period in 2001. The decrease was primarily due to a $4.9 million, or 52%, decrease in revenues from the Finance segment partially offset by a $3.0 million, or 12%, increase in revenues from the Real Estate segment. The decrease in Finance revenues was primarily due to a lower average loan portfolio balance and lower interest rates. The increase in Real Estate revenues was primarily due to higher sales volume principally resulting from a 20% increase in unit sales. For the nine months ended September 30, 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) decreased $1.0 million, or 13%, for the three months ended September 30, 2002 when compared to the same period in 2001. Excluding the impact of unfavorable foreign currency translations, direct costs of services decreased 17%. This decrease was primarily due to savings in marketing expenses and other auction direct costs principally resulting from the Company's restructuring plans (as discussed below and in Note 12 of Notes to Consolidated Financial Statements) and other cost containment efforts. Direct costs of services decreased $8.2 million, or 19%, for the nine months ended September 30, 2002 when compared to the same period in 2001. Excluding the impact of unfavorable foreign currency translations, direct costs of services decreased 20%. This decrease was due in part to a $2.4 million reduction in catalogue production costs primarily resulting from the Company's use of digital photography and other catalogue savings initiatives, as well as the decrease in the number of lots sold at auction when compared to the prior period, as discussed above. Additionally, results for the nine months ended September 30, 2002 reflect savings in marketing expenses and other auction direct costs principally resulting from the Company's restructuring plans (as discussed below and in Note 12 of Notes to Consolidated Financial Statements) and other cost containment efforts. Salaries and related costs decreased $0.6 million, or 2%, and $7.7 million, or 7%, for the three and nine months ended September 30, 2002, respectively, when compared to the same periods in 2001. Excluding the impact of unfavorable foreign currency translations, salaries and related costs decreased 5% and 8%, respectively, for those periods. These decreases were primarily due to savings achieved in the Auction 30 segment as a result of the Company's restructuring plans and other cost containment efforts. Additionally, results for the three and nine months ended September 30, 2002 reflect reduced salaries and related costs as a result of the capitalization of costs associated with computer software developed or obtained for internal use. Such capitalized costs totaled $1.0 million and $1.4 million for the three and nine months ended September 30, 2002, respectively. The comparison to the prior periods is unfavorably influenced by the reversal in the third quarter of 2001 of a $0.8 million accrual that was no longer necessary as a result of favorable changes in circumstances for which there was no comparable event in 2002. General and administrative expenses increased $2.6 million, or 12%, for the three months ended September 30, 2002 when compared to the same period in 2001. Excluding the impact of unfavorable foreign currency translations, general and administrative expenses increased 8%. The comparison to the prior year is unfavorably influenced by the reversal in August 2001 of a $1.6 million bad debt accrual that was no longer required as a result of a settlement related to a past due receivable for which there was no comparable event in the current period. Additionally, results for the third quarter of 2002 reflect increased insurance costs principally in the Auction segment, as well as higher professional fees. These unfavorable variances were partially offset by savings in travel and entertainment expenses primarily as a result of the Company's restructuring plans and other cost containment efforts. General and administrative expenses were relatively unchanged for the nine months ended September 30, 2002 when compared to the same period in 2001. Excluding the impact of unfavorable foreign currency translations, general and administrative expenses decreased 1% principally due to savings in travel and entertainment expenses, professional fees and telecommunication costs primarily as a result of the Company's restructuring plans and other cost containment efforts. Also favorably influencing the comparison to the prior year is the reversal in the second quarter of 2002 of a $1.1 million bad debt accrual that was no longer necessary due to the collection of the related client receivable balance. These favorable variances were partially offset by increased insurance costs principally in the Auction segment and the reversal of approximately $2.0 million of accruals in the second quarter of 2001 due to positive changes in circumstances for which there was no comparable event in the current period. The comparison to the prior year is also unfavorably influenced by the reversal in August 2001 of a $1.6 million bad debt accrual that was no longer required as a result of a settlement related to a past due receivable. 31 Depreciation and amortization expense decreased 4% for the three and nine months ended September 30, 2002, respectively, when compared to the same periods in 2001. Excluding the impact of unfavorable foreign currency translations, depreciation and amortization expense decreased 6% and 5%, respectively, for those periods. These decreases were primarily attributable to lower depreciation expense due to the write-off of computer hardware and software in the fourth quarter of 2001 as a result of the Company's strategic alliance with eBay, 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). These decreases were partially offset by the incremental depreciation and amortization expense associated with capital projects placed in service subsequent to the third quarter of 2001. Additionally, results for the nine months ended September 30, 2002 are unfavorably impacted by depreciation expense associated with the final phase of the York Property, which was placed in service in April 2001. INTERNET RELATED OPERATING EXPENSES - Internet related operating expenses totaled $1.6 million and $7.4 million for the three and nine months ended September 30, 2002, respectively. For the three and nine months ended September 30, 2001, total Internet related operating expenses were $4.5 million and $18.7 million, respectively. These significant decreases were 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. RETENTION COSTS - See Note 11 of Notes to Consolidated Financial Statements for information related to the Company's retention programs for key employees. RESTRUCTURING PLANS - 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 being achieved through lower salaries and related costs 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.) 32 (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 $0.3 million and $0.9 million for the three and nine months ended September 30, 2002, respectively, when compared to the same periods in 2001. These decreases were partially due to lower interest expense resulting from a lower average cost of borrowing related to the Company's Amended and Restated Credit Agreement (see Note 6 of Notes to Consolidated Financial Statements), as well as lower outstanding borrowings. The decrease in interest expense was partially offset by lower interest income primarily due to decreased cash balances, lower interest rates and a reduction in amounts earned from overdue client receivable balances. INCOME TAX BENEFIT - The consolidated effective tax benefit rate was 23% and 25% for the three and nine months ended September 30, 2002, respectively, compared to 38% for the same periods in 2001. The decrease in the effective tax benefit rate when compared to the prior year is primarily due to the fact that the fine payable to the European Commission (see Note 9 of Notes to Consolidated Financial Statements and Part II, Item 1 "Legal Proceedings") is not tax deductible. NET LOSS AND LOSS PER SHARE - For the three months ended September 30, 2002, net loss increased to ($43.0) million from ($33.1) million for the same period in 2001. Diluted loss per share for the three months ended September 30, 2002 increased to ($0.70) from ($0.54) for the same period in 2001. The impact on diluted loss per share of the special charges related to the DOJ investigation and other related matters (see Note 9 of Notes to Consolidated Financial Statements and Part II, Item 1 "Legal Proceedings") was ($0.34) and ($0.01) for the three months ended September 30, 2002 and 2001, respectively. The impact on diluted loss per share related to the Company's Internet operating loss was ($0.01) and ($0.04) for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002, net loss increased to ($48.2) million from ($41.3) million for the same period in 2001. Diluted loss per share for the nine months ended September 30, 2002 increased to ($0.78) from ($0.68) for the same period in 2001. The impact on diluted loss per share of the special charges related to the DOJ investigation and other related matters (see Note 9 of Notes to Consolidated Financial Statements and Part II, Item 1 "Legal 33 Proceedings") was ($0.32) and ($0.03) for the nine months ended September 30, 2002 and 2001, respectively. The impact on diluted loss per share related to the Company's Internet operating loss was ($0.03) and ($0.14) for the nine months ended September 30, 2002 and 2001, respectively. BUSINESS ENVIRONMENT - The business environment in the art market continues to be difficult and the Company continues to face intense competition for consignments, particularly from its traditional competitor, Christie's. As a result of the competition for consignments, the Company has experienced a decrease in seller's commission revenue as a percentage of Auction Sales, as well as an increase in shared and introductory auction commissions during the current period. The Company currently believes that this business environment may continue and, as a result, may adversely impact future results of operations. (See statement on Forward Looking Statements.) Additionally, for the nine months ended September 30, 2002, the Company experienced margin erosion partially due to commissions shared with partners who participated in the Company's auction guarantee transactions (see Note 10 of Notes to Consolidated Financial Statements) in order to reduce the Company's principal risk. The Company has entered into shared commission transactions for certain auctions occurring durring the fourth quarter of 2002. OTHER MATTERS - As a result of the competitive environment discussed above and the current economic environment, as well as management's continued focus on improving profitability, the Company is currently assessing all aspects of its business and is developing plans to improve profitability through further cost reductions and other strategic actions. As such, the Company may record a restructuring charge in the fourth quarter of 2002 or the first quarter of 2003. (See statement on Forward Looking Statements.) CONTINGENCIES - See Notes 9 and 10 of Notes to Consolidated Financial Statements for information on contingencies. (See statement on Forward Looking Statements.) FINANCIAL CONDITION AS OF SEPTEMBER 30, 2002 - For the nine months ended September 30, 2002, total cash and cash equivalents decreased $85.9 million from December 31, 2001 primarily due to the factors discussed below. Net cash used by operations was $76.2 million for the nine months ended September 30, 2002 and was largely the result of a net loss from operations, as well as approximately $28.7 million of retention payments to key employees (see Note 11 of Notes to Consolidated Financial Statements) and the payment of approximately $12.3 million into an escrow account established for the benefit of a consignor, which is recorded within prepaid expenses and other current assets in the Company's Consolidated Balance Sheet at September 30, 2002. 34 Net cash used by investing activities was $33.3 million for the nine months ended September 30, 2002 and was primarily due to the funding of new client loans and auction guarantees. These investing cash outflows were partially offset by the collection of maturing client loans. Net cash provided by financing activities was $22.2 million for the nine months ended September 30, 2002 and was primarily the result of $80 million in borrowings under the Revolving Facility of the Amended and Restated Credit Agreement. These financing cash inflows were partially offset by the repayment in August 2002 of $30 million in borrowings under the Term Facility of the Amended and Restated Credit Agreement and the repayment of $30 million in borrowings under the Revolving Facility. COMMITMENTS AS OF SEPTEMBER 30, 2002 - The table below summarizes the Company's material contractual obligations and commitments as of September 30, 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) $ 150,000 $ 150,000 $ - $ - $ - Long-term debt - principal(2) 100,000 - - - 100,000 ------------- ------------- ------------- ------------- ------------- Sub-total 250,000 150,000 - - 100,000 ------------- ------------- ------------- ------------- ------------- Interest payments on borrowings: Short-term borrowings - interest(1) 3,026 3,026 - - - Long-term debt - interest(2) 44,116 6,875 13,750 13,750 9,741 ------------- ------------- ------------- ------------- ------------- Sub-total 47,142 9,901 13,750 13,750 9,741 ------------- ------------- ------------- ------------- ------------- Other commitments: Operating lease obligations 128,059 15,854 26,945 23,342 61,918 Retention programs(3) 19,600 16,600 3,000 - - Antitrust fine(4) 39,000 6,000 18,000 15,000 - European Commission fine(4) 20,072 20,072 - - - Guarantees to consignors(5) 56,568 56,568 - - - Employment agreements(6) 2,440 2,227 213 - - ------------- ------------- ------------- ------------- ------------- Sub-total 265,739 117,321 48,158 38,342 61,918 ------------- ------------- ------------- ------------- ------------- Total $ 562,881 $ 277,222 $ 61,908 $ 52,092 $ 171,659 ============= ============= ============= ============= =============
35 (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). The amount disclosed in the commitments chart above consists of approximately $102 million in gross auction guarantees less partner shares and prefunded amounts. (See Note 10 of Notes to Consolidated Financial Statements.) (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 9 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 is recorded in the Company's Consolidated Balance Sheets within the short-term and long-term settlement liabilities. The Discount Certificates are currently expected to be printed and issued to the class of plaintiffs during the second quarter of 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 $12.5 million as of September 30, 2002. (See Notes 4 and 10 of Notes to Consolidated Financial Statements.) 36 LIQUIDITY AND CAPITAL RESOURCES - The Company generally relies on operating cash flows supplemented by borrowings to meet its financing requirements. In July 2002, the Company extended the maturity date of the Revolving Facility under the Amended and Restated Credit Agreement from July 10, 2002 to August 11, 2002 and reduced the borrowing capacity from $120 million to $100 million. In August 2002, the maturity date of the Revolving Facility was extended to February 11, 2003. In August 2002, the maturity date of the Term Facility under the Amended and Restated Credit Agreement was extended from August 11, 2002 to February 11, 2003 and the borrowing capacity was reduced from $130 million to $100 million. The Company paid fees of $2.0 million in connection with the August 2002 extension of the Amended and Restated Credit Agreement, which are being amortized to interest expense over the extended term of the agreement. 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, any 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. Borrowings under the Term Facility bear interest equal to LIBOR plus 3.5%. Borrowings under the Revolving Facility generally bear interest equal to: (i) LIBOR plus 3.5% or (ii) the Prime Rate plus 2.5%. 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 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 September 30, 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 February 11, 2003. 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 and capital expenditures, as well as the European Commission fine (see Part II, Item 1 "Legal Proceedings"), payments due in December 2002 and January 2003 under the Company's retention programs 37 (see Note 11 of Notes to Consolidated Financial Statements), the payment due on February 6, 2003 under the Company's Antitrust fine (see Part II, Item 1 "Legal Proceedings") and the interest payment due on February 1, 2003 related to the Company's long-term debt securities (see Note 6 of Notes to Consolidated Financial Statements). As discussed above, the Term Facility and Revolving Facility under the Company's Amended and Restated Credit Agreement are available through February 11, 2003. On this date, the Term Facility and the Revolving Facility will expire and any outstanding borrowings will be due and payable to the Company's existing lender 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 (see Note 6 of Notes to Consolidated Financial Statements), additional funding will be necessary to supplement operating cash flows. As previously disclosed, management has been exploring a sale-leaseback transaction involving the York Property as a means of additional funding and is currently focusing on such a transaction. It is management's intention that any such sale-leaseback transaction would be done in conjunction with an extension, amendment or refinancing of the Revolving Facility under the Amended and Restated Credit Agreement. A portion of the proceeds from a sale-leaseback transaction would be used to repay the outstanding borrowings under the Term Facility due on February 11, 2003. Any remaining proceeds, together with amounts available under an extended, amended, or refinanced Revolving Facility, would be available for the Company's other funding needs described above. If consummated, management currently believes that a sale-leaseback transaction in conjunction with an extension, amendment or refinancing of the Revolving Facility under the Amended and Restated Credit Agreement would be in place by February 