3B2 EDGAR HTML -- c56633_10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|
|
|
S |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008. |
OR |
£ |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
COMMISSION FILE NUMBER 1-9750 |
(Exact name of registrant as specified in its charter)
|
|
|
Delaware (State or other jurisdiction of incorporation or organization) 1334 York Avenue New York, New York (Address of principal executive offices) |
|
38-2478409 (I.R.S. Employer Identification No.) 10021 (Zip Code) |
(212) 606-7000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of each class |
|
Name of each exchange on which registered |
Common Stock, $0.10 Par Value |
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes R No £
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No R
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes R No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. R
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Act). Large accelerated filer R Accelerated filer £ Non-accelerated filer £
(Do not check if a smaller
reporting company) Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)
Yes £ No R
As of June 30, 2008, the aggregate market value of the 66,337,077 shares of Common Stock held by non-affiliates of the registrant was $1,749,308,720, based upon the closing price ($26.37) on the New York Stock Exchange composite tape on such date for the Common Stock.
As of February 18, 2009, there were outstanding 67,084,781 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants proxy statement for the 2009 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
ITEM 1: DESCRIPTION OF BUSINESS
Overview
Sothebys (or, together with its subsidiaries, unless the context otherwise requires, the Company) is one of the worlds two largest auctioneers of authenticated fine art, antiques and decorative art, jewelry and collectibles. In 2008, Sothebys accounted for $4.9 billion, or 51%, of the total aggregate
auction sales of the two major auction houses that comprise the global auction market.
Sothebys operations are organized into three business segments: Auction, Finance and Dealer. In addition to auctioning, the Auction segment is engaged in a number of related activities, including the brokering of private purchases and sales of fine art, jewelry and collectibles. Sothebys also operates
as a dealer in works of art through its Dealer segment, conducts art-related financing activities through its Finance segment and is engaged, to a lesser extent, in licensing activities. A detailed explanation of the activities of each of the Companys segments, as well as its licensing activities is provided
below.
Sothebys was initially incorporated in Michigan in August 1983. In October 1983, the Company acquired Sotheby Parke Bernet Group Limited, which was then a publicly held company listed on the International Stock Exchange of the United Kingdom and which, through its predecessors, had been
engaged in the auction business since 1744. In 1988, Sothebys issued shares of Class A Limited Voting Common Stock, par value $0.10 per share (the Class A Stock), to the public, which were listed on the New York Stock Exchange (the NYSE). As successor to the business that began in 1744,
Sothebys is the oldest company listed on the NYSE.
In June 2006, Sothebys (then named Sothebys Holdings, Inc.) reincorporated into the State of Delaware (the Reincorporation). The Reincorporation and related proposals were approved by the shareholders of Sothebys Holdings, Inc. at the annual meeting of shareholders on May 8, 2006. The
Reincorporation was completed by means of a merger of Sothebys Holdings, Inc. with and into Sothebys Delaware, Inc., a Delaware corporation (Sothebys Delaware) and a wholly-owned subsidiary of Sothebys Holdings, Inc. incorporated for the purpose of effecting the Reincorporation, with
Sothebys Delaware being the surviving corporation. Sothebys Delaware was renamed Sothebys upon completion of the merger.
In the merger, each outstanding share of Class A Stock was converted into one share of Common Stock of Sothebys Delaware (Sothebys Delaware Stock). As a result, holders of Class A Stock became holders of Sothebys Delaware Stock, and their rights as holders thereof are now governed by the
General Corporation Law of the State of Delaware and the Certificate of Incorporation and By-Laws of Sothebys Delaware.
The Reincorporation was accounted for as a reverse merger, whereby, for accounting purposes, Sothebys Holdings, Inc. is considered the acquiror and the surviving corporation is treated as the successor to the historical operations of Sothebys Holdings, Inc. Accordingly, the historical financial
statements of Sothebys Holdings, Inc. which were previously reported to the Securities and Exchange Commission (the SEC) on Forms 10-K and 10-Q, among other forms, are treated as the financial statements of the surviving corporation.
The Reincorporation did not result in any change in the business or principal facilities of Sothebys Holdings, Inc. Additionally, immediately after the Reincorporation, Sothebys Holdings, Inc. management and board of directors continued as the management and board of directors of Sothebys
Delaware and Sothebys Delaware stock continued to trade on the NYSE under the symbol BID.
1
Auction Segment
Description of Business
The purchase and sale of works of art in the international art market are primarily effected through the major auction houses, numerous art dealers, smaller auction houses and also directly between collectors. Although art dealers and smaller auction houses generally do not report sales figures
publicly, Sothebys management believes that art dealers account for the majority of the volume of transactions in the international art market.
Sothebys and Christies International, PLC (Christies), a privately held, French-owned, auction house, are the two largest art auction houses in the world. To a much lesser extent, Sothebys also faces competition from smaller auction houses such as Phillips de Pury & Company and regional auction
houses such as Bonhams.
Sothebys auctions a wide variety of property, including fine art, antiques and decorative art, jewelry and collectibles. The objects auctioned by Sothebys are unique, and their value can only be estimated. Sothebys principal role as an auctioneer is to identify, evaluate and appraise works of art
through its international staff of specialists; to stimulate purchaser interest through professional marketing techniques; and to match sellers and buyers through the auction process.
In its role as auctioneer, Sothebys principally functions as an agent accepting property on consignment from its selling clients. Sothebys bills the buyer for property purchased, receives payment from the buyer and remits to the consignor the consignors portion of the buyers payment after deducting
Sothebys commissions, expenses and applicable taxes and royalties. Sothebys auction commissions include those earned from the buyer (buyers premium) and those earned from the consignor (sellers commission), both of which are calculated as a percentage of the hammer price of property sold at
auction. In 2008, 2007 and 2006, auction commission revenues accounted for 91%, 83% and 83%, respectively, of Sothebys consolidated revenues.
Amounts billed to buyers are recorded as accounts receivable in Sothebys Consolidated Balance Sheets. Under Sothebys standard payment terms, payments to purchasers are due within 30 days from the sale date and consignor payments are made 35 days from the sale date. However, at times,
Sothebys provides extended payment terms to certain buyers in order to support and market a sale. At such times, Sothebys attempts to match the timing of receipt from the buyer with payment to the consignor, but is not always successful in doing so. The amount and length of extended payment terms
provided to buyers varies from selling season to selling season.
Under the standard terms and conditions of its auction sales, Sothebys is not obligated to pay consignors for items that have not been paid for by purchasers. If a purchaser defaults on payment, Sothebys has the right to cancel the sale and return the property to the owner, re-offer the property at a
future auction or negotiate a private sale. In certain situations, under negotiated arrangements or when the buyer takes possession of property before payment is made, Sothebys is liable to the consignor for the net sale proceeds whether or not the buyer makes payment.
From time to time in the ordinary course of its business, Sothebys will guarantee to consignors a minimum price in connection with the sale of property at auction (an auction guarantee). In the event that the property sells for less than the minimum guaranteed price, Sothebys must perform under
the auction guarantee by funding the difference between the sale price at auction and the amount of the auction guarantee. If the property does not sell, the amount of the guarantee must be paid, but Sothebys has the right to recover such amount through the future sale of the property. In some cases,
the sale proceeds ultimately realized by Sothebys exceed the amount of any losses previously recognized on the auction guarantee. Additionally, Sothebys is generally entitled to a share of excess proceeds if the property under the auction guarantee sells above a minimum price. In addition, Sothebys is
obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. In certain situations, Sothebys reduces its financial exposure under auction guarantees through risk and reward sharing arrangements with third parties. Sothebys counterparties to
these sharing arrangements are typically international art dealers or prominent art collectors. Sothebys could be exposed to losses in the event of nonperformance by these counterparties. In response to the downturn in the international art market that began in
2
September 2008, as well as the current uncertain and challenging economic environment, Sothebys substantially reduced its use of auction guarantees for sales occurring in January and February 2009, when compared to the comparable sales occurring in 2008 and 2007. Sothebys expects to continue to
significantly limit its use of auction guarantees for the foreseeable future. (See statement on Forward Looking Statements and Off-Balance Sheet Arrangements under Managements Discussion and Analysis of Financial Condition and Results of Operations for more information on auction guarantees.)
In addition to auctioning, the Auction segment is engaged in a number of related activities, including the brokering of private purchases and sales of fine art, jewelry and collectibles.
Seasonality
The worldwide art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. Accordingly, Sothebys auction business is seasonal, with peak revenues and operating income generally occurring in those quarters. Consequently, first and third
quarter results have historically reflected lower Net Auction Sales (the hammer (sale) price of property sold at auction) when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of Sothebys operating expenses. (See Seasonality under Managements
Discussion and Analysis of Financial Condition and Results of Operations and Note U of Notes to Consolidated Financial Statements.)
The Auction Market and Competition
Competition in the international art market is intense. A fundamental challenge facing any auctioneer or art dealer is to obtain high quality and valuable property for sale either as agent or as principal. Sothebys primary auction competitor is Christies. To a much lesser extent, Sothebys also faces
competition from smaller auction houses such as Phillips de Pury & Company, regional auction houses such as Bonhams and a variety of art dealers across all collecting categories.
The owner of a work of art wishing to sell it has four principal options: (1) sale or consignment to, or private sale by, an art dealer; (2) consignment to, or private sale by, an auction house; (3) private sale to a collector or museum without the use of an intermediary; or (4) for certain categories of
property (in particular, collectibles) consignment to, or private sale through, an internet-based service. The more valuable the property, the more likely it is that the owner will consider more than one option and will solicit proposals from more than one potential purchaser or agent, particularly if the
seller is a fiduciary representing an estate or trust. A complex array of factors may influence the sellers decision. These factors, which are not ranked in any particular order, include:
|
|
|
|
|
The level and breadth of expertise of the art dealer or auction house with respect to the property; |
|
|
|
|
|
The extent of the prior relationship, if any, between the art dealer or auction house and its staff and the seller; |
|
|
|
|
|
The reputation and historic level of achievement by the art dealer or auction house in attaining high sale prices in the propertys specialized category; |
|
|
|
|
|
The desire for privacy on the part of clients; |
|
|
|
|
|
The amount of cash offered by an art dealer, auction house or other purchaser to purchase the property outright, which is greatly influenced by the amount and cost of capital resources available to such parties; |
|
|
|
|
|
The level of auction guarantees or the terms of other financial options offered by auction houses; |
|
|
|
|
|
The level of pre-sale estimates offered by auction houses; |
|
|
|
|
|
The desirability of a public auction in order to achieve the maximum possible price (a particular concern for fiduciary sellers, such as trustees and estate executors);
|
3
|
|
|
|
|
The amount of commission charged by art dealers or auction houses to sell a work on consignment; |
|
|
|
|
|
The cost, style and extent of pre-sale marketing and promotion to be undertaken by an art dealer or auction house; |
|
|
|
|
|
Recommendations by third parties consulted by the seller; |
|
|
|
|
|
The desire of clients to conduct business with a publicly traded company; and |
|
|
|
|
|
The availability and extent of related services, such as tax or insurance appraisals and short-term financing.
|
It is not possible to measure with any particular accuracy the entire international art market or to reach any conclusions regarding overall competition because art dealers and auction firms frequently do not publicly report annual totals for auction sales, revenues or profits, and the amounts reported
may not be verifiable.
Auction Regulation
Regulation of the auction business varies from jurisdiction to jurisdiction. In many jurisdictions, Sothebys is subject to laws and regulations that are not directed solely toward the auction business, including, but not limited to, import and export regulations, antitrust laws, cultural property ownership
laws, data protection and privacy laws, anti-money laundering laws and value added sales taxes. In addition, Sothebys is subject to local auction regulations, such as New York City Auction Regulations Subchapter M of Title 6 §§ 2-1212-125, et. seq. Such regulations do not impose a material impediment to
the worldwide business of Sothebys but do affect the market generally, and a material adverse change in such regulations could affect the business. In addition, the failure to comply with such local laws and regulations could subject Sothebys to civil and/or criminal penalties in such jurisdictions.
Sothebys has a Compliance Department which, amongst other activities, develops and updates compliance policies and audits, monitors, and provides training to Sothebys employees on compliance with many of these laws and regulations.
Finance Segment
Description of Business
Sothebys Finance segment provides certain collectors and art dealers with financing, generally secured by works of art that Sothebys either has in its possession or permits borrowers to possess. The Finance segments loans are predominantly variable interest rate loans. Clients who borrow from
Sothebys through its Finance segment are often unable to borrow on conventional terms from traditional lenders and are typically not highly interest rate sensitive.
The Finance segment generally makes two types of secured loans: (1) advances secured by consigned property to borrowers who are contractually committed, in the near term, to sell the property at auction (a consignor advance); and (2) general purpose term loans to collectors or art dealers
secured by property not presently intended for sale (a term loan). A 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. Term loans allow Sothebys to establish or enhance mutually beneficial relationships with art dealers and collectors and sometimes result in auction consignments. Secured loans are made with full recourse against the borrower. To the extent that Sothebys is looking wholly or partially to
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 a borrower becomes subject to bankruptcy or insolvency laws, Sothebys ability to realize on its collateral may be
limited or delayed by the application of such laws.
The target loan to value ratio (principal loan amount divided by the low auction estimate of the collateral) for Finance segment secured loans is 50% or lower. However, certain Finance segment loans are initially made at loan to value ratios higher than 50%. In addition, as a result of Sothebys
normal periodic revaluation of loan collateral, the loan-to-value ratio of certain loans may increase
4
above the 50% target loan-to-value ratio due to decreases in the low auction estimates of the collateral. As of December 31, 2008, Finance segment loans with loan to value ratios above 50% totaled $93.5 million and represented 53% of net notes receivable and consignor advances. The property related
to such loans has a low auction estimate of approximately $141.5 million.
Under certain circumstances, the Finance segment also finances the purchase of works of art by unaffiliated art dealers through unsecured loans. The property purchased pursuant to such unsecured loans is sold privately or at auction with any profit or loss shared by Sothebys and the art dealer.
Interest income related to such unsecured loans is reflected in the results of the Finance segment, while Sothebys share of any profit or loss is reflected in the results of the Dealer segment.
Sothebys Finance segment activities, which are conducted through its wholly-owned subsidiaries, are generally funded through operating cash flows supplemented by credit facility borrowings. (See Liquidity and Capital Resources under Managements Discussion and Analysis of Financial Condition
and Results of Operations.)
(See Notes B and D of Notes to Consolidated Financial Statements.)
The Finance Market and Competition
A considerable number of traditional lending sources offer conventional loans at a lower cost to borrowers than the average cost of loans offered by Sothebys Finance segment. Additionally, many traditional lenders offer borrowers a variety of integrated financial services such as wealth management
services, which are not offered by Sothebys. Few lenders, however, are willing to accept works of art as sole collateral as they do not possess the ability to both appraise and sell works of art within a vertically integrated organization. Management believes that through a combination of its art expertise
and skills in international law and finance, Sothebys has the ability to tailor attractive financing packages for clients who wish to obtain liquidity from their art assets.
Dealer Segment
Description of Business
The Dealer segments activities include:
|
|
|
|
|
The activities of Noortman Master Paintings (NMP), an art dealer specializing in Dutch and Flemish Old Master Paintings, as well as French Impressionist and Post-Impressionist paintings, that was acquired in June 2006. NMP is based in Maastricht, The Netherlands. As an art dealer, NMP
sells works of art directly to private collectors and museums and, from time-to-time, acts as a broker in private purchases and sales of art. |
|
|
|
|
|
The investment in and resale of art and other collectibles directly by Sothebys. |
|
|
|
|
|
The investment in art through unsecured loans made by Sothebys to unaffiliated art dealers. The property purchased pursuant to such unsecured loans is sold privately or at auction with any profit or loss shared by Sothebys and the unaffiliated art dealer. |
|
|
|
|
|
The activities of certain equity investees, including Acquavella Modern Art (or AMA). (See Note E of Notes to Consolidated Financial Statements.)
|
Robert C. Noortman, who was the Managing Director of NMP and sole shareholder of Arcimboldo S.A., died unexpectedly on January 14, 2007. NMP is continuing under the leadership of Mr. Noortmans son, William Noortman. (See Impairment Loss and Insurance Recovery under
Managements Discussion and Analysis of Financial Condition and Results of Operations.)
The Dealer Market and Competition
The Dealer segment operates in the same market as the Auction segment and is impacted to varying degrees by many of the same competitive factors (as discussed above under The Auction Market and Competition). The most prominent competitive factors impacting the Dealer segment, which
are not ranked in any particular order, include: (i) relationships and personal interaction
5
between the buyer or seller and the art dealer; (ii) the level of specialized expertise of the art dealer; and (iii) the ability of the art dealer to finance purchases of art.
Licensing
On February 17, 2004, Sothebys consummated the sale of Sothebys International Realty (SIR) to a subsidiary of Realogy Corporation (Realogy), formerly Cendant Corporation. In conjunction with the sale, Sothebys entered into an agreement with Realogy to license the SIR trademark and
certain related trademarks for an initial 50-year term with a 50-year renewal option (the Realogy License Agreement). Initially, the Realogy License Agreement was applicable to the U.S., Canada, Israel, Mexico and certain Caribbean countries.
Also in conjunction with the sale, Realogy received options to acquire most of the other non-U.S. offices of Sothebys real estate brokerage business and to expand the Realogy License Agreement to cover the related trademarks in other countries outside the U.S., excluding Australia and New
Zealand (the International Options). The International Options were exercised by Realogy and the Realogy License Agreement was amended to cover New Zealand during 2004.
The Realogy License Agreement provides for an ongoing license fee during its term based on the volume of commerce transacted under the licensed trademarks. In 2008, 2007 and 2006, Sothebys earned $2.8 million, $2.8 million and $2.6 million, respectively, in license fee revenue related to the
Realogy License Agreement.
Sothebys also licenses its name for use in connection with art education services in the U.S. and the U.K. Sothebys continues to consider additional opportunities to license the Sothebys brand in businesses where appropriate.
Strategic Initiatives
Increased Focus on Sothebys Most Valuable Relationships
Managements focus on the high-end of the art market has been an important contributor to Sothebys success. Accordingly, management is dedicating more of its time, energy and organization to broadening and extending the breadth and depth of relationships with major clients. These efforts are
part of a multi-year strategy to invest in those areas which Sothebys major clients value most.
Over the past several years, Sothebys has made substantial investments in information technology designed to improve client service. A new portfolio of enterprise systems anchored by SAP has been deployed across the organization, which has enhanced the quality of information and the processing
of sales and inventory tracking, as well as data management. In addition, Sothebys has launched a new web-based client portal, mySothebys, which provides clients with real-time access to their account data and balances, as well as information on current and historical transactions, auction tracking
services and enhanced media content. Client relationships are a key driver of Sothebys success, and its clients expect a consistently high level of service. Management believes these initiatives will have a meaningful impact on the future of the business.
Realign Operations to Enhance Profitability
In line with Sothebys strategy to focus on major clients, management has initiated significant changes to its business portfolio to enhance the long-term value of the franchise. This has resulted in the discontinuation of auctions at Olympia, Sothebys former secondary salesroom in London, which had
traditionally processed sales at a substantially lower price point than Sothebys other salesrooms. Similar efforts are well underway to reduce low-end sales categories in New York, Amsterdam and Milan, such as increasing Sothebys minimum lot thresholds to $5,000, 4,000 and £3,000, depending on the
location. As a result of these actions, management expects to continue to reduce the quantity of lots offered for sale at auction. Additionally, Sothebys has invested in new staff in order to strengthen client relationships and grow revenues. However, there could be an unfavorable impact on short-term
operating results as a result of these investments. (See Restructuring Plan and
6
Related Charges under Managements Discussion and Analysis of Financial Condition and Results of Operations and statement on Forward Looking Statements.)
Increase Exposure to Emerging Markets
Sothebys is making significant efforts to grow its presence in emerging markets such as Russia, China and the Middle East. Sothebys has opened offices in Beijing and Moscow and is establishing a greater presence in the Middle East and will be conducting its first ever sales in Qatar in 2009.
Capitalize on Brand Extension Opportunities
As discussed above, Sothebys has licensed the SIR trademark and certain related trademarks in connection with the sale of its real estate business to Realogy in 2004. Management intends to continue to further leverage the Sothebys brand in other luxury retail categories.
Financial and Geographical Information about Segments
See Note C of Notes to Consolidated Financial Statements for financial and geographical information about Sothebys segments.
Employees
As of December 31, 2008, Sothebys had 1,638 employees with 642 located in North America; 569 in the U.K.; 301 in Continental Europe; and 126 in Asia. Sothebys regards its relations with its employees as good. The table below provides a breakdown of Sothebys employees by segment as of
December 31, 2008 and 2007.
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
Auction . |
|
|
|
1,452 |
|
|
|
|
1,390 |
|
Finance |
|
|
|
10 |
|
|
|
|
9 |
|
Dealer |
|
|
|
9 |
|
|
|
|
8 |
|
All Other |
|
|
|
167 |
|
|
|
|
148 |
|
|
|
|
|
|
Total |
|
|
|
1,638 |
|
|
|
|
1,555 |
|
|
|
|
|
|
Employees classified within All Other principally relate to Sothebys central corporate and information technology departments.
(See Restructuring Plan and Related Charges under Managements Discussion and Analysis of Financial Condition and Results of Operations.)
Website Address
Sothebys makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K through a hyperlink from its website, www.sothebys.com, to http://investor.shareholder.com/bid/sec.cfm, a website maintained by an unaffiliated third-party
service. Such reports are made available on the same day that they are electronically filed with or furnished to the SEC.
ITEM 1A: RISK FACTORS
Sothebys operating results and liquidity are significantly influenced by a number of risk factors, many of which are not within its control. These factors, which are not ranked in any particular order, include:
The overall strength of the various worldwide economies and financial markets
The art market in which Sothebys operates is influenced over time by the overall strength of the various worldwide economies and financial markets, although this correlation may not be immediately evident in the short-term. Sothebys business can be particularly influenced by the
7
economies of the U.S., the U.K., and the major countries or territories of Continental Europe and Asia.
Interest rates
Fluctuations in interest rates influence the cost of funds for borrowings under Sothebys senior secured credit facility, which is used periodically to finance working capital needs and, in particular, the Finance segments client loan portfolio.
Government laws and regulations
Many of Sothebys activities are subject to laws and regulations including, but not limited to, import and export regulations, cultural property ownership laws, data protection and privacy laws, anti-money laundering laws, antitrust laws and value added sales taxes. In addition, Sothebys is subject to
local auction regulations, such as New York City Auction Regulations Subchapter M of Title 6 §§ 2-1212-125, et. seq. Such regulations do not impose a material impediment to the worldwide business of Sothebys, but do affect the market generally, and a material adverse change in such regulations could
affect the business. Additionally, export and import laws and cultural property ownership laws could affect the availability of certain kinds of property for sale at Sothebys principal auction locations or could increase the cost of moving property to such locations.
Political conditions and world events
Global political conditions and world events may affect Sothebys business through their effect on the economies of various countries, as well as on the decision of buyers and sellers to purchase and sell art in the wake of economic uncertainty. Global political conditions may also influence the
enactment of legislation that could adversely affect Sothebys business.
Foreign currency exchange rate movements
Sothebys has operations throughout the world, with approximately 68% of its revenues earned outside of the U.S. in 2008. Accordingly, fluctuations in exchange rates can have a significant impact on Sothebys results of operations.
Competition
Competition in the art market is intense, including competition both with other auctioneers and with art dealers.
The amount and quality of property being consigned to art auction houses
The amount and quality of property being consigned to art auction houses is influenced by a number of factors not within Sothebys control. Many major consignments, and specifically single-owner sale consignments, often become available as a result of the death or financial or marital difficulties of
the owner, all of which are unpredictable. This, plus the ability of Sothebys to sell such property, can cause auction and related revenues to be highly variable from period to period.
The demand for fine arts, decorative arts, and collectibles
The demand for fine arts, decorative arts, and collectibles is influenced not only by overall economic conditions, but also by changing trends in the art market as to which kinds of property and the works of which artists are most sought after and by the collecting preferences of individual collectors,
all of which can be unpredictable.
Qualified personnel
Sothebys business is largely a service business in which the ability of its employees to develop and maintain relationships with potential sellers and buyers of works of art is essential to its success.
8
Moreover, Sothebys business is both complex and unique, making it important to retain key specialists and members of management. Accordingly, Sothebys business is highly dependent upon its success in attracting and retaining qualified personnel.
Reliance on a small number of clients
Sothebys relies on a small number of important clients who make a significant contribution to its business and profitability. Accordingly, Sothebys business and profitability is highly dependent upon its ability to develop and maintain relationships with this small group of important clients.
Demand for art-related financing
Sothebys Finance segment is dependent on the demand for art-related financing, which can be significantly influenced by overall economic conditions and by the often unpredictable financial requirements of owners of major art collections.
Strategic Initiatives and Restructuring Plan
Management is undertaking certain strategic initiatives, as well as a Restructuring Plan. Sothebys future operating results are dependent in part on the success of management in implementing these plans. Implementation of Sothebys strategic plans and its Restructuring Plan could unfavorably impact
its short-term operating results. (See Restructuring Plan and Related Charges under Managements Discussion and Analysis of Financial Condition and Results of Operations and statement on Forward Looking Statements.)