11, 2003 and would be priced at market rates that reflect the Company's current credit rating. Management currently believes that there are other potential financing options that may be available to the Company as an alternative to a sale-leaseback transaction including an extension, amendment or refinancing of both the Term Facility and the Revolving Facility under the Amended and Restated Credit Agreement, as well as any one or a 38 combination of one or more of the following in conjunction with an extension, amendment or refinancing of the Revolving Facility under the Amended and Restated Credit Agreement: a long-term mortgage on the York Property, the sale of certain other corporate assets or operating units, or the collection of client loans. If necessary, management would also explore other financing options such as the issuance of various types of debt instruments with varying maturities, including convertible debt, and the issuance of additional equity securities. However, there can be no assurances that the Company would be successful in securing funding from one of the options outlined above and some of the above alternatives might come at a high cost or could limit the Company's operating flexibility. Additionally, any convertible debt or equity security issuance may be dilutive. On June 3, 2002, A. Alfred Taubman, the controlling shareholder of the Company, filed with the SEC an amended Schedule 13D in which he announced his intention to work in cooperation with the Company to explore a possible sale or merger of the Company or the sale of his stake in the Company (a "Transaction"). Management believes that, if a sale or merger is consummated by February 11, 2003, any new controlling shareholder would provide, arrange or facilitate the financing necessary to conduct the Company's business. If the Company were unable to secure adequate long-term funding or satisfy its liquidity needs through a sale-leaseback transaction in conjunction with an extension, amendment or refinancing of the Revolving Facility under the Amended and Restated Credit Agreement or pursuant to one of the other options stated above, or in conjunction with a Transaction, prior to the expiration of the Amended and Restated Credit Agreement, this would have a material adverse effect on the Company's business, results of operations, financial condition and/or ability to operate. 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; 39 (3) Political conditions in various nations; (4) 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 sale 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; (10) The supply and demand for luxury residential real estate; (11) The outcome of the process currently underway regarding a possible sale or merger of the Company or sale of A. Alfred Taubman's stake in the Company; (12) The final resolution of various antitrust matters including the ultimate outcome of the International Antitrust Litigation and the threatened litigation by one of the parties that opted out of the class action settlement in the U.S. Antitrust Litigation and (13) The Company's ability to secure adequate financing subsequent to February 11, 2003. RECENTLY ISSUED ACCOUNTING STANDARDS - See Note 14 of Notes to Consolidated Financial Statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES -- The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company believes the following critical accounting policies and estimates significantly affect the amounts recorded in its Consolidated Financial Statements: (1) The Company maintains allowances for doubtful accounts primarily related to auction accounts receivable. Such allowances are established for specific accounts receivable balances that management believes may not be collectible. A reserve is also established for probable losses inherent in the remainder of the accounts receivable balance based on historical collections data. If the financial condition of the Company's clients were to deteriorate, additional allowances would be required. (See Note 4 of Notes to Consolidated Financial Statements.) (2) The Company maintains allowances for credit losses related to its client loan portfolio. Secured loans which may not be collectible are analyzed based on the current estimated realizable value of the collateral securing each loan. The Company establishes reserves for such secured loans that management believes are under-collateralized, and with respect to which, the under-collateralized amount may not be collectible from the borrower. To the extent that the Company is looking wholly or partially to the collateral for repayment of its loans, repayment can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations where the borrower becomes subject to bankruptcy or insolvency laws, the Company's ability to realize on its collateral may be limited or delayed by the application of such laws. (See Note 4 of Notes to Consolidated Financial Statements.) Unsecured loans are analyzed based on management's estimate of the current collectibility of each loan. A reserve is established for probable losses inherent in the remainder of the loan portfolio based on historical data and current market conditions. If the financial condition of the Company's clients were to deteriorate, additional allowances would be required. (See Note 4 of Notes to Consolidated Financial Statements.) (3) The carrying value of the Company's investment in Acquavella Modern Art ("AMA"), which is reflected in Investments in the Company's Consolidated Balance Sheets, is based on management's estimate of the fair value of the underlying inventory of fine art owned by AMA. If the market value of this inventory were to decline, an allowance would be required to reduce the carrying value of the Company's investment in AMA. (4) The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. (5) Included in the Company's net restructuring charges are estimates for severance and employee termination benefits, as well as for the write-off of certain impaired assets. When actual results differ from the estimates made by management, the Company adjusts the restructuring liability in its Consolidated Financial Statements. Any adjustment impacting earnings is recorded within restructuring charges in the Company's Consolidated Statements of Operations. (See Note 12 of Notes to Consolidated Financial Statements.) (6) The Company records a loss contingency if it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. The Company bases its estimates for loss contingencies on various assumptions that are believed to be reasonable under the circumstances. When actual results differ from the estimates made by management, the Company adjusts the related liability in its Consolidated Financial Statements. Any adjustment impacting earnings is recorded within the same line item where it was originally recorded in the Company's Consolidated Statements of Operations. (See Notes 9 and 10 of Notes to Consolidated Financial Statements.) (7) The Company's pension obligations under its U.K. defined benefit plan are dependent on assumptions used in calculating such amounts. These assumptions include the discount rate, the expected return on plan assets, future compensation increases, and other factors. In accordance with accounting principles generally accepted in the U.S., actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company's pension obligations and future expense. 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: 40 (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 effects of market risk and (4) The successful implementation of the Company's restructuring plans. 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 September 30, 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 $3.3 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 September 30, 2002 from that set forth in the Company's Form 10-K for the year ended December 31, 2001. At September 30, 2002, the Company had $42.0 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 September 30, 2002 includes an asset of approximately $0.1 million recorded within other current assets 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 September 30, 2002, all of the Company's forward exchange contracts were with one counterparty. 41 ITEM 4: CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the SEC. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation. 42 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 ("Christie's"). The Company has pled guilty to a violation of the United States ("U.S.") antitrust laws in connection with a conspiracy to fix auction commission rates charged to sellers in the U.S. and elsewhere and, on February 2, 2001, the U.S. District Court for the Southern District of New York accepted the Company's plea and imposed on the Company a fine of $45 million payable without interest over a period of five years. The Company has funded $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 Canadian Competition Bureau is also conducting an investigation regarding commissions charged by the Company and Christie's for auction services, and the Company is cooperating with this investigation. The European Commission has been conducting an investigation regarding anti-competitive practices by Christie's and the Company since January 2000. On October 30, 2002, the European Commission issued a decision in which it determined that the Company and Christie's had breached the competition provisions of the Treaty Establishing the European Community by agreeing to fix selling commissions and other trading terms in connection with auctions held in the European Union. Pursuant to this decision, the European Commission imposed a fine of approximately $20.1 million on the Company. The Company is considering with its legal advisers whether to file an appeal of this decision. (See Note 9 of Notes to Consolidated Financial Statements.) A number of private civil actions, styled as class actions, were also filed against the Company alleging violations of federal and state antitrust laws based upon alleged agreements between Christie's and the Company regarding commissions charged to purchasers and sellers of property in the U.S. and elsewhere, including actions (the "U.S. Antitrust Litigation") alleging violations of federal antitrust laws in connection with auctions in the United States. 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 43 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 investigations. The U.S. Antitrust Litigation, 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 or reserved for. (See Note 9 of Notes to Consolidated Financial Statements.) Under the Settlement Agreement relating to the U.S. Antitrust Litigation, 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. 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 $20 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, and the mediation process is underway. 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, 44 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, 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. The Company and Christie's have filed a petition for certiorari seeking review of the Court of Appeals' decision by the U.S. Supreme Court. 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 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 certain 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 45 expenses incurred by Mr. Taubman after April 12, 2001 in connection with any such proceeding. In the U.K., on June 12, 2002, the Company and Christie's each received a letter of claim from a law firm purporting to be acting on behalf of 41 identified and an unspecified number of unidentified individuals and businesses who sold items at auctions held by the Company and Christie's in London, England, during the period from September 1995 through at least February 7, 2000. The letter of claim was sent in anticipation of possible litigation seeking damages on behalf of the law firm's clients as a result of an alleged anti-competitive agreement between the Company and Christie's relating to sellers' commissions. The Company has requested further information from the law firm regarding the number and identity of its clients and the nature and amounts of their claims. The Company cannot predict at this time whether any legal proceedings will ultimately result from this letter of claim or what the amount of any damages claimed in any such legal proceedings might be. 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.) 46 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10(a) Amendment No. 2 dated as of July 30, 2002 to the Amended and Restated Credit Agreement dated as of July 10, 2001 among Sotheby's Holdings, Inc., Sotheby's, Inc., Oatshare Limited, Sotheby's, Sotheby's Global Trading GmbH; the lenders party thereto; and JPMorgan Chase Bank (f/k/a The Chase Manhattan Bank) 10(b) Employment Agreement between Sotheby's Holdings, Inc. and Mitchell Zuckerman 99(a) Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99(b) Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K (i) On October 30, 2002, the Company reported on Form 8-K regarding the fine imposed by the European Commission. 47 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOTHEBY'S HOLDINGS, INC. By: /s/ Michael L. Gillis ---------------------- Michael L. Gillis Senior Vice President, Controller and Chief Accounting Officer Date: November 13, 2002 48 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, William F. Ruprecht, Chief Executive Officer of Sotheby's Holdings, Inc. ("the Company"), certify that: (1) I have reviewed this quarterly report on Form 10-Q of the Company; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; (4) The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 49 (5) The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and (6) The Company's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ William F. Ruprecht ------------------------- William F. Ruprecht Chief Executive Officer Sotheby's Holdings, Inc. November 13, 2002 50 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, William S. Sheridan, Chief Financial Officer of Sotheby's Holdings, Inc. ("the Company"), certify that: (1) I have reviewed this quarterly report on Form 10-Q of the Company; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; (4) The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 51 (5) The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and (6) The Company's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ William S. Sheridan ------------------------- William S. Sheridan Chief Financial Officer Sotheby's Holdings, Inc. November 13, 2002 52 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 10(a) Amendment No. 2 dated as of July 30, 2002 to the Amended and Restated Credit Agreement dated as of July 10, 2001 among Sotheby's Holdings, Inc., Sotheby's, Inc., Oatshare Limited, Sotheby's, Sotheby's Global Trading GmbH; the lenders party thereto; and JPMorgan Chase Bank (f/k/a The Chase Manhattan Bank) 10(b) Employment Agreement between Sotheby's Holdings, Inc. and Mitchell Zuckerman 99(a) Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99(b) Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
53 EX-10.(A) 3 a2091855zex-10_a.txt EXHIBIT 10(A) EXHIBIT 10(a) AMENDMENT NO. 2 dated as of July 30, 2002 to the Amended and Restated Credit Agreement dated as of July 10, 2001 (as amended, restated or otherwise modified from time to time, the "CREDIT AGREEMENT") among Sotheby's Holdings, Inc., a Michigan corporation ("HOLDINGS"), Sotheby's, Inc., a New York corporation, Oatshare Limited, a company registered in England, Sotheby's, a company registered in England, Sotheby's Global Trading GmbH, a company organized in Switzerland (each referred to individually as a "BORROWER" and collectively as the "BORROWERS"); the lenders from time to time party thereto (the "LENDERS"); and JPMorgan Chase Bank (f/k/a The Chase Manhattan Bank), a New York banking corporation, as administrative agent (in such capacity, the "ADMINISTRATIVE AGENT") and as collateral agent (in such capacity, the "COLLATERAL AGENT") for the Lenders and as the issuing bank. WHEREAS, the Borrowers are currently contemplating the sale of the property subject to the Lien of the Chicago Mortgage (the "CHICAGO PROPERTY") to a buyer to be determined for approximately $3,000,000 and have requested that the Chicago Property be released from the Lien of the Collateral Agent upon such sale; WHEREAS, the Borrowers have requested that the Lenders approve certain amendments to the Credit Agreement; WHEREAS, the Borrowers have indicated that, concurrent with the effectiveness of this Amendment, certain of the Borrowers will prepay Term Loans in an aggregate principal amount of $30,000,000; WHEREAS, the undersigned Lenders are willing, on the terms and subject to the conditions set forth herein, to approve such amendment to the Credit Agreement; NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Borrowers and the undersigned Lenders hereby agree as follows: SECTION 1. DEFINED TERMS. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement. SECTION 2. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is hereby amended, effective as of the Amendment Effective Date (as defined in Section 6), as follows: (a) AMENDMENT OF SECTION 1.01. (i) The definition of "CHICAGO MORTGAGE" is hereby deleted in its entirety. (ii) The definition of "MORTGAGE" is hereby amended by removing the reference therein to ", the Chicago Mortgage". (iii) The definition of "MORTGAGED PROPERTY" is hereby amended by removing the reference therein to ", the property subject to the Chicago Mortgage". (iv) The definition of "REVOLVING MATURITY DATE" is hereby amended by replacing the reference therein to "August 11, 2002" with a reference to "February 11, 2003". (v) The definition of "TERM MATURITY DATE" is hereby amended by replacing the reference therein to "August 11, 2002" with a reference to "February 11, 2003". (b) AMENDMENT OF SECTION 2.08. (i) Each reference in Section 2.08(a) to "3.00" is hereby replaced with a reference to "3.50". (ii) Each reference in Section 2.08(b) to "2.00" is hereby replaced with a reference to "2.50". (c) AMENDMENT OF SECTION 3.14. Paragraph (d) of Section 3.14 is hereby amended and restated in its entirety as follows: "(d) The York Avenue Mortgage is, and the other Mortgages when executed and delivered will be, effective to create in favor of the Collateral Agent legal, valid and enforceable Liens on all right, title and interest of the grantors thereunder in and to the Mortgaged