Value of artworks
The art market is not a highly liquid trading market, as a result of which, the valuation of artworks is inherently subjective and the realizable value of artworks often fluctuates over time. Accordingly, Sothebys is at risk both as to the value of art held as inventory and as to the value of artworks
pledged as collateral for Finance segment loans.
Auction guarantees
As discussed above under Value of Artworks, the art market is not a highly liquid trading market and, as a result, the valuation of artworks is inherently subjective. Accordingly, Sothebys is at risk with respect to its ability to estimate the likely selling prices of works of art offered under auction
guarantees. Accordingly, if managements judgments about the likely selling prices of works of art which are subject to auction guarantees prove to be inaccurate, there could be an adverse impact on Sothebys results of operations, financial condition and liquidity.
U.K. Pension Plan
Future costs and obligations related to Sothebys defined benefit pension plan in the U.K. are heavily influenced by changes in interest rates, investment performance in the debt and equity markets and actuarial assumptions, each of which is unpredictable.
Income taxes
Sothebys operates in many tax jurisdictions throughout the world. Variations in taxable income in the various jurisdictions in which Sothebys does business can have a significant impact on its effective tax rate.
Similarly, Sothebys clients reside in various tax jurisdictions throughout the world. To the extent that there are changes to tax laws in any of these jurisdictions, such changes could adversely impact the ability and/or willingness of Sothebys clients to purchase or sell works of art.
9
Insurance Coverage
Sothebys maintains insurance coverage for the works of art it owns and for works of art consigned to it by its clients, which are stored at Sothebys facilities around the world. An inability to adequately insure such works of art due to limited capacity of the global art insurance market in the future
could have an adverse impact on Sothebys business.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2: PROPERTIES
Sothebys North American Auction, Dealer and Finance operations, as well as its corporate offices, are headquartered at 1334 York Avenue, New York, New York (the York Property). The York Property contains approximately 439,000 square feet of building area and is home to the Companys
sole North American auction salesroom and its principal North American exhibition space.
On February 7, 2003, Sothebys sold the York Property to an affiliate of RFR Holding Corp. (or RFR) and entered into an agreement to lease it back from RFR for an initial 20-year term, with options for Sothebys to extend the lease for two additional 10-year terms. On January 11, 2008,
Sothebys entered into a contract to reacquire the York Property from RFR for an aggregate purchase price of $370 million (the Purchase and Sale Agreement). Sothebys also agreed to give the principals of RFR certain terms for future sales of works of art at Sothebys auctions. The sale of the York
Property was originally scheduled to take place on July 1, 2009, subject to RFRs right under the Purchase and Sale Agreement to accelerate the closing to an earlier date. On November 21, 2008, RFR exercised its right to accelerate the closing, which occurred on February 6, 2009. Appraisals of the
York Property were performed in January 2009, which confirmed that the value of the York Property was approximately $390 million. (See York Property under Managements Discussion and Analysis of Financial Condition and Results of Operations.)
Sothebys also leases office and exhibition space in several other major cities throughout the U.S.
Sothebys
U.K. operations (primarily Auction) are principally centered at New Bond
Street, London, where the main salesrooms, exhibition space and administrative
offices of Sothebys U.K. are located. Sothebys has invested approximately
$15 million over the last three years on the refurbishment of the New Bond
Street premises to enhance existing exhibition and client entertainment facilities,
as well as to partially compensate for the loss of space under a lease related
to a small portion of the New Bond Street complex that expired in September
2008. Almost all of the New Bond Street complex is either owned or held under
various freehold and long-term lease arrangements. Below is a table outlining
the various ownership, freehold and lease arrangements related to Sothebys
London premises (net
book values are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Square Footage |
|
Net Book Value of Land |
|
Net Book Value of Building and Building Improvements |
|
Net Book Value of Leasehold Improvements |
|
Total Net Book Value of New Bond Street Premises |
Owned Property |
|
|
|
11,376 |
|
|
|
$ |
|
5,252 |
|
|
|
$ |
|
2,372 |
|
|
|
$ |
|
|
|
|
|
$ |
|
7,624 |
|
Freeholds* |
|
|
|
85,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,205 |
|
|
|
|
23,205 |
|
Leases with a remaining term of greater than 20 years** |
|
|
|
55,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,430 |
|
|
|
|
4,430 |
|
All
Other Leases*** |
|
|
|
149,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033 |
|
|
|
|
1,033 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
301,057 |
|
|
|
$ |
|
5,252 |
|
|
|
$ |
|
2,372 |
|
|
|
$ |
|
28,668 |
|
|
|
$ |
|
36,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
Freeholds are occupancy arrangements in which there is no rent paid, and the arrangement has no termination date. |
|
** |
|
|
|
These
leases do not have any escalation terms and provide for fixed monthly
payments through the lease termination date. Includes a lease for 25,320
square feet of space, which is due to expire in 2034 and a lease for
29,720 square feet of space, which is due to expire in 2060.
|
|
|
|
|
|
*** |
|
|
|
In
addition, Sothebys leases additional office and warehouse space
elsewhere in London. |
10
Sothebys also leases space primarily for Auction operations in various locations throughout Continental Europe, including salesrooms in Amsterdam, The Netherlands; Geneva and Zurich, Switzerland; Milan, Italy; and Paris, France; in Asia, in Hong Kong; and in Australia. Additionally, Sothebys
owns land and a building in Maastricht, The Netherlands, which houses Noortman Master Paintings, an art dealer acquired by the Company in June 2006.
In managements opinion, Sothebys worldwide premises are adequate for the current conduct of its business. However, management continually analyzes its worldwide premises for both its current and future business needs as part of its ongoing efforts to manage infrastructure and other overhead
costs. Where appropriate, management will continue to make any necessary changes to address Sothebys premises requirements. (See Restructuring Plan and Related Charges under Managements Discussion and Analysis of Financial Condition and Results of Operations.)
ITEM 3: LEGAL PROCEEDINGS
Sothebys is involved from time to time in claims, proceedings and litigation, including the matters described below.
Sothebys Inc. v. Halsey Minor is an action commenced by a subsidiary of Sothebys in September 2008 in the U.S. District Court for the Southern District of New York, seeking to collect approximately $18 million for three paintings that Mr. Minor purchased in auctions conducted by Sothebys in
the spring of 2008. Mr. Minor filed a counterclaim in that action alleging that Sothebys had failed to disclose that the consignor of one of those paintings had an outstanding loan from Sothebys and asserting that the sale should, therefore, be rescinded or the price of the painting reduced. In October
2008, Mr. Minor commenced a separate action in the U.S. District Court for the Northern District of California seeking recovery for alleged losses on behalf of a purported class of purchasers of properties that were subject to alleged undisclosed loans from Sothebys. The action also asserted breaches of
fiduciary duties arising from alleged art consulting advice provided to Mr. Minor by a Sothebys employee. Sothebys filed a motion in the New York action to enjoin the California action as duplicative of claims that have been or could be asserted in the New York action. In January 2009, the judge in
the New York action granted that motion. Sothebys also filed a motion in the California action seeking dismissal of that action on grounds similar to those asserted in its motion in the New York action. In January 2009, the judge in the California action granted that motion. Mr. Minors time to appeal
those decisions has expired. While it is not possible to predict the outcome of litigation, management believes that there are meritorious defenses to the claims asserted in the counterclaim to the New York action and in the California action and that they will not have a material adverse effect on
Sothebys consolidated results of operations, financial condition and/or cash flows. These actions are being vigorously defended.
Italian MatterIn October 2008, the Italian Antitrust Authority commenced an investigation of Italian auction houses and an Italian auction house trade association seeking evidence of practices that reduce competition, particularly in respect of the sale of modest value works of art. Sothebys
subsidiary, Sothebys Italia S.r.l., has been contacted by the Italian Antitrust Authority and is cooperating fully with the investigation. While it is not possible to predict the outcome of this investigation, management does not believe that it will have a material adverse effect on Sothebys consolidated
results of operations, financial condition and/or cash flows.
Sothebys becomes involved in other various claims and lawsuits incidental to the ordinary course of its business. Management does not believe that the outcome of any of these pending claims or proceedings will have a material adverse effect on Sothebys consolidated results of operations, financial
condition and/or cash flows.
(See statement on Forward Looking Statements.)
ITEM 4: SUBMISSION TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Sothebys shareholders during the fourth quarter of 2008.
11
PART II
|
|
|
ITEM 5: |
|
MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS |
Market Information
The principal U.S. market for Sothebys common stock is the NYSE (symbol: BID). The number of holders of record of Sothebys common stock as of February 18, 2009 was 1,639. The quarterly price ranges on the NYSE of Sothebys common stock for 2008 and 2007 were as follows:
|
|
|
|
|
Quarter Ended |
|
2008 |
|
High |
|
Low |
March 31 |
|
|
$ |
|
39.67 |
|
|
|
$ |
|
25.30 |
|
June 30 |
|
|
$ |
|
30.18 |
|
|
|
$ |
|
23.75 |
|
September 30 |
|
|
$ |
|
28.98 |
|
|
|
$ |
|
18.63 |
|
December 31 |
|
|
$ |
|
20.18 |
|
|
|
$ |
|
7.24 |
|
|
|
|
|
|
Quarter Ended |
|
2007 |
|
High |
|
Low |
March 31 |
|
|
$ |
|
44.92 |
|
|
|
$ |
|
30.22 |
|
June 30 |
|
|
$ |
|
53.25 |
|
|
|
$ |
|
43.93 |
|
September 30 |
|
|
$ |
|
53.99 |
|
|
|
$ |
|
35.52 |
|
December 31 |
|
|
$ |
|
61.40 |
|
|
|
$ |
|
30.80 |
|
Sothebys senior secured credit agreement contains a financial covenant limiting dividend payments. Dividend payments made after June 30, 2007 are limited to 50% of Sothebys net income arising after July 1, 2007 computed on a cumulative basis. (See Liquidity and Capital Resources under
Managements Discussion and Analysis of Financial Condition and Results of Operations for more information on Sothebys senior secured credit agreement.)
The following table summarizes dividends declared and paid per share of common stock for the periods indicated (in thousands, except per share amounts):
|
|
|
|
|
Quarter Ended |
|
2008 |
|
Per Share |
|
Amount |
March 31 |
|
|
$ |
|
0.15 |
|
|
|
$ |
|
10,167 |
|
June 30 |
|
|
$ |
|
0.15 |
|
|
|
$ |
|
10,165 |
|
September 30 |
|
|
$ |
|
0.15 |
|
|
|
$ |
|
10,145 |
|
December 31 |
|
|
$ |
|
0.15 |
|
|
|
$ |
|
10,174 |
|
|
|
|
|
|
Quarter Ended |
|
2007 |
|
Per Share |
|
Amount |
|
|
|
|
|
March 31 |
|
|
$ |
|
0.10 |
|
|
|
$ |
|
6,631 |
|
June 30 |
|
|
$ |
|
0.10 |
|
|
|
$ |
|
6,655 |
|
September 30 |
|
|
$ |
|
0.15 |
|
|
|
$ |
|
9,997 |
|
December 31 |
|
|
$ |
|
0.15 |
|
|
|
$ |
|
10,043 |
|
On
February 26, 2009, Sothebys Board of Directors declared a quarterly
dividend of $0.15 per share (approximately $10.2 million), to be paid on
March 16, 2009 to shareholders of record as of March 9, 2009.
Sothebys ability to pay quarterly dividends is assessed by management on a regular basis in reference to prevailing economic, financial, market and other conditions.
12
Equity Compensation Plans
The following table provides information as of December 31, 2008 with respect to shares of Sothebys common stock that may be issued under its existing equity compensation plans, including the Sothebys 1997 Stock Option Plan (the Stock Option Plan), the Sothebys Restricted Stock Unit Plan
(the Restricted Stock Unit Plan) and the Sothebys Amended and Restated Stock Compensation Plan for Non-Employee Directors (the Directors Stock Plan):
|
|
|
|
|
|
|
|
|
(A) |
|
(B) |
|
(C) |
Plan Category (1) |
|
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (2) |
|
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (3) |
|
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (4) |
|
|
(In thousands, except per share data) |
Equity compensation plans approved by shareholders |
|
|
|
3,472 |
|
|
|
$ |
|
16.74 |
|
|
|
|
3,243 |
|
Equity compensation plans not approved by shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
3,472 |
|
|
|
$ |
|
16.74 |
|
|
|
|
3,243 |
|
|
|
|
|
|
|
|
|
(1) |
|
|
|
See Note M of Notes to Consolidated Financial Statements for a description of the material features of Sothebys equity compensation plans. |
|
(2) |
|
|
|
Includes 2,537,303 shares of common stock awarded under the Restricted Stock Unit Plan on which the restrictions have not yet lapsed. |
|
(3) |
|
|
|
The weighted-average exercise price does not take into account 2,537,303 shares of common stock awarded under the Restricted Stock Unit Plan, which have no exercise price. |
|
(4) |
|
|
|
Includes 2,658,451 shares of common stock available for future issuance under the Restricted Stock Unit Plan, 525,000 shares available for issuance under the 1997 Stock Option Plan and 59,000 shares available for issuance under the Directors Stock Plan.
|
Performance Graph
The following graph compares Sothebys cumulative total shareholder return on its common stock for the five-year period from December 31, 2003 to December 31, 2008 with the cumulative return of the Standard & Poors MidCap 400 Stock Index (S&P MidCap 400) and Sothebys Peer Group (the
Peer Group). The Peer Group consists of Nordstrom, Inc., Saks Holdings, Inc., Tiffany & Co. and Movado, Inc. Management believes the members of this Peer Group to be purveyors of luxury goods appealing to a segment of the population consistent with Sothebys own clientele as no other auction
house of comparable market share or capitalization is publicly traded.