Properties and the proceeds thereof, and the York Avenue Mortgage constitutes, and the other Mortgages when filed in the appropriate offices will constitute, perfected first priority Liens on and security interests in, all right, title and interest of such grantors in and to the Mortgaged 2 Properties and the proceeds thereof, subject only to Liens existing on the date hereof and expressly permitted by Section 6.01." (d) AMENDMENT OF SECTION 6.08. Section 6.08 is hereby amended and restated in its entirety as follows: "SECTION 6.08. ADJUSTED CONSOLIDATED NET WORTH. Permit Adjusted Consolidated Net Worth to be less than $160,000,000 on or prior to December 30, 2002 or less than $175,000,000 on and after December 31, 2002." SECTION 3. RELEASE OF CHICAGO PROPERTY. The undersigned Lenders hereby instruct the Collateral Agent to release the Chicago Property from the Lien of the Chicago Mortgage upon the sale of such property. SECTION 4. PREPAYMENT OF TERM LOANS. The Borrowers hereby acknowledge and agree that certain of the Borrowers have provided the Administrative Agent with a notice of prepayment of Term Loans pursuant to Section 2.12 of the Credit Agreement, which notices indicate that Term Loans in an aggregate principal amount of $30,000,000 shall be prepaid concurrent with the effectiveness of this Amendment. SECTION 5. REPRESENTATIONS AND WARRANTIES. To induce the other parties hereto to enter into this Amendment, each of the Borrowers represents and warrants to each of the Lenders and the Administrative Agent that, as of the Amendment Effective Date: (a) this Amendment has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms; (b) after giving effect to this Amendment, the representations and warranties of each of the Borrowers set forth in the Loan Documents are true and correct on and as of the Amendment Effective Date with the same effect as though made on and as of the Amendment Effective Date, except for representations and warranties that expressly relate to an earlier date, which representations and warranties were true and correct as of such earlier date; and (c) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. 3 SECTION 6. EFFECTIVENESS. This Amendment shall become effective on August 12, 2002 (the "AMENDMENT EFFECTIVE DATE"), provided that each of the following conditions is satisfied: (a) The Administrative Agent (or its counsel) shall have received copies hereof that, when taken together, bear the signatures of the Borrowers and each of the Lenders. (b) The Administrative Agent shall have received all amounts due and payable by the Borrowers under the Credit Agreement on or prior to the date hereof, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses (including fees and disbursements of Cravath, Swaine & Moore, counsel to the Administrative Agent). (c) The Borrowers shall have prepaid Term Loans in an aggregate principal amount of $30,000,000 pursuant to the terms of Section 2.12 of the Credit Agreement. (d) Each Lender shall have received an amendment fee in an amount equal to 0.50% of the Revolving Commitment and outstanding Term Loans of such Lender after giving effect to the prepayment of Term Loans referred to in Section 4 hereof. Notwithstanding anything contained in this Amendment or any other Loan Document to the contrary, the amendments set forth in Sections 2(a)(i), 2(a)(ii), 2(a)(iii) and 2(c) shall become effective on the first date upon which each of the conditions set forth in paragraphs (a)-(d) of this Section 6 is satisfied and on which the sale of the Chicago Property is consummated. SECTION 7. APPLICABLE LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. SECTION 8. EFFECT OF AMENDMENT. Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, amend or otherwise affect the rights and remedies of the Lenders or the Administrative Agent under the Credit Agreement or any other Loan Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle any party to any Loan Document to a 4 consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document in similar or different circumstances. This Amendment shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein. After the Amendment Effective Date, any reference to the Credit Agreement shall mean the Credit Agreement, as amended hereby. This Amendment shall constitute a "LOAN DOCUMENT" for all purposes of the Credit Agreement and the other Loan Documents. SECTION 9. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which when so executed and delivered shall constitute an original, but all of which when taken together shall constitute but one and the same instrument. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Amendment. SECTION 10. COSTS AND EXPENSES. Holdings agrees to reimburse the Administrative Agent for its reasonable out-of-pocket expenses in connection with this Amendment, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent. SECTION 11. HEADINGS. Section headings used herein are for convenience of reference only, are not part of this Amendment and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment. 5 IN WITNESS WHEREOF, the Borrowers and the undersigned Lenders have caused this Amendment to be duly executed by their duly authorized officers, all as of the date first above written. SOTHEBY'S HOLDINGS, INC., by /s/ William S. Sheridan ------------------------ Name: William S. Sheridan Title: Executive Vice President and Chief Financial Officer SOTHEBY'S, INC., by /s/ William S. Sheridan ------------------------ Name: William S. Sheridan OATSHARE LIMITED, by /s/ William S. Sheridan ------------------------ Name: William S. Sheridan SOTHEBY'S, by /s/ William S. Sheridan ------------------------ Name: William S. Sheridan 6 SOTHEBY'S GLOBAL TRADING GmbH, by /s/ Robert C. Wolcott ------------------------ Name: Robert C. Wolcott Title: Senior Vice President by /s/ Michael L. Gillis ------------------------ Name: Michael L. Gillis Title: Senior Vice President, Controller and Chief Accounting Officer JPMORGAN CHASE BANK (F/K/A THE CHASE MANHATTAN BANK), individually and as Administrative Agent, by /s/ Teri Streusand ------------------------ Name: Teri Streusand Title: Vice President 7 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF JULY 30, 2002 TO THE SOTHEBY'S AMENDED AND RESTATED CREDIT AGREEMENT Name of Institution: HSBC BANK PLC by /s/ Paul Hagger ------------------------ Name: Paul Hagger Title: Business Banking Manager Name of Institution: COMERICA BANK by /s/ Dan M. Roman ------------------------ Name: Dan M. Roman Title: First Vice President Name of Institution: BATTERY PARK, CDO LIMITED by /s/ Richard W. Stewart ------------------------ Name: Richard W. Stewart Title: Director Name of Institution: CLYDESDALE CLO 2001-1, LTD by /s/ Richard W. Stewart ------------------------ Name: Richard W. Stewart Title: Director 8 Name of Institution: NOMURA BOND AND LOAN FUND By: UFJ Trust Company of New York as Trustee By: Nomura Corporate Research and Asset Management, Inc. Attorney in Fact by /s/ Richard W. Stewart ------------------------ Name: Richard W. Stewart Title: Director Name of Institution: KATONAH II, LTD by /s/ Ralph Della Rocca ------------------------ Name: Ralph Della Rocca Title: Authorized Officer, Katonah Capital, L.L.C. as Manager Name of Institution: FRANKLIN FLOATING RATE TRUST by /s/ Richard D'Addario ------------------------ Name: Richard D'Addario Title: Senior Vice President 9 Name of Institution: FRANKLIN FLOATING RATE MASTER SERVICES by /s/ Richard D'Addario ------------------------ Name: Richard D'Addario Title: Senior Vice President Name of Institution: FRANKLIN FLOATING RATE DAILY ACCESS FUND by /s/ Richard D'Addario ------------------------ Name: Richard D'Addario Title: Senior Vice President Name of Institution: FRANKLIN CLO I, LTD by /s/ Richard D'Addario ------------------------ Name: Richard D'Addario Title: Senior Vice President Name of Institution: FRANKLIN CLO II, LTD by /s/ Richard D'Addario ------------------------ Name: Richard D'Addario Title: Senior Vice President 10 Name of Institution: FRANKLIN CLO III, LTD by /s/ Richard D'Addario ------------------------ Name: Richard D'Addario Title: Senior Vice President Name of Institution: HELLER FINANCIAL, INC. by /s/ W. Jerome McDermott ------------------------ Name: W. Jerome McDermott Title: Duly Authorized Signatory Name of Institution: GENERAL ELECTRIC CAPITAL CORPORATION by /s/ Gregory Hong ------------------------ Name: Gregory Hong Title: Duly Authorized Signatory Name of Institution: BLACK DIAMOND CLO 2000-1 LTD by /s/ Alan Corkish ------------------------ Name: Alan Corkish Title: Director 11 Name of Institution: BLACK DIAMOND INTERNATIONAL FUNDING, LTD by /s/ Alan Corkish ------------------------ Name: Alan Corkish Title: Director Name of Institution: DAVID L. BABSON & COMPANY, INC. AS COLLATERAL MANAGER FOR ELC (CAYMAN)LTD. 1999-II by /s/ John W. Stelwagon ------------------------ Name: John W. Stelwagon Title: Managing Director Name of Institution: THE BANK OF NOVA SCOTIA by /s/ K.C. Clark ------------------------ Name: K.C. Clark Title: Managing Director Name of Institution: LONG LANE MASTER TRUST IV By: Fleet National Bank as Trust Administrator by /s/ Kevin Kearns ------------------------ Name: Kevin Kearns Title: Managing Director 12 Name of Institution: CANADIAN IMPERIAL BANK OF COMMERCE by /s/ Stephanie Devane ------------------------ Name: Stephanie Devane Title: Authorized Signatory Name of Institution: THE BANK OF NEW YORK by /s/ Roger Grossman ------------------------ Name: Roger A. Grossman Title: Vice President Name of Institution: SENIOR DEBT PORTFOLIO By: Boston Management and Research as Investment Advisor by /s/ Barbara Campbell ------------------------ Name: Barbara Campbell Title: Vice President Name of Institution: EATON VANCE SENIOR INCOME TRUST By: Eaton Vance Management as Investment Advisor by /s/ Barbara Campbell ------------------------ Name: Barbara Campbell Title: Vice President 13 Name of Institution: EATON VANCE INSTITUTIONAL SENIOR LOAN FUND By: Eaton Vance Management as Investment Advisor by /s/ Barbara Campbell ------------------------ Name: Barbara Campbell Title: Vice President Name of Institution: OXFORD STRATEGIC INCOME FUND By: Eaton Vance Management as Investment Advisor by /s/ Barbara Campbell ------------------------ Name: Barbara Campbell Title: Vice President Name of Institution: EATON VANCE CDO III, LTD By: Eaton Vance Management as Investment Advisor by /s/ Barbara Campbell ------------------------ Name: Barbara Campbell Title: Vice President Name of Institution: GRAYSON & CO. By: Boston Management and Research as Investment Advisor by /s/ Barbara Campbell ------------------------ Name: Barbara Campbell Title: Vice President 14 Name of Institution: EATON VANCE CDO IV, LTD By: Eaton Vance Management as Investment Advisor by /s/ Barbara Campbell ------------------------ Name: Barbara Campbell Title: Vice President Name of Institution: FIRST DOMINION FUNDING, I by /s/ Andrew H. Marshak ------------------------ Name: Andrew H. Marshak Title: Authorized Signatory Name of Institution: FIRST DOMINION FUNDING, II by /s/ Andrew H. Marshak ------------------------ Name: Andrew H. Marshak Title: Authorized Signatory Name of Institution: FIRST DOMINION FUNDING, III by /s/ Andrew H. Marshak ------------------------ Name: Andrew H. Marshak Title: Authorized Signatory 15 Name of Institution: CSAM FUNDING II by /s/ Andrew H. Marshak ------------------------ Name: Andrew H. Marshak Title: Authorized Signatory 16 EX-10.(B) 4 a2091855zex-10_b.txt EXHIBIT 10(B) EXHIBIT 10(b) EMPLOYMENT AGREEMENT February 6, 2001 BY HAND Mitchell Zuckerman Sotheby's Holdings, Inc. 1334 York Avenue New York, NY 10021 Dear Mitchell: This letter sets forth our understanding and agreement with respect to your employment by Sotheby's Holdings, Inc. together with all of its subsidiaries and related entities ("Sotheby's" or the "Company"). This Agreement is being provided to you because you are a key employee at the Company, perform highly specialized and unique duties for the Company, and could do substantial harm to the Company if you left its employment, particularly during this present period of uncertainty for the Company. Consequently, Sotheby's is offering you the following terms and financial enhancements to ensure your continued employment with and loyalty to the Company, and so that you will focus fully and exclusively on your job duties at Sotheby's during this period. (1) TERM OF EMPLOYMENT. a) You agree to continue as a full-time employee of Sotheby's and Sotheby's agrees to continue to employ you full-time, subject to the terms and conditions set forth herein (the "Agreement"), for a period beginning on the date hereof and ending twenty-four (24) months after the date hereof, unless extended in writing by both the Company and you or as otherwise provided in this Agreement. b) This Agreement may be terminated: i) upon mutual written agreement of the Company and you; ii) at the option of the Company, upon written notice to you for Cause (as hereinafter defined); iii) upon thirty (30) days' prior written notice by you for Good Reason (as hereinafter defined) within thirty (30) days after the existence of circumstances constituting Good Reason; iv) at the option of the Company in the event of your Permanent Disability (as hereinafter defined); or v) automatically upon your death. c) As used herein, the term "Cause" shall mean and be limited to: i) conviction of a felony crime, or ii) fraud, willful malfeasance or gross negligence in performance of your duties which is materially injurious to the Company. The Chief Executive Officer, in conjunction with the appropriate supervisor, shall determine, in their sole discretion, whether the occurrence or non-occurrence of an event constitutes Cause within the meaning of this Agreement. Such determination shall be final, binding and conclusive on the parties hereto. d) As used herein, the term "Good Reason" shall mean, without your express written consent, the occurrence of any of the following events: i) any failure by the Company to comply with the provisions of Paragraphs 3 or 4 of the Agreement; provided, however, that payment of the bonus amounts set forth in Subparagraph 4(b) from an External Source shall not be deemed to be a failure of the Company to comply with the provisions of Paragraph 4 constituting Good Reason; ii) your being required to relocate to a principal place of business more than thirty-five (35) miles outside New York, New York; iii) any action by the Company that results in a material diminution in your position (except in connection with the termination of your employment for Cause or as a result of your death or Permanent Disability or temporarily as a result of your illness or other absence); or iv) the failure of the Company's successor to assume this Agreement in accordance with Paragraph 20; provided, however, that the Company shall have thirty (30) days following the receipt of notice from you of the existence of circumstances constituting Good Reason to correct such circumstances. e) As used herein, the term "Permanent Disability" shall mean, and be limited to, any physical or mental illness, disability or impairment that has prevented you from continuing the performance of your normal duties and responsibilities hereunder for a period in excess of six (6) consecutive months. For purposes of determining whether a Permanent Disability has occurred under this Agreement, 2 the written determination thereof by a physician mutually acceptable to the Company and you or, if you and the Company cannot agree upon a physician, by a physician selected by agreement of a physician designated by the Company and a physician designated by you, shall be conclusive; provided, however that if such physicians cannot agree upon a third physician within thirty (30) days, such third physician shall be designated by the American Arbitration Association. (2) TITLE; RESPONSIBILITIES. You shall continue to serve as President of Sotheby's Financial Services, Inc. and Sotheby's Ventures, LLC. In addition to the foregoing, you agree to perform such other functions and responsibilities as may be reasonably requested by Sotheby's from time to time. Except as otherwise permitted by the Company, in accordance with Paragraph 12, during your employment with the Company, you shall devote substantially all of your business time (excluding periods of vacation and sick leave) and efforts to the performance of your functions and responsibilities hereunder. (3) COMPENSATION. In consideration for the services to be rendered by you to Sotheby's, you shall receive during the 24-month period of employment by Sotheby's after your execution of this Agreement, the following: a) An annual base salary of $385,000, which shall be payable in appropriate installments to conform with the regular payroll dates for salaried personnel of Sotheby's. In the event your employment continues beyond the 24-month period after your execution of this Agreement, your base salary shall be reviewed thereafter on an annual basis (the first such review to take place effective as of the 25th month following the execution of this Agreement) and shall be subject to such adjustment as your supervisor(s) shall determine; and b) In addition to the annual base salary, you will be eligible for: i) An annual bonus composed of a 25% worldwide corporate financial performance target and a 75% individual performance target. Your 2001 total bonus target is $250,000. You will be guaranteed a minimum bonus of $125,000 for each of 2001 and 2002. ii) A private treaty bonus in the Company's discretion to reflect private treaty transactions you have initiated in excess of your departmental private treaty target. iii) Continuation of the special annual payment made to you on September 1, 2000 and, as determined by the Company in its sole discretion, as long thereafter as is appropriate. (4) ADDITIONAL COMPENSATION IN CONSIDERATION FOR SPECIAL UNDERTAKINGS DURING THE 24-MONTH EMPLOYMENT PERIOD. In order to preserve stability and to assure your continued employment during this period of uncertainty for the Company, and because it is essential 3 that during this period you focus fully and exclusively on your job duties for the Company, you agree to the following undertakings during the 24-month period of employment by Sotheby's after execution of this Agreement, in exchange for the Special Additional Consideration set forth in Subparagraph 4(b) below. a) Employee Undertakings i) You agree to reaffirm and abide by your acknowledged fiduciary obligation to cooperate with the Company