The graph reflects an investment of $100 in Sothebys common stock, the S&P MidCap 400, which includes Sothebys, and Sothebys Peer Group, respectively, on December 31, 2003, and a reinvestment of dividends at the average of the closing stock prices at the beginning and end of each quarter.
13
Comparison of Five-Year Cumulative Total Return Among
Sothebys, the Peer Group Index and the S&P MidCap 400
as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/03 |
|
12/31/04 |
|
12/31/05 |
|
12/31/06 |
|
12/31/07 |
|
12/31/08 |
Sothebys |
|
|
$ |
|
100.00 |
|
|
|
$ |
|
132.94 |
|
|
|
$ |
|
134.41 |
|
|
|
$ |
|
228.58 |
|
|
|
$ |
|
284.01 |
|
|
|
$ |
|
68.06 |
|
Peer Group |
|
|
$ |
|
100.00 |
|
|
|
$ |
|
109.80 |
|
|
|
$ |
|
113.83 |
|
|
|
$ |
|
153.50 |
|
|
|
$ |
|
148.65 |
|
|
|
$ |
|
51.92 |
|
S&P MidCap 400 |
|
|
$ |
|
100.00 |
|
|
|
$ |
|
116.24 |
|
|
|
$ |
|
130.62 |
|
|
|
$ |
|
144.10 |
|
|
|
$ |
|
155.59 |
|
|
|
$ |
|
99.13 |
|
14
ITEM 6: SELECTED FINANCIAL DATA
The following table provides selected financial data for Sothebys (in thousands of dollars, except per share data).
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
Net Auction Sales (1) |
|
|
$ |
|
4,189,735 |
|
|
|
$ |
|
4,625,914 |
|
|
|
$ |
|
3,234,526 |
|
|
|
$ |
|
2,361,830 |
|
|
|
$ |
|
2,334,937 |
|
Income statement data: |
|
|
|
|
|
|
|
|
|
|
Auction and related revenues |
|
|
$ |
|
616,625 |
|
|
|
$ |
|
833,128 |
|
|
|
$ |
|
631,344 |
|
|
|
$ |
|
496,899 |
|
|
|
$ |
|
439,526 |
|
Finance revenues |
|
|
|
14,183 |
|
|
|
|
17,025 |
|
|
|
|
15,864 |
|
|
|
|
8,302 |
|
|
|
|
5,907 |
|
Dealer revenues |
|
|
|
55,596 |
|
|
|
|
62,766 |
|
|
|
|
12,776 |
|
|
|
|
5,131 |
|
|
|
|
3,604 |
|
License fee revenues |
|
|
|
3,438 |
|
|
|
|
2,960 |
|
|
|
|
2,922 |
|
|
|
|
1,404 |
|
|
|
|
45,745 |
|
Other revenues |
|
|
|
1,717 |
|
|
|
|
1,843 |
|
|
|
|
1,903 |
|
|
|
|
2,117 |
|
|
|
|
2,274 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
$ |
|
691,559 |
|
|
|
$ |
|
917,722 |
|
|
|
$ |
|
664,809 |
|
|
|
$ |
|
513,853 |
|
|
|
$ |
|
497,056 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
$ |
|
(28,349 |
) |
|
|
|
$ |
|
(14,166 |
) |
|
|
|
$ |
|
(27,148 |
) |
|
|
|
$ |
|
(27,738 |
) |
|
|
|
$ |
|
(30,267 |
) |
|
Income from continuing operations |
|
|
$ |
|
28,269 |
|
|
|
$ |
|
213,139 |
|
|
|
$ |
|
107,359 |
|
|
|
$ |
|
63,217 |
|
|
|
$ |
|
62,397 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
$ |
|
28,269 |
|
|
|
$ |
|
213,139 |
|
|
|
$ |
|
107,049 |
|
|
|
$ |
|
61,602 |
|
|
|
$ |
|
86,679 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations |
|
|
$ |
|
0.44 |
|
|
|
$ |
|
3.34 |
|
|
|
$ |
|
1.78 |
|
|
|
$ |
|
1.04 |
|
|
|
$ |
|
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
$ |
|
0.44 |
|
|
|
$ |
|
3.34 |
|
|
|
$ |
|
1.77 |
|
|
|
$ |
|
1.01 |
|
|
|
$ |
|
1.40 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations |
|
|
$ |
|
0.43 |
|
|
|
$ |
|
3.25 |
|
|
|
$ |
|
1.73 |
|
|
|
$ |
|
1.02 |
|
|
|
$ |
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
$ |
|
0.43 |
|
|
|
$ |
|
3.25 |
|
|
|
$ |
|
1.72 |
|
|
|
$ |
|
1.00 |
|
|
|
$ |
|
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share |
|
|
$ |
|
0.60 |
|
|
|
$ |
|
0.50 |
|
|
|
$ |
|
0.20 |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
Working capital |
|
|
$ |
|
663,117 |
|
|
|
$ |
|
490,740 |
|
|
|
$ |
|
258,636 |
|
|
|
$ |
|
141,711 |
|
|
|
$ |
|
212,318 |
|
Total assets |
|
|
$ |
|
1,679,331 |
|
|
|
$ |
|
2,020,104 |
|
|
|
$ |
|
1,477,165 |
|
|
|
$ |
|
1,060,752 |
|
|
|
$ |
|
1,224,812 |
|
Credit facility borrowings |
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
34,542 |
|
|
|
$ |
|
|
|
Long-term debt (net) |
|
|
$ |
|
329,267 |
|
|
|
$ |
|
99,888 |
|
|
|
$ |
|
99,791 |
|
|
|
$ |
|
99,701 |
|
|
|
$ |
|
99,617 |
|
York Property capital lease obligation |
|
|
$ |
|
167,190 |
|
|
|
$ |
|
168,986 |
|
|
|
$ |
|
170,605 |
|
|
|
$ |
|
172,044 |
|
|
|
$ |
|
172,169 |
|
Shareholders equity |
|
|
$ |
|
553,662 |
|
|
|
$ |
|
604,017 |
|
|
|
$ |
|
301,687 |
|
|
|
$ |
|
126,276 |
(2) |
|
|
|
$ |
|
235,385 |
|
|
(1) |
|
|
|
Represents the hammer (sale) price of property sold at auction. |
|
(2) |
|
|
|
The significant decrease in shareholders equity between 2004 and 2005 is principally due to the impact of a recapitalization transaction.
|
15
ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Seasonality
The worldwide art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. Accordingly, Sothebys auction business is seasonal, with peak revenues and operating income generally occurring in those quarters. Consequently, first and third
quarter results have historically reflected lower Net Auction Sales when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of Sothebys operating expenses. (See Note U of Notes to Consolidated Financial Statements for information on Sothebys
quarterly results for the years ended December 31, 2008 and 2007.)
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with GAAP (as defined below under Use of Non-GAAP Financial Measures) requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements
and accompanying notes. Actual results may ultimately differ from managements original estimates as future events and circumstances sometimes do not develop as expected. Note B of Notes to Consolidated Financial Statements describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. In addition, management believes that the following are the most critical accounting estimates, which are not ranked in any particular order, which may affect Sothebys financial condition and/or results of operations.
|
(1) |
|
|
|
Value of artworksThe art market is not a highly liquid trading market. As a result, the valuation of artworks is inherently subjective and the realizable value of artworks often varies over time. Accordingly, Sothebys is at risk as to the value of art held as inventory by its Auction and Dealer
segments, the value of its investment in AMA, and the value of artworks pledged as collateral for Finance segment loans. Additionally, Sothebys is at risk with respect to its ability to estimate the likely selling prices of works of art offered under auction guarantees. |
|
|
|
|
|
If management determines that the estimated realizable value of specific artworks held in inventory is less than the carrying value, Sothebys records a loss in the Auction or Dealer segment, as appropriate, to reduce the carrying value of the specific artwork to the lower of its cost or managements
estimate of realizable value. |
|
|
|
|
|
As of December 31, 2008 and 2007, Sothebys Consolidated Balance Sheets included inventory with a carrying value of $186.6 million (approximately 11% of total assets) and $206 million (approximately 10% of total assets), respectively. In determining the estimated realizable value of artworks,
management relies upon the opinions of Sothebys specialists, who consider the following complex array of factors when valuing artworks:
|
|
|
|
|
|
Whether the work is expected to be offered at auction or sold privately. |
|
|
|
|
|
The current and expected future demand for works of art, taking into account changing trends in the art market as to which collecting categories and artists are most sought after. |
|
|
|
|
|
Recent sale prices achieved in the art market for comparable works within a particular collecting category and/or by a particular artist.
|
|
|
|
|
|
To the extent that Sothebys is looking wholly or partially to the artworks pledged as collateral for the repayment of Finance segment loans, repayment can be adversely impacted by a decline in the estimated realizable value of the collateral. Management reevaluates the value of the collateral for
specific loans when it becomes aware of a situation where the estimated realizable value of the collateral may be less than the loan balance. In the event that the estimated realizable value of the artworks pledged as collateral declines and becomes less than the corresponding loan balance, Sothebys
would be required to assess whether it is necessary to record a loss in the Finance segment to reduce the carrying value of a specific loan, after taking |
16
|
|
|
|
into account the ability of the borrower to repay Sothebys for any shortfall in the value of the collateral when compared to the amount of the loan. |
|
|
|
|
|
Due to the inherent subjectivity involved in estimating the value of artworks, managements judgments about the estimated realizable value of art held by its Auction and Dealer segments, the fair value of its auction guarantee liability, the value of its investment in AMA and the value of artworks
pledged as collateral for Finance segment loans may prove, with the benefit of hindsight, to be inaccurate. |
|
|
|
|
|
(See Notes B, D, E and P of Notes to Consolidated Financial Statements.) |
|
(2) |
|
|
|
Pension ObligationsThe pension obligations related to Sothebys U.K. defined benefit pension plan (the U.K. Pension Plan) are developed from an actuarial valuation. Inherent in this valuation are key assumptions and estimates, including the discount rate, expected long-term return on plan assets,
future compensation increases, mortality assumptions and other factors, which are updated on at least an annual basis. In determining these assumptions and estimates, management considers current market conditions, market indices and other relevant data. |
|
|
|
|
|
The discount rate assumption represents the approximate weighted average rate at which Sothebys pension obligations could be effectively settled and is based on a hypothetical portfolio of high-quality corporate bonds with maturity dates approximating the length of time remaining until individual
benefit payment dates. The discount rate used to calculate the $4 million net pension benefit related to the U.K. Pension Plan in 2008 was 6.3%. A hypothetical increase or decrease of 0.1% in this assumption (i.e., from 6.3% to 6.4% or from 6.3% to 6.2%) would result in a decrease or increase in
net annual pension cost of approximately $0.1 million. As of the date of the most recent plan actuarial valuation (December 31, 2008), the discount rate used to calculate the $192.2 million benefit obligation related to the U.K. Pension Plan was 6.0%. A hypothetical increase or decrease of 0.1% in
this assumption (i.e., from 6.0% to 6.1% or from 6.0% to 5.9%) would result in a decrease or increase in the benefit obligation of approximately $3.7 million. |
|
|
|
|
|
The assumption for the expected long-term return on plan assets is based on expected future appreciation, as well as dividend and interest yields available in equity and bond markets as of the measurement date and weighted according to the composition of invested plan assets. The expected long-
term return on plan assets used to calculate the $4 million net pension benefit related to the U.K. Pension Plan in 2008 was 8.3%. A hypothetical increase or decrease of 0.25% in this assumption (i.e., from 8.3% to 8.55% or from 8.3% to 8.05%) would result in a decrease or increase in net annual
pension cost of approximately $0.6 million. |
|
|
|
|
|
The assumption for future average annual compensation increases is established after considering historical salary data for the Companys U.K. employees and current economic data for inflation, as well as managements expectations for future salary growth. The assumption for future average annual
compensation increases used to calculate the $4 million net annual pension benefit related to the U.K. Pension Plan in 2008 was 5.3%. A hypothetical increase or decrease of 0.25% in this assumption (i.e., from 5.3% to 5.55% or from 5.3% to 5.05%) would result in an increase or decrease in net
annual pension cost of approximately $0.2 million. As of the date of the most recent plan actuarial valuation (December 31, 2008), the assumption for future annual compensation increases used to calculate the $192.2 million benefit obligation related to the U.K. Pension Plan was 4.8%. A
hypothetical increase or decrease of 0.25% in this assumption (i.e., from 4.8% to 5.05% or from 4.8% to 4.55%) would result in an increase or decrease in the benefit obligation of approximately $1.2 million. |
|
|
|
|
|
The mortality assumptions used in the actuarial valuation represent the approximate life expectancies for plan members based upon standardized data tables used by actuaries in the U.K. that include allowances for longer future life expectancies. A hypothetical 5% increase or decrease in life
expectancies would result in an increase or decrease in net pension cost of approximately $0.1 million. Additionally, a hypothetical 5% increase or decrease in life expectancies would result in an increase or decrease in the benefit obligation of approximately $1.6 million.