in the event of and in connection with matters relating to the Company including without limitation a restructuring (any business or capital restructuring), refinancing or sale of the Company or a significant interest therein (including but not limited to an actual or potential change of control) including, but not limited to, your obligations to: (a) not disparage the Company or its assets to any third party; (b) maintain your loyalty to the Company in all respects, including without limitation, compliance with Paragraph 13; (c) provide full and complete active cooperation in working toward successful sale seasons and in otherwise assisting in promoting the Company; and (d) fully assist with any transition with respect to any business or capital restructuring, refinancing or sale of the Company or a significant interest therein. ii) For the period beginning on the date hereof and ending 24 months after the date hereof, you agree to refrain from any substantive discussions, meetings or communications of any kind whatsoever with any other potential employer, including, but not limited to, an art auction house, art dealer or any other company, organization or entity in which you would perform similar duties and responsibilities to those you have performed at Sotheby's, regarding prospective employment for yourself during the 24-month employment period. By entering into this Agreement, and agreeing to the special undertakings set forth herein, you agree that for this 24-month period you are knowingly and voluntarily foregoing the right to engage in such conduct in exchange for the consideration set forth herein, and you acknowledge the vital importance of these undertakings to the Company during this period. b) Special Additional Consideration 4 In consideration of the foregoing undertakings by you, the Company shall provide the following special additional consideration provided you do not breach this Agreement (except as stated in Subparagraph 11(c)): i) With respect to the special cash bonus of $300,000 payable February 28, 2002 and a leadership incentive bonus in the amount of $350,000 payable on February 28, 2002 and $350,000 payable on September 30, 2002, as set forth in my letters to you of May 10, 2000 and October 16, 2000, Sotheby's shall provide a Guarantee (as hereinafter defined) of these payments. All other terms and conditions of these bonus payments set forth in the May 10, 2000 and October 16, 2000 letters remain in effect. ii) You will also receive an additional "commitment bonus" in the third quarter of 2001 in the amount of $300,000. Further, Sotheby's shall provide a Guarantee (as hereinafter defined) of this payment. iii) You will also receive an additional "retention bonus" in the amount of $2,400,000, provided you do not breach this Agreement. This payment will be made in three (3) installments: 20% on July 15, 2001, 20% on January 15, 2002 and 60% on January 15, 2003. Further, Sotheby's shall provide a Guarantee (as hereinafter defined) of these payments. iv) Pursuant to the Sotheby's 1997 Stock Option Plan, an option to purchase 83,333 shares at an exercise price of $27 per share will be provided to you upon your execution of this Agreement. c) The "Guarantee" mentioned in Subparagraph 4(b) shall refer to the guarantee in the form attached hereto. d) The bonus amounts set forth in Subparagraph 4(b) have been developed based in part on the role you play in bringing business to the Company. e) All bonus payments set forth in Subparagraphs 3(b)(iii) and 4(b) 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 special payments are also not part of the bonus calculation in the event you are entitled to benefits under the Sotheby's, Inc. Severance Plan. f) If, at any time during the 24-month employment period, you breach any of the undertakings set forth herein, you will return to the Company all of the "Special Additional Consideration" you may have received pursuant to Subparagraph 4(b) above, and will not thereafter be entitled to any further "Special Additional Consideration." In addition, payment of the "Special Additional Consideration" pursuant to Subparagraph 4(b) will not be made if, for any reason, you are not 5 employed by the Company on the date such payment would otherwise be made, except as otherwise provided in Subparagraphs 11(a) or 11(b). (5) STOCK OPTIONS. Your options will continue to vest pursuant to the Sotheby's 1997 Stock Option Plan, and you will continue to be eligible for further grants. The benefits provided in this Agreement are in addition to any stock options you have already received. (6) BENEFITS. You shall continue to be entitled, to the extent that your position, title, tenure, salary, age, health and other qualifications make you eligible, to participate in all employee benefit plans or programs now in effect or hereafter adopted by Sotheby's, including the Sotheby's, Inc. Severance Plan, medical, dental, disability, life insurance, stock options and pension benefits. Your participation in such plans or programs shall continue to be subject to the provisions, rules and regulations applicable thereto. Any benefits that you may become eligible for under the Sotheby's, Inc. Severance Plan shall be in addition to the other benefits specified in this Agreement. In the event you are entitled to 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 you in which case you would receive the enhanced benefit. (7) VACATION. You shall continue to be entitled to annual vacation time, with full pay, in accordance with the established policies of Sotheby's now or hereafter in effect for similarly situated employees but in no event less than the number of days to which you are presently entitled. (8) EXPENSES. You shall be authorized to incur reasonable and necessary expenses incurred in connection with Sotheby's business, including expenses for entertainment, travel and similar items in accordance with Sotheby's travel and entertainment policy. Sotheby's will reimburse you for all such expenses upon presentation by you monthly of an itemized account of such expenditures. Such expenditures, however, shall be subject at all times to the approval of Sotheby's in accordance with Sotheby's expense reimbursement policy. (9) CAR ALLOWANCE. You will be eligible to continue your current annual car allowance of $18,000 for 2001 and 2002. (10) CONFIDENTIALITY AGREEMENT; SOTHEBY'S RULES AND POLICIES. As a condition to your continued employment by the Company, you 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"). You acknowledge that you have read, understood and signed each of the foregoing. (11) COMPENSATION UPON TERMINATION DURING THE 24-MONTH EMPLOYMENT PERIOD. a) If during the 24-month employment period your employment by the Company is 6 terminated by you for Good Reason in accordance with Subparagraph 1(b)(iii) hereof, the Company shall pay or provide you with the following: i) The sum of your base salary through the date of termination to the extent not theretofore paid, any declared and earned but unpaid bonus amount for the fiscal year ended December 31, 2001 and reimbursement for any unreimbursed expenses incurred through the date of termination in accordance with Paragraph 8 ("Accrued Obligations"); ii) Continued payment of your base salary on a semi-monthly basis from the date of termination through the end of the 24-month employment period or the date six (6) months after the effective date of your termination, whichever is later; iii) On, or within fifteen (15) days following the date of termination, a pro-rated bonus equal to the product of (x) the bonus payments set forth in Subparagraphs 3(b)(i) and 3(b)(ii) paid or earned and payable for the most recently completed fiscal year of the Company and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the date of termination, and the denominator of which is 365 (the "Pro-Rated Bonus"); and iv) On, or within fifteen (15) days following the date of termination, payment of any portion of the "retention bonus" described in Subparagraph 4(b)(iii) not paid as of the date of termination. In addition, you will not be obligated to return to the Company any portion of the "Special Additional Consideration" you may have received pursuant to Subparagraph 4(b) above. Notwithstanding the foregoing, if during the 24-month employment period your employment by the Company is terminated and as a result of such termination you become eligible to receive payments and/or benefits under the Sotheby's, Inc. Severance Plan, then you shall not be entitled to receive the Pro-Rated Bonus in accordance with the provisions of Subparagraph 11(a)(iii). b) If during the 24-month employment period your employment by the Company is terminated on account of your Permanent Disability or your death, the Company shall pay or provide you (or, in the event of your death, your estate) with the following: i) Accrued Obligations; ii) On, or within fifteen (15) days following the date of termination, a Pro-Rated Bonus; and iii) On, or within fifteen (15) days following the date of termination, payment 7 of any portion of the "retention bonus" described in Subparagraph 4(b)(iii) not paid as of the date of termination. In addition, you (or, in the event of your death, your estate) will not be obligated to return to the Company any portion of the "Special Additional Consideration" you may have received pursuant to Subparagraph 4(b) above. c) If during the 24-month employment period your employment by the Company is terminated by the Company for Cause, this Agreement shall terminate without further obligation to you, except that the Company shall pay or provide you with the sum of your base salary through the date of termination to the extent not theretofore paid. You will not be eligible for any bonus or special payments including those in Subparagraphs 3(b) and 4(b) after the date of termination of your employment. d) If during the 24-month employment period your employment by the Company is terminated in accordance with Subparagraphs 1(b)(i) hereof, the Company shall pay or provide you with the amounts mutually agreed on by the Company and you. e) Any payments payable pursuant to this Paragraph 11 beyond Accrued Obligations shall only be payable if you deliver to the Company a release, as similarly required under the Sotheby's, Inc. Severance Plan, of all your 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 14) 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. (12) EMPLOYMENT AFTER EXPIRATION OF THE 24-MONTH EMPLOYMENT PERIOD. a) After expiration of the 24-month employment period under the terms of this Agreement, and provided that the Agreement is not extended or superseded by the mutual written consent of the parties in accordance with Subparagraph 1(a), you will be an employee at-will; provided, however, that (i) prior to resigning or retiring from the Company you will provide the Company with a least six (6) months' written notice of such resignation or retirement during which time the provisions of Paragraphs 3(a), 4(a)(i) and 12 through 22 shall continue, and (ii) prior to termination by the Company, the Company will provide you with at least six (6) months' written notice of termination following the 24-month period herein during which time the provisions of Paragraphs 3(a), 4(a)(i), 6, 10 and 12 through 22 shall continue. 8 b) In any event, after notice is given either by you or the Company pursuant to Subparagraph 12(a), you will remain an employee through the 6-month notice period (the "Notice Period"). After the expiration of the 24-month employment period provided for in this Agreement, you will continue to receive your base salary as set forth in Subparagraph 3(a), and the provisions of Paragraphs 2, 4(a)(i), 5-8, 10, 12, 13 and 15 through 22 will remain in effect. It is at the sole discretion of the Company whether you shall be required to continue to perform services for the Company during the Notice Period. (13) 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 you have specialized, unique confidential knowledge vital to the Company, you agree that during the 24-month period after you enter into this Agreement (and regardless of whether your employment is terminated) and during the period you remain employed by the Company (including the Notice Period), 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 auction business or in any other business in which the Company is engaged, whether such engagement by you is as an officer, director, proprietor, employee, partner, owner, consultant, advisor, agent, sales representative or other participation. b) In addition to the foregoing, during the 24-month period after you enter into this Agreement and during the Notice 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, i) recruit, solicit or induce any Sotheby's employees to terminate their employment with Sotheby's; ii) solicit the business of, do business with, or seek to do business with, any client of the Company; iii) encourage or assist any competitor of the Company to solicit or service any client of the Company; or iv) 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 you had no dealings on behalf of Sotheby's, or clients you 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 you did have dealings as well as that person's estate, heirs and/or 9 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 13 is unenforceable against you, the provisions of this Paragraph 13 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. (14) INDEMNIFICATION. The Company shall maintain for your benefit director and officer liability insurance in the same amount and to the same extent as the Company covers similarly situated employees. In addition, to the extent not covered by director and officer liability insurance, you shall be indemnified by the Company against liability as an officer or director of the Company to the maximum extent permitted by applicable law. Your rights under this Paragraph 14 shall continue so long as you may be subject to such liability, whether or not this Agreement may have terminated prior thereto (15) MISCELLANEOUS. You may not assign your rights or delegate your obligations under this Agreement. Sotheby's shall be entitled to withhold from any payments or deemed payments under this Agreement any amount of withholding required by law. This Agreement constitutes the entire agreement between you and Sotheby's concerning the subject matter of your employment, with the exception of letters and documents specifically referenced herein, and it supersedes all prior agreements including, but not limited to, any prior notice and non-compete agreements, written or oral, discussions, and negotiations on that subject (other than the letters and documents specifically referenced herein). Notwithstanding the foregoing, you authorize Sotheby's to deduct your payment for your executive mortgage loan and demand promissory note from your salary and bonus payment pursuant to Subparagraphs 3(a) and 3(b)(i) herein, which you acknowledge is for your benefit. All terms of your executive mortgage loan and demand promissory note remain in full force and effect. Any waiver or amendment of any provision of this Agreement must be done in writing and signed by both parties. (16) LEGAL AND EQUITABLE REMEDIES. Sotheby's shall be entitled to enjoin a violation by you 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 Agreement by you, Sotheby's shall be entitled to specific enforcement by injunctive relief of your 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. (17) SEVERABILITY. If at any time there is a judicial determination by any court of competent jurisdiction that any provision of this Agreement is unenforceable against you, the other provisions of this Agreement shall not be rendered void but shall be deemed amended to 10 apply as to such maximum extent as the court may judicially determine or indicate to be enforceable under New York law. (18) CONFIDENTIALITY. You shall not disclose this Agreement or the contents thereof to anyone other than (i) your legal or financial advisor, provided that you give to each such person to whom disclosure is made notice of the confidentiality provisions of this Agreement and each agrees to keep the existence, terms and conditions of this Agreement fully confidential or (ii) except as required by law or with the prior written approval of Sotheby's. (19) CHOICE OF LAW/CHOICE OF FORUM. 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. (20) BINDING ON SUCCESSOR COMPANY. 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 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 20, if this Agreement is not assumed as a matter of law, the Company will require its assumption by the successor entity. (21) REPRESENTATION BY COUNSEL. The parties have each been represented by counsel of their own choosing in negotiating this Agreement. (22) NOTICES. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to you at the address set forth on the initial page of this Agreement and to the Company at Sotheby's, Inc., 1334 York Avenue, New York, New York 10021, Attention: General Counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Any such notice shall be deemed given when so delivered personally, or, if mailed, five (5) days after the date of deposit in the United States mail, except that notice of change of address shall be effective only upon receipt. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 11 Please review this Agreement carefully and, if it correctly states our agreement, sign and return to me the enclosed copy. Very truly yours, SOTHEBY'S HOLDINGS, INC. By: /s/ William F. Ruprecht ----------------------- William F. Ruprecht Chief Executive Officer Read, accepted and agreed to this 7th day of February, 2001 /s/ Mitchell Zuckerman - ---------------------- Mitchell Zuckerman 12 EX-99.(A) 5 a2091855zex-99_a.txt EXHIBIT 99(A) EXHIBIT 99(a) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Sotheby's Holdings, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William F. Ruprecht, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ William F. Ruprecht ------------------------ William F. Ruprecht Chief Executive Officer November 13, 2002 EX-99.(B) 6 a2091855zex-99_b.txt EXHIBIT 99(B) EXHIBIT 99(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Sotheby's Holdings, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William S. Sheridan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ William S. Sheridan ------------------------- William S. Sheridan Chief Financial Officer November 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----