|
17
|
|
|
|
|
As of the December 31, 2008 and September 30, 2007 actuarial valuations for the U.K. Pension Plan, pre-tax net actuarial losses totaled $18.3 million ($13.2 million, after tax) and $14.2 million ($10.2 million, after tax), respectively. These losses accumulated over several years as a result of differences
in actual experience compared to projected experience. Between September 30, 2007 and December 31, 2008, significant asset losses due to a decline in global equity markets were largely offset by reductions in plan liabilities. These reductions resulted from an increase in the bond yields used to
determine the discount rate and a reduction in the allowance for future discretionary pension increases to retirees. The net actuarial losses, which are reflected in the Consolidated Balance Sheets on an after-tax basis within accumulated other comprehensive income (loss), are being systematically
recognized as an increase in future net annual pension cost in accordance with Statement of Financial Accounting Standards (SFAS) SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R). Such pre-tax losses in excess of 10% of the greater of the market-related value of plan assets or the plans projected benefit obligation are recognized over a period of approximately 14.4 years, which represents the average remaining service period of active employees expected to receive
benefits under the plan. |
|
|
|
|
|
(See Note N of Notes to Consolidated Financial Statements for additional information related to the U.K. Pension Plan, as well as Sothebys other material pension arrangements. Additionally, see Employee Benefit Costs under Managements Discussion and Analysis of Financial Condition and
Results of Operations for the years ended December 31, 2008 and 2007.) |
|
(3) |
|
|
|
Income TaxesThe provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which Sothebys operates. Future changes in applicable laws, projected levels of taxable income, and tax planning could change
the effective tax rate and the tax balances recorded by Sothebys. |
|
|
|
|
|
At December 31, 2008, Sothebys had net deferred tax assets of $93.4 million primarily resulting from deductible temporary differences, which will reduce taxable income in future periods over a number of years. Included in this net deferred tax asset is a valuation allowance of $1.3 million to reduce
Sothebys deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for the valuation allowance management considers, among other things, its projections of future taxable income and ongoing prudent and feasible tax planning strategies. If Sothebys
projections of future taxable income and other positive evidence considered in evaluating the need for a valuation allowance prove, with the benefit of hindsight, to be inaccurate, it will be more difficult to support the realization of these deferred tax assets. As a result, an additional valuation
allowance may be required, which would have an adverse impact on Sothebys results. Conversely, should management determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would have a favorable
impact on Sothebys results in the period such determination was made. |
|
|
|
|
|
Additionally, liabilities are recorded to address potential exposures involving uncertain tax positions that Sothebys has taken or expects to take on income tax returns that could be challenged by taxing authorities. These potential exposures result from the varying applications of statutes, rules,
regulations and interpretations. Inherent in Sothebys liabilities for uncertain tax positions are assumptions based on past experiences and judgments about potential actions by taxing jurisdictions. The cost of the ultimate resolution of these matters may be greater or less than the liability that Sothebys
has recorded in its Consolidated Balance Sheets. |
|
|
|
|
|
(See discussion of Income Tax Expense under Managements Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2008 and 2007, as well as Notes J and K of Notes to Consolidated Financial Statements.) |
|
(4) |
|
|
|
Goodwill and Intangible AssetsGoodwill is not amortized, but is tested annually for impairment at the reporting unit level as of October 31 and between annual tests if indicators of impairment exist. These indicators could include a significant change in the outlook for the business, legal factors, lower
than expected operating results, increased competition, or the sale |
18
|
|
|
|
or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, the assignment of assets and liabilities to reporting units, the assignment of goodwill to reporting units, and the determination of the
fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This methodology requires significant judgments including the estimation by management of future cash flows, which is dependent on internal forecasts. Changes in the
estimates and assumptions used by management could materially affect the determination of fair value and/or impairment. |
|
|
|
|
|
Intangible assets are amortized over their estimated useful lives unless such lives are deemed indefinite. If indicators of potential impairment exist, intangible assets with defined useful lives are tested for impairment based on managements estimates of undiscounted cash flows and, if impaired, written
down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment as of October 31 and written down to fair value as required. Changes in the estimates and assumptions used by management could materially affect
the determination of fair value and/or impairment. |
|
|
|
|
|
(See Impairment Loss and Insurance Recovery under Managements Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2008 and 2007 and Notes G and H of Notes to Consolidated Financial Statements.)
|
Use of Non-GAAP Financial Measures
GAAP refers to generally accepted accounting principles in the United States of America. Included in Managements Discussion and Analysis of Financial Condition and Results of Operations (or MD&A) are financial measures presented in accordance with GAAP and also on a non-GAAP basis.
EBITDA, as presented in MD&A under Key Performance Indicators, is a supplemental measure of Sothebys performance that is not required by, or presented in accordance with, GAAP. EBITDA is not a measure of Sothebys financial performance under GAAP and should not be considered as
an alternative to net income or any other performance measure derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of Sothebys liquidity.
Sothebys defines EBITDA as net income, excluding income tax expense (benefit), net interest expense and depreciation and amortization expense. Sothebys cautions users of its financial statements that amounts presented in accordance with its definition of EBITDA may not be comparable to
similar measures disclosed by other companies, because not all companies and analysts calculate EBITDA in the same manner. Management believes that EBITDA provides an important supplemental measure of Sothebys performance and believes that it is a measure frequently used by securities
analysts, investors and other interested parties in the evaluation of Sothebys. Management also utilizes EBITDA in analyzing Sothebys performance. A reconciliation of EBITDA to net income in accordance with GAAP is presented in the Overview sections below discussing Sothebys results of
operations for the years ended December 31, 2008, 2007 and 2006.
19
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Note C (Segment Reporting) of Notes to Consolidated Financial Statements should be read in conjunction with this discussion.
Overview
For the year ended December 31, 2008, net income decreased $184.9 million, or 87%, when compared to the prior year. The decrease in net income is primarily the result of lower Net Auction Sales, significant auction guarantee losses and inventory writedowns, all attributable to a downturn in the
international art market that began in September 2008, which resulted from a weakening global economy, as well as turbulence in the global financial and credit markets. Also contributing to Sothebys decreased profitability in 2008 is a lower level of private sale commissions, higher net interest expense
and a higher effective tax rate, partially offset by lower salaries and related costs.
A more detailed discussion of each of the significant factors impacting Sothebys results for the year ended December 31, 2008 and the comparison to the prior year is provided below.
Outlook
The international art market is currently in a decline from the peak levels experienced in recent years. In particular, the market for Impressionist and Contemporary Art, which had experienced substantial growth from 2004 to 2007, has been significantly impacted by this downturn and is not expected
to approach recent peaks in the near term. However, management is taking measures to improve the profitability of Sothebys auction sales in 2009, including significantly reducing the use of auction guarantees and special concessions to consignors. Sothebys also continues to develop its presence in
emerging markets such as Turkey and Qatar, and will be conducting its first ever sales in Qatar in 2009.
Due to the downturn in the international art market that began in September 2008, as well as the current uncertain and challenging economic environment, in the fourth quarter of 2008 management began a strategic review of its operations with the goal of materially recalibrating Sothebys cost base
through a restructuring plan impacting its operations globally (the Restructuring Plan).
On
December 1, 2008, the Executive Committee of Sothebys Board of Directors
(the Executive Committee) approved the first phase of the Restructuring
Plan that is resulting in headcount reductions impacting Sothebys
Auction segment in North America, as well as certain corporate departments.
This decision resulted in employee-related restructuring charges for severance
and related benefits of $4.3 million in the fourth quarter of 2008.
On February 26, 2009, Sothebys Board of Directors approved the second phase of the Restructuring Plan impacting Sothebys Auction segment in the U.K. and Continental Europe. This phase of the Restructuring Plan will result in headcount reductions and, subject to the completion of the required
legal processes, a reduction in Sothebys selling activities in Amsterdam and the vacating of certain premises in connection with a reorganization of Sothebys European sourcing network. This decision will result in employee-related restructuring charges of approximately $6 million in the first quarter of
2009, as well as approximately $3 million of lease exit and facilities-related costs that will be recognized in 2009.
Following the full implementation of the Restructuring Plan in the first quarter of 2010, management expects to achieve annual cost savings of approximately $17 million in salaries and related costs, resulting from a 15% reduction in global headcount, and approximately $4 million in savings for
facilities-related costs. Of these expected annual cost savings, approximately $15 million is expected to be realized in 2009, with approximately $13 million related to salaries and related costs and $2 million related to facilities-related costs. The overall cost savings expected to be achieved as a result of the
Restructuring Plan is expected to be partially offset by a decrease in gross profit (i.e., auction commission revenues less direct costs of sales) of approximately $4 million as a result of the reduction in Sothebys selling activities in Amsterdam.
20
In
addition to the Restructuring Plan noted above, management is implementing
a number of other cost savings initiatives impacting all areas of expense.
As a result of these cost savings initiatives, management has targeted savings
of approximately $100 million in 2009 versus 2008, to be achieved in direct
costs of services, marketing expenses, salaries and related costs and general
and administrative expenses. A portion of the expected savings is the result
of favorable changes in foreign exchange rates versus 2008 and a lower expected
volume of Net Sales. This $100 million savings target includes the expected
2009 savings noted above as a result of the Restructuring Plan. (See statement
on Forward Looking Statements.)
Results of Operations For the Years Ended December 31, 2008 and 2007
Sothebys results from continuing operations for the years ended December 31, 2008 and 2007 are summarized below (in thousands of dollars):
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
Favorable/(Unfavorable) |
|
$ Change |
|
% Change |
Revenues: |
|
|
|
|
|
|
|
|
Auction and related revenues |
|
|
$ |
|
616,625 |
|
|
|
$ |
|
833,128 |
|
|
|
$ |
|
(216,503 |
) |
|
|
|
|
(26.0 |
%) |
|
Finance revenues |
|
|
|
14,183 |
|
|
|
|
17,025 |
|
|
|
|
(2,842 |
) |
|
|
|
|
(16.7 |
%) |
|
Dealer revenues |
|
|
|
55,596 |
|
|
|
|
62,766 |
|
|
|
|
(7,170 |
) |
|
|
|
|
(11.4 |
%) |
|
License fee revenues |
|
|
|
3,438 |
|
|
|
|
2,960 |
|
|
|
|
478 |
|
|
|
|
(16.1 |
%) |
|
Other revenues |
|
|
|
1,717 |
|
|
|
|
1,843 |
|
|
|
|
(126 |
) |
|
|
|
|
(6.8 |
%) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
691,559 |
|
|
|
|
917,722 |
|
|
|
|
(226,163 |
) |
|
|
|
|
(24.6 |
%) |
|
Expenses ** |
|
|
|
617,141 |
|
|
|
|
641,940 |
|
|
|
|
24,799 |
|
|
|
|
(3.9 |
%) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
74,418 |
|
|
|
|
275,782 |
|
|
|
|
(201,364 |
) |
|
|
|
|
(73.0 |
%) |
|
Net interest expense |
|
|
|
(28,349 |
) |
|
|
|
|
(14,166 |
) |
|
|
|
|
(14,183 |
) |
|
|
|
|
* |
|
ÏExtinguishment of debt (net) |
|
|
|
5,364 |
|
|
|
|
|
|
|
|
|
5,364 |
|
|
|
|
* |
|
Insurance recovery |
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
(20,000 |
) |
|
|
|
|
(100.0 |
%) |
|
Other (expense) income |
|
|
|
(2,956 |
) |
|
|
|
|
1,403 |
|
|
|
|
(4,359 |
) |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes |
|
|
|
48,477 |
|
|
|
|
283,019 |
|
|
|
|
(234,542 |
) |
|
|
|
|
(82.9 |
%) |
|
Income tax expense |
|
|
|
22,347 |
|
|
|
|
72,512 |
|
|
|
|
50,165 |
|
|
|
|
(69.2 |
%) |
|
Equity in earnings of investees, net of taxes |
|
|
|
2,139 |
|
|
|
|
2,632 |
|
|
|
|
(493 |
) |
|
|
|
|
(18.7 |
%) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
$ |
|
28,269 |
|
|
|
$ |
|
213,139 |
|
|
|
$ |
|
(184,870 |
) |
|
|
|
|
(86.7 |
%) |
|
|
|
|
|
|
|
|
|
|
Key performance indicators: |
|
|
|
|
|
|
|
|
Aggregate Auction Sales (a) |
|
|
$ |
|
4,905,504 |
|
|
|
$ |
|
5,391,628 |
|
|
|
$ |
|
(486,124 |
) |
|
|
|
|
(9.0 |
%) |
|
Net Auction Sales (b) |
|
|
$ |
|
4,189,735 |
|
|
|
$ |
|
4,625,914 |
|
|
|
$ |
|
(436,179 |
) |
|
|
|
|
(9.4 |
%) |
|
Private Sales (c) |
|
|
$ |
|
373,721 |
|
|
|
$ |
|
729,988 |
|
|
|
$ |
|
(356,267 |
) |
|
|
|
|
(48.8 |
%) |
|
Consolidated Sales (d) |
|
|
$ |
|
5,334,821 |
|
|
|
$ |
|
6,184,382 |
|
|
|
$ |
|
(849,561 |
) |
|
|
|
|
(13.7 |
%) |
|
Auction commission margin (e) |
|
15.1% |
|
16.5% |
|
|
|
N/A |
|
|
|
|
(8.5 |
%) |
|
Average loan portfolio (f) |
|
|
$ |
|
185,545 |
|
|
|
$ |
|
171,286 |
|
|
|
$ |
|
14,259 |
|
|
|
|
(8.3 |
%) |
|
EBITDA (g) |
|
|
$ |
|
105,560 |
|
|
|
$ |
|
323,606 |
|
|
|
$ |
|
(218,046 |
) |
|
|
|
|
(67.4 |
%) |
|
Legend:
|
* |
|
|
|
Represents a change in excess of 100%. |
|
** |
|
|
|
Expenses for 2008 include a benefit of $18.4 million recognized as a result of the reversal of the remaining liability for discount certificates that were issued by Sothebys in 2003 in conjunction with the settlement of antitrust related civil litigation, an impairment loss of $13.2 million related to
goodwill and intangible assets and $4.3 million in restructuring charges. Expenses for 2007 include an impairment loss of $15 million related to goodwill and intangible assets and a $4.8 million gain on the sale on land and buildings. |
|
(a) |
|
|
|
Represents the hammer (sale) price of property sold at auction plus buyers premium. |
|
(b) |
|
|
|
Represents the hammer (sale) price of property sold at auction. |
|
(c) |
|
|
|
Represents the total purchase price of property sold in private sales brokered by Sothebys. |
|
(d) |
|
|
|
Represents the sum of Aggregate Auction Sales, Private Sales and Dealer revenues.
|
21
|
(e) |
|
|
|
Represents total auction commission revenues as a percentage of Net Auction Sales. |
|
(f) |
|
|
|
Represents the average loan portfolio of Sothebys Finance segment. |
|
(g) |
|
|
|
See Use of Non-GAAP Financial Measures above and related reconciliation below.
|
Reconciliation of Non-GAAP Financial Measures
The following is a reconciliation of net income to EBITDA for the years ended December 31, 2008 and 2007 (in thousands of dollars):
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
Net income |
|
|
$ |
|
28,269 |
|
|
|
$ |
|
213,139 |
|
Income tax expense related to continuing operations |
|
|
|
22,347 |
|
|
|
|
72,512 |
|
Income tax expense related to earnings from equity investees |
|
|
|
1,750 |
|
|
|
|
1,688 |
|
Net interest expense |
|
|
|
28,349 |
|
|
|
|
14,166 |
|
Depreciation and amortization expense |
|
|
|
24,845 |
|
|
|
|
22,101 |
|
|
|
|
|
|
EBITDA |
|
|
$ |
|
105,560 |
|
|
|
$ |
|
323,606 |
|
|
|
|
|
|
Impact of Foreign Currency Translations
For the year ended December 31, 2008, foreign currency translations had a net unfavorable impact of approximately $6.6 million on Sothebys income from continuing operations before taxes. The components of this unfavorable impact are as follows (in thousands of dollars):
|
|
|
Year Ended December 31, 2008 |
|
Favorable/ (Unfavorable) |
Total revenues |
|
|
$ |
|
(12,599 |
) |
|
Total expenses |
|
|
|
6,367 |
|
|
|
|
Operating income |
|
|
|
(6,232 |
) |
|
Net interest expense and other |
|
|
|
(287 |
) |
|
|
|
|
Impact of foreign currency translations on income from continuing operations before taxes |
|
|
$ |
|
(6,519 |
) |
|
|
|
|
Revenues
For the years ended December 31, 2008 and 2007, revenues consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
Favorable/(Unfavorable) |
|
$ Change |
|
% Change |
Auction and related revenues: |
|
|
|
|
|
|
|
|
Auction commission revenues |
|
|
$ |
|
632,772 |
|
|
|
$ |
|
761,181 |
|
|
|
$ |
|
(128,409 |
) |
|
|
|
|
(16.9 |
%) |
|
Auction expense recoveries |
|
|
|
15,245 |
|
|
|
|
18,269 |
|
|
|
|
(3,024 |
) |
|
|
|
|
(16.6 |
%) |
|
Private sale commissions |
|
|
|
33,799 |
|
|
|
|
54,821 |
|
|
|
|
(21,022 |
) |
|
|
|
|
(38.3 |
%) |
|
Principal activities |
|
|
|
(82,743 |
) |
|
|
|
|
(22,409 |
) |
|
|
|
|
(60,334 |
) |
|
|
|
|
* |
|
Catalogue subscription revenues |
|
|
|
6,955 |
|
|
|
|
8,452 |
|
|
|
|
(1,497 |
) |
|
|
|
|
(17.7 |
%) |
|
Other |
|
|
|
10,597 |
|
|
|
|
12,814 |
|
|
|
|
(2,217 |
) |
|
|
|
|
(17.3 |
%) |
|
|
|
|
|
|
|
|
|
|
Total auction and related revenues |
|
|
|
616,625 |
|
|
|
|
833,128 |
|
|
|
|
(216,503 |
) |
|
|
|
|
(26.0 |
%) |
|
|
|
|
|
|
|
|
|
|
Other revenues: |
|
|
|
|
|
|
|
|
Finance revenues |
|
|
|
14,183 |
|
|
|
|
17,025 |
|
|
|
|
(2,842 |
) |
|
|
|
|
(16.7 |
%) |
|
Dealer revenues |
|
|
|
55,596 |
|
|
|
|
62,766 |
|
|
|
|
(7,170 |
) |
|
|
|
|
(11.4 |
%) |
|
License fee revenues |
|
|
|
3,438 |
|
|
|
|
2,960 |
|
|
|
|
478 |
|
|
|
|
(16.1 |
%) |
|
Other |
|
|
|
1,717 |
|
|
|
|
1,843 |
|
|
|
|
(126 |
) |
|
|
|
|
(6.8 |
%) |
|
|
|
|
|
|
|
|
|
|
Total other revenues |
|
|
|
74,934 |
|
|
|
|
84,594 |
|
|
|
|
(9,660 |
) |
|
|
|
|
(11.4 |
%) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
$ |
|
691,559 |
|
|
|
$ |
|
917,722 |
|
|
|
$ |
|
(226,163 |
) |
|
|
|
|
(24.6 |
%) |
|
|
|
|
|
|
|
|
|
|
Legend:
22
|
* |
|
|
|
Represents a change in excess of 100%.
|
Auction and Related Revenues
For the year ended December 31, 2008, auction and related revenues decreased $216.5 million, or 26%, when compared to the prior year. This decrease is principally due to lower auction commission revenues, a higher level of principal activity losses and lower private sale commissions. Also
impacting the comparison of auction and related revenues to the prior year are changes in foreign currency exchange rates, which contributed approximately $14.9 million to the decrease. A detailed discussion of the significant factors impacting the comparison of auction and related revenues versus the
prior year is presented below.
Auction Commission RevenuesFor the year ended December 31, 2008, auction commission revenues decreased $128.4 million, or 17%, when compared to the prior year. This decrease is principally due to a $436.2 million, or 9%, decrease in Net Auction Sales and a lower auction commission margin.
Also impacting the comparison of auction commission revenues to the prior year are changes in foreign currency exchange rates, which contributed approximately $14.8 million to the decrease.
See Net Auction Sales and Auction Commission Margin below for a discussion of these key performance indicators.
Net Auction SalesFor the year ended December 31, 2008, Net Auction Sales decreased $436.2 million, or 9%, when compared to the prior year. During 2008, Net Auction Sales were impacted by changes in foreign currency exchange rates, which contributed $76.2 million to the decrease. The
remainder of the decrease in Net Auction Sales is largely due to the downturn in the international art market that began in September 2008, which resulted from a weakening global economy, as well as turbulence in the global financial and credit markets. More specifically, the decline in 2008 Net
Auction Sales versus the prior year is due to the following factors:
|
|
|
|
|
A $52 million, or 2%, decrease in recurring Impressionist and Contemporary Art sales, mostly attributable to the performance of the November 2008 sales in New York, which decreased $303.7 million, or 46%, when compared to the sales conducted in November 2007. |
|
|
|
|
|
An $84 million decrease in sales of Antiquities in New York as 2007 results for this collecting category included the record sales of a bronze figure of Artemis and the Stag for $25.5 million and The Guennol Lioness for $51 million. There were no comparably priced Antiquities works sold in 2008. |
|
|
|
|
|
A $69 million, or 54%, decrease in Asian Art sales in New York, primarily attributable to a lower volume of property offered and sold in the current year, as well as lower average selling prices in 2008. The lower volume of property offered and sold in 2008 is due, in part, to $22.1 million of Net
Auction Sales in the first quarter of 2007 attributable to property consigned by the Albright-Knox Art Gallery, for which there was no comparable consignment in the current period. |
|
|
|
|
|
A $61 million, or 24%, decrease in Jewelry sales. 2007 results include the sale in Switzerland of the Chloe Diamond for $14.4 million, which is the second highest price ever for a diamond sold at auction. There was no comparably priced Jewelry consignment sold in 2008. |
|
|
|
|
|
The cessation of auction sales conducted at Sothebys former Olympia salesroom in West London, which had traditionally processed property at a substantially lower price point than Sothebys other auction salesrooms. In 2007, approximately $66 million of Net Auction Sales were conducted at
Olympia. In line with Sothebys strategic focus on major clients and the related shift in its business portfolio toward high-end consignments, no auctions were held at Olympia after the third quarter of 2007. |
|
|
|
|
|
A $51 million, or 19%, decrease in sales of Old Master Paintings and Drawings. In 2007, the results from this collecting category included the sale of Rembrandts St. James the Greater for $23 million. There was no comparably priced work sold in this collecting category in 2008. |
|
|
|
|
|
Significant decreases across most other regional collecting categories, most notably in sales of Decorative Arts and Furniture ($72 million, or 24%, decrease), British Paintings and Pictures |
23
|
|
|
|
($40 million, or 28%, decrease) and Books and Manuscripts ($39 million, or 42%, decrease). These decreases are primarily the result of single-owner sales in 2007 that were not repeated in 2008.
|
The overall decrease in Net Auction Sales in 2008 was partially offset by the following factors:
|
|
|
|
|
$176 million of Net Auction Sales attributable to the unprecedented Beautiful Inside My Head Forever sale held in London in September 2008, which featured the sale of new Contemporary Art works by Damien Hirst. This sale was the first ever auction dedicated to the work of a single living
artist. |
|
|
|
|
|
$38.6 million of Net Auction Sales attributable to the (RED) charity auction held in New York in February 2008, the proceeds of which (including Sothebys auction commission revenues) were donated to the United Nations Foundation to support HIV/AIDS relief programs in Africa conducted by
the Global Fund to Fight AIDS, Tuberculosis and Malaria. There was no equivalent charitable auction conducted in 2007.
|
Auction Commission MarginAuction commission margin represents total auction commission revenues as a percentage of Net Auction Sales. Typically, auction commission margins are higher for lower value works of art or collections, while higher valued property earns lower margins. In certain
situations, auction commission margins are adversely impacted by arrangements whereby auction commissions are shared with consignors or with Sothebys partners in auction guarantees. In such situations, in an effort to reduce its financial exposure under auction guarantees, Sothebys may: (a) share
auction commissions with consignors in order to secure high value consignments without issuing auction guarantees and/or (b) enter into risk and reward sharing arrangements with unaffiliated partners whereby Sothebys reduces its financial exposure under an auction guarantee in exchange for sharing the
auction commission. Additionally, Sothebys may also share auction commissions with a consignor as part of an auction guarantee, typically in exchange for a portion of the hammer (sale) price in excess of a negotiated amount.
Effective September 1, 2007, Sothebys increased its buyers premium charged on certain auction sales. In salesrooms in the U.S., the buyers premium became 25% of the hammer price on the first $20,000, 20% of the hammer price above $20,000 up to and including $500,000 and 12% of any
remaining amount over $500,000. In foreign salesrooms, with certain exceptions, these U.S. dollar thresholds were translated into an appropriate fixed local currency amount. This pricing structure was effective through May 31, 2008. For auction sales conducted during the first eight months of 2007, the
buyers premium charged was generally 20% on the first $500,000 of the hammer (sale) price and 12% on any remaining amount over $500,000.
Partly as a result of the factors discussed below that reduced auction commission margins in 2008, Sothebys implemented a buyers premium rate increase that became effective on June 1, 2008. Generally, this pricing structure is 25% on the first $50,000 of hammer (sale) price; 20% on the portion of
hammer price above $50,000 up to and including $1 million; and 12% on any remaining amount above $1 million.
As detailed in the chart above under Key Performance Indicators, in 2008, Sothebys experienced a decrease of approximately 9% (from 16.5% to 15.1%) in auction commission margin when compared to the prior year. The decrease in auction commission margin when compared to the prior year
is principally due to the following factors:
|
|
|
|
|
Competitive pressures and market conditions, which in certain cases have caused Sothebys to accept lower auction commission margins in order to win consignments. |
|
|
|
|
|
An increase in risk reduction arrangements and strategies in an effort to reduce Sothebys exposure to auction guarantees in response to the uncertain economic environment over the last year. As discussed above, when management employs such risk reduction arrangements and strategies, Sothebys
shares its auction commissions with consignors or with its partners in auction guarantees. |
|
|
|
|
|
A change in sales mix, as a more significant portion of Net Auction Sales in 2008 was at the high-end of Sothebys business where auction commission margins are traditionally lower.
|
24
These unfavorable factors were partially offset by the impact of the increased buyers premium rate structures, as described above, that became effective in September 2007 and June 2008.
In response to the downturn in the international art market that began in September 2008, as well as the current uncertain and challenging economic environment, management is taking measures to improve auction commission margins in 2009, including significantly reducing the use of auction
guarantees and special concessions. As a result, Sothebys has experienced a significant improvement in auction commission margin for 2009 auction sales to-date. (See statement on Forward Looking Statements.)
Principal ActivitiesAuction segment principal activities consist mainly of gains and losses related to auction guarantees including: (i) any share of overage or shortfall recognized when the guaranteed property is offered or sold at auction, (ii) any subsequent writedowns to the carrying value of
guaranteed property that initially failed to sell at auction and (iii) any subsequent recoveries and losses on the sale of guaranteed property that initially failed to sell at auction. To a much lesser extent, Auction segment principal activities include gains and losses related to the sale of other Auction
segment inventory, as well as any writedowns to the carrying value of such inventory, which consists mainly of objects obtained incidental to the auction process primarily as a result of defaults by purchasers after the consignor has been paid.
As the market for high-end collecting categories grew considerably from 2005 through September 2008, competition between the Company and its principal competitor, Christies, greatly increased. As a result of this competitive landscape, the Companys use of auction guarantees as a means of
securing consignments increased significantly during this period and peaked in 2007. Accordingly, for the years ended December 31, 2008, 2007, 2006 and 2005, the total amount of auction guarantees issued by the Company, net of the impact of risk sharing arrangements with partners, was approximately
$626 million, $902 million, $450 million and $131 million, respectively.
For the year ended December 31, 2008, principal activity losses increased $60.3 million to $82.7 million, when compared to the prior year. The higher level of principal activity losses in 2008 is largely attributable to the downturn in the international art market that began in September 2008, which
resulted from a weakening global economy, as well as turbulence in the global financial and credit markets.
Included in the $82.7 million of principal activity losses in 2008 are $60.2 million of net losses related to property offered or sold under auction guarantees, of which $52.6 million relates to Sothebys autumn sales of Contemporary, Impressionist, and Asian Art in New York, London and Hong Kong.
Also included in the $82.7 million of principal activity losses in 2008 are $17.4 million of subsequent writedowns to the carrying value of guaranteed property that initially failed to sell at auction. A considerable portion of these writedowns relate to works that were obtained at the recent peak of the
international art market in 2007 and the first half of 2008.
When evaluating the performance of the Companys portfolio of auction guarantees, management takes into consideration the overall revenues earned on guarantees, which includes auction commission revenues, as well as any net guarantee gains or losses reflected in principal activities. Accordingly,
the impact of the $60.2 million of net auction guarantee losses recognized in 2008 was partially offset by $43.8 million in auction commission revenues earned from property sold under auction guarantees during the period. Therefore, in 2008, Sothebys overall loss related to property offered or sold under
auction guarantees was approximately $16.4 million, including the impact of auction commission revenues. By comparison, in 2007, Sothebys recognized net revenues related to property offered or sold under auction guarantees of approximately $57.8 million, consisting of $76.9 million in auction
commission revenues partially offset by $19.9 million of net auction guarantee losses. (Auction commission revenues are reported in the table above within Auction Commission Revenues and are not a component of Principal Activities.)
In response to the downturn in the international art market that began in September 2008, as well as the current uncertain and challenging economic environment, Sothebys substantially reduced its use of auction guarantees for sales occurring in January and February 2009 and expects to continue to
significantly limit the use of auction guarantees for the foreseeable future. (See statement on Forward Looking Statements.)
25
Private Sale CommissionsThe level of private sale commissions earned by Sothebys can vary significantly from period to period. For the year ended December 31, 2008, private sale commissions decreased $21 million, or 38%, primarily due to a lower volume of high-end private sales in the current
period. In particular, private sale commissions in the prior year include the landmark private sale of the Rostropovich-Vishnevskaya Collection of Russian Art in September 2007, for which there was no comparable individual private sale in 2008.
Finance Revenues
For the year ended December 31, 2008, Finance revenues decreased $2.8 million, or 17%, when compared to the prior year. This decrease is principally due to lower interest rates earned on the portfolio as a result of lower benchmark interest rates, partially offset by a higher average portfolio
balance. (Note: For the purposes of Managements Discussion and Analysis, Finance revenues are presented on a consolidated basis and do not include intercompany revenues earned by the Finance segment from Sothebys Auction segment, which are eliminated in consolidation. See Note C of Notes to
Consolidated Financial Statements.)
Dealer Segment Results
Dealer revenues consist of revenues earned from the sale of property held by Noortman Master Paintings and objects purchased by Sothebys for investment purposes, as well as Sothebys share of gains resulting from the sale of property purchased by art dealers through unsecured loans from
Sothebys. Dealer cost of sales includes the net book value of Dealer inventory sold during the period and any writedowns to the carrying value of Dealer inventory. The table below summarizes revenues, cost of sales and (loss) profit for the Dealer segment for years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
Favorable/(Unfavorable) |
|
$ Change |
|
% Change |
Dealer revenues |
|
|
$ |
|
55,596 |
|
|
|
$ |
|
62,766 |
|
|
|
$ |
|
(7,170 |
) |
|
|
|
|
(11.4 |
%) |
|
Dealer cost of sales |
|
|
|
(61,978 |
) |
|
|
|
|
(49,161 |
) |
|
|
|
|
(12,817 |
) |
|
|
|
|
(26.1 |
%) |
|
|
|
|
|
|
|
|
|
|
Dealer (loss) profit |
|
|
$ |
|
(6,382 |
) |
|
|
|
$ |
|
13,605 |
|
|
|
$ |
|
(19,987 |
) |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
Legend:
|
* |
|
|
|
Represents a change in excess of 100%.
|
In 2008, Dealer segment performance declined significantly primarily due to $12.2 million of Dealer inventory writedowns recorded in 2008 and lower levels of profitability on sales of investment property.
Expenses
For the years ended December 31, 2008 and 2007, expenses consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
Favorable/(Unfavorable) |
|
$ Change |
|
% Change |
Direct costs of services |
|
|
$ |
|
95,410 |
|
|
|
$ |
|
80,400 |
|
|
|
$ |
|
(15,010 |
) |
|
|
|
|
(18.7 |
%) |
|
Dealer cost of sales |
|
|
|
61,978 |
|
|
|
|
49,161 |
|
|
|
|
(12,817 |
) |
|
|
|
|
(26.1 |
%) |
|
Marketing expenses |
|
|
|
19,662 |
|
|
|
|
19,792 |
|
|
|
|
130 |
|
|
|
|
0.7 |
% |
|
Salaries and related costs |
|
|
|
240,126 |
|
|
|
|
293,720 |
|
|
|
|
53,594 |
|
|
|
|
18.2 |
% |
|
General and administrative expenses |
|
|
|
176,004 |
|
|
|
|
166,539 |
|
|
|
|
(9,465 |
) |
|
|
|
|
(5.7 |
%) |
|
Depreciation and amortization expense |
|
|
|
24,845 |
|
|
|
|
22,101 |
|
|
|
|
(2,744 |
) |
|
|
|
|
(12.4 |
%) |
|
Impairment loss |
|
|
|
13,189 |
|
|
|
|
14,979 |
|
|
|
|
1,790 |
|
|
|
|
12.0 |
% |
|
Restructuring charges |
|
|
|
4,312 |
|
|
|
|
|
|
|
|
|
(4,312 |
) |
|
|
|
|
* |
|
Antitust related matters |
|
|
|
(18,385 |
) |
|
|
|
|
|
|
|
|
|
18,385 |
|
|
|
|
* |
|
Gain on sale of land and buildings |
|
|
|
|
|
|
|
|
(4,752 |
) |
|
|
|
|
(4,752 |
) |
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
$ |
|
617,141 |
|
|
|
$ |
|
641,940 |
|
|
|
$ |
|
24,799 |
|
|
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
26
Legend:
|
* |
|
|
|
Represents a change in excess of 100%.
|
Direct Costs of Services
Direct costs of services consists largely of sale specific marketing costs such as auction catalogue production and distribution expenses, sale advertising and promotion expenses and traveling exhibition costs. Also included in direct costs of services are sale-related shipping expenses. The level of direct
costs incurred in any period is generally dependent upon the volume and composition of Sothebys auction offerings. For example, direct costs attributable to single-owner or other high-value collections are typically higher than those associated with standard various-owner sales, mainly due to higher
promotional costs for catalogues, special events and traveling exhibitions, as well as higher shipping expenses.
For the year ended December 31, 2008, direct costs of services increased $15 million, or 19%, when compared to the prior year. This increase is consistent with the composition of Sothebys auction offerings during 2008 and, in particular, is primarily attributable to the following factors:
|
|
|
|
|
Costs related to the promotion of the Beautiful Inside My Head Forever sale ($3.7 million) and the (RED) charity auction ($1 million). There were no comparable sale events in 2007. |
|
|
|
|
|
Increased sale venue rental costs in Hong Kong. |
|
|
|
|
|
Higher catalogue and sale promotion costs related to recurring Impressionist and Contemporary Art Sales in New York and London. |
|
|
|
|
|
Increased traveling exhibition costs reflecting Sothebys efforts to promote its sales globally, including in emerging markets. |
|
|
|
|
|
Unfavorable experience with property loss and damage claims.
|
The comparison of direct costs of services to the prior period is favorably impacted by the cessation of auction sales conducted at Sothebys former Olympia salesroom, as discussed above. Additionally, 2007 results include costs to promote and execute the landmark private sale of the Rostropovich-
Vishnevskaya Collection of Russian Art, for which there was no comparable private sale or related costs in 2008. The overall increase in direct costs of services is also partially offset by changes in foreign currency exchange rates, which reduced direct costs of services by approximately $2.4 million when
compared to the prior year.
Management is implementing cost containment efforts addressing direct costs of services in 2009, especially with regards to the costs to produce and distribute catalogues.
Marketing Expenses
Marketing expenses are costs related to the promotion of the Sothebys brand and consist of the cost of corporate marketing activities (including the cost of client service initiatives) and the cost of strategic sponsorships of cultural institutions.
For the year ended December 31, 2008, marketing expenses were unchanged when compared to the prior year as higher costs to promote the Sothebys brand globally, especially in emerging markets such as the Middle East, India, Russia and Turkey, were offset by the costs of several strategic client
service initiatives that were implemented in 2007.
Salaries and Related Costs
For the years ended December 31, 2008 and 2007, salaries and related costs consisted of the following (in thousands of dollars):
27
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
Favorable/(Unfavorable) |
|
$ Change |
|
% Change |
Full-time salaries |
|
|
$ |
|
139,653 |
|
|
|
$ |
|
126,737 |
|
|
|
$ |
|
(12,916 |
) |
|
|
|
|
(10.2 |
%) |
|
Stock compensation expense |
|
|
|
30,180 |
|
|
|
|
26,995 |
|
|
|
|
(3,185 |
) |
|
|
|
|
(11.8 |
%) |
|
Incentive bonus costs |
|
|
|
27,464 |
|
|
|
|
65,844 |
|
|
|
|
38,380 |
|
|
|
|
58.3 |
% |
|
Payroll taxes |
|
|
|
19,486 |
|
|
|
|
21,160 |
|
|
|
|
1,674 |
|
|
|
|
7.9 |
% |
|
Employee benefits |
|
|
|
8,857 |
|
|
|
|
36,241 |
|
|
|
|
27,384 |
|
|
|
|
75.6 |
% |
|
Option Exchange * |
|
|
|
216 |
|
|
|
|
1,168 |
|
|
|
|
952 |
|
|
|
|
81.5 |
% |
|
Other ** |
|
|
|
14,270 |
|
|
|
|
15,575 |
|
|
|
|
1,305 |
|
|
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
Total salaries and related costs |
|
|
$ |
|
240,126 |
|
|
|
$ |
|
293,720 |
|
|
|
$ |
|
53,594 |
|
|
|
|
18.2 |
% |
|
|
|
|
|
|
|
|
|
|
Key Performance Indicator: |
|
|
|
|
|
|
|
|
Salaries and related costs as a % of total revenues |
|
34.7% |
|
32.0% |
|
|
|
N/A |
|
|
|
|
-8.4 |
% |
|
Legend:
|
* |
|
|
|
Includes the amortization of costs related to an exchange offer in 2004 of cash or restricted stock for certain stock options held by eligible employees under the Stock Option Plan. |
|
** |
|
|
|
Principally includes the cost of temporary labor and overtime.
|
Sothebys compensation strategy provides for variability in pay, commensurate with Sothebys financial performance. Accordingly, salaries and related costs for 2008 reflect a $53.6 million, or 18%, decrease versus the prior year largely due to a $38.4 million, or 58%, decrease in accrued incentive
compensation costs as a result of Sothebys significantly lower profitability in 2008. Also contributing to the decrease in salaries and related costs are substantially lower employee benefit costs. The overall decrease in salaries and related costs is partially offset by higher costs for full-time salaries and stock
compensation.
See discussion below for a more detailed explanation of the significant factors contributing to the overall decrease in salaries and related costs versus the prior year.
Incentive Bonus CostsFor the year ended December 31, 2008, accrued incentive bonus costs decreased $38.4 million, or 58%, when compared to the same period in the prior year, due to Sothebys significantly lower profitability in 2008.
Employee BenefitsEmployee benefits include the cost of Sothebys retirement plans and its health and welfare programs, as well as employee severance costs (excluding severance costs related to the Restructuring Plan discussed below). Sothebys material retirement plans include a defined benefit
pension plan covering most of its U.K. employees and defined contribution and deferred compensation plans for its U.S. employees. Generally, the level of employee benefit costs is dependent upon headcount and compensation levels, as well as Sothebys financial performance. Additionally, expenses
related to the U.K. Pension Plan are significantly influenced by interest rates, investment performance in the debt and equity markets and actuarial assumptions. Furthermore, costs related to the Sothebys Deferred Compensation Plan (or the DCP) vary directly with the performance of various
participant deemed investment funds.
In February 2008, Sothebys agreed with the Trustees of the U.K. Pension Plan to cease advance funding of future discretionary benefit increases to retirees. As a result, an updated actuarial valuation was prepared as of February 29, 2008 reflecting this change. On an annual basis, Sothebys, in
consultation with the Trustees, determines an appropriate level of funding of discretionary benefit increases for that particular year, depending on specific objective criteria related to the financial status of Sothebys and the U.K. Pension Plan. Management, in consultation with the Trustees, is continuing
to develop additional alternatives to further improve the financial status of the U.K. Pension Plan.
For the year ended December 31, 2008, employee benefit costs decreased $27.4 million, or 76%, when compared to the prior year. This decrease is primarily attributable to the following factors:
|
|
|
|
|
A $15.7 million reduction in costs related to the U.K. Pension Plan, resulting in a net pension credit of $4 million in 2008. This reduction is primarily due to the cessation of advance funding of future discretionary benefit increases to retirees, as discussed above, and the higher |
28
|
|
|
|
discount rate assumptions used to calculate pension costs in the January 1, 2008 and February 29, 2008 actuarial valuations, when compared to the prior year. |
|
|
|
|
|
A decrease of $8 million in costs associated with the DCP resulting from a $6 million loss in deemed participant investments during 2008. This income statement benefit is substantially offset by a loss of $5.1 million in trust assets related to the DCP Liability, which is reflected within other
(expense) income, as discussed below. |
|
|
|
|
|
A $2.8 million decrease in profit sharing costs related to Sothebys U.S. defined contribution plan. As a result of Sothebys lower profitability, there was no profit sharing accrual in 2008.
|
For the year ended December 31, 2009, the pension credit related to the U.K. Pension Plan is expected to decrease by approximately $1.5 million when compared to 2008 primarily as a result of the changes in assumptions used in the December 31, 2008 actuarial valuation. (See statement on Forward
Looking Statements.)
(See Note N for information on Sothebys material retirement plans.)
Full-Time SalariesFor the year ended December 31, 2008, full-time salaries increased $12.9 million, or 10%, when compared to the prior year principally due to strategic headcount additions, as well as limited salary increases to existing employees.
(See Restructuring Plan and Related Charges below for information on expected future savings in salaries and related costs.)
Stock Compensation ExpenseFor the year ended December 31, 2008, stock compensation expense (excluding costs related to the Option Exchange) increased $3.2 million, or 12%, when compared to the prior year. This increase is attributable to the following factors:
|
|
|
|
|
Incremental costs related to a higher value of Executive Bonus Plan (EBP) restricted stock awarded in February 2008, when compared to 2007. The value of these awards was based on Sothebys financial performance in 2007. |
|
|
|
|
|
Incremental costs related to restricted stock grants in February 2008 to a broader base of employees than in prior years as part of Sothebys new incentive compensation structure that was implemented in 2008 to align with Sothebys client-focused strategic initiatives. Under this new structure, such
restricted stock grants, although at the sole discretion of the Compensation Committee, are awarded in relation to prior year profitability and are subject to future service requirements. |
|
|
|
|
|
The incremental impact of costs related to restricted stock awarded in 2007.
|
The overall increase in stock compensation expense versus the prior year is partially offset by a credit of $2.2 million recorded in the fourth quarter of 2008 related to the revaluation of restricted stock awarded to certain senior executives in July 2006 that only vest if certain Company net income or
share price targets are achieved. It is not expected that the net income targets will be achieved by the respective vesting dates.
For the year ending December 31, 2009, stock compensation expense is expected to decrease approximately $10 million, or 33%, when compared to 2008, principally due to a significantly lower level of restricted stock awarded in February 2009 as a result of Sothebys lower profitability in 2008. (See
statement on Forward Looking Statements.) The table below details stock compensation expense for the years ending December 31, 2008 (actual), 2009 (projected) and 2010 (projected) based only on awards granted or contractually committed to as of February 11, 2009:
29
|
|
|
|
|
|
|
Type of Grant |
|
2008 Actual |
|
2009 Projected |
|
2010 Projected |
2006 Executive Bonus Plan Grant (for 2005) * |
|
|
$ |
|
511 |
|
|
|
$ |
|
38 |
|
|
|
$ |
|
|
|
2007 Executive Bonus Plan Grant (for 2006) * |
|
|
|
1,824 |
|
|
|
|
696 |
|
|
|
|
47 |
|
2008 Executive Bonus Plan Grant (for 2007) * |
|
|
|
5,515 |
|
|
|
|
2,807 |
|
|
|
|
1,077 |
|
Initial grant under new incentive compensation structure effective in 2008 |
|
|
|
8,072 |
|
|
|
|
4,931 |
|
|
|
|
2,642 |
|
2009 GrantIncentive Compensation |
|
|
|
|
|
|
|
|
2,809 |
|
|
|
|
1,716 |
|
2006 Employment Arrangements |
|
|
|
5,766 |
|
|
|
|
4,272 |
|
|
|
|
2,269 |
|
All other grants and contractually committed stock compensation |
|
|
|
8,478 |
|
|
|
|
4,768 |
|
|
|
|
1,996 |
|
Stock Option Expense |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock Compensation Expense ** |
|
|
$ |
|
30,180 |
|
|
|
$ |
|
20,321 |
|
|
|
$ |
|
9,747 |
|
|
|
|
|
|
|
|
Legend:
|
* |
|
|
|
Executive Bonus Plan grants and grants made under the Sothebys current incentive compensation program are based on the Companys financial performance in the year prior to the date of grant. |
|
** |
|
|
|
The chart above does not include the potential issuance of any additional discretionary restricted stock grants in 2009 or 2010. Any such awards of restricted stock would generate higher total stock compensation expense than shown in the chart above. (See statement on Forward Looking
Statements.)
|
General and Administrative Expenses
For the year ended December 31, 2008, general and administrative expenses increased $9.5 million, or 6%, when compared to the prior year. The comparison of general and administrative expenses to the prior year is influenced by the following factors:
|
|
|
|
|
A $6.6 million increase in premises rental and other facilities-related costs, primarily as a result of U.K. premises initiatives. |
|
|
|
|
|
A $3.9 million, or 7%, increase in professional fees, partially due to a $1.8 million increase in costs associated with Sothebys outsourced tax compliance function, as well as higher legal, consulting and audit fees. The overall increase in professional fees versus the prior year is partially offset by $3.7
million in one-time costs recorded in 2007 associated with Sothebys assessment of its rights and options with respect to the York Property (see York Property below). |
|
|
|
|
|
A $3.9 million increase in bad debt expense. |
|
|
|
|
|
An increase of $1.2 million in travel and entertainment costs principally due to a higher level of travel in pursuit of business opportunities and, also as a result of, the increasing globalization of Sothebys client base.
|
The overall increase in general and administrative expenses is partially offset by a $1.3 million benefit to general and administrative expenses recognized in the third quarter of 2008 as a result of a real estate tax rebate in the U.K., for which there was no comparable event in the prior year. Also
impacting the comparison to the prior year are changes in foreign currency exchange rates, which reduced general and administrative expenses by approximately $4.7 million.
Management is currently implementing cost containment efforts addressing general and administrative expenses in 2009, especially with regards to travel and entertainment costs and professional fees.
Depreciation and Amortization Expense
For the year ended December 31, 2008, depreciation and amortization expense increased $2.7 million, or 12%, when compared to the prior year. This increase is primarily attributable to a higher rate of capital expenditures over the last two years, due in part to the refurbishment of Sothebys
30
premises in the U.K., as well as additional investments in information technology designed to improve client service. Additionally, results for 2008 include amortization expense of approximately $0.7 million related to intangible assets recognized in connection with the acquisition of an auction house in
France, for which there was no comparable expense in the prior year (see Note H of Notes to Consolidated Financial Statements).
For the year ending December 31, 2009, Sothebys expects a net decrease in depreciation expense of approximately $2 million when compared to 2008, principally as a result of the purchase of the York Property on February 6, 2009 (see York Property below). The expected decrease in depreciation
expense is principally the result of the difference between the depreciable lives of the purchased York Property building and the derecognized York Property capital lease asset. (See statement on Forward Looking Statements.)
Impairment Loss and Insurance Recovery
Robert C. Noortman, who was the Managing Director of Noortman Master Paintings, died unexpectedly on January 14, 2007. As a result of Mr. Noortmans death, in the first quarter of 2007, Sothebys recorded an impairment loss of approximately $15 million in the Dealer segment related to NMPs
goodwill ($7.3 million), customer relationships ($6 million) and trade name ($0.8 million), as well as Mr. Noortmans non-compete agreement ($0.9 million).
Also as a result of Mr. Noortmans death, the Company became entitled to a $20 million death benefit under a key man life insurance policy that the Company had purchased in conjunction with the acquisition of NMP. Accordingly, in the first quarter of 2007, the Company recognized a $20 million
insurance recovery within other income. The Company collected these insurance proceeds in April 2007.
Sothebys performed its annual impairment test of NMPs goodwill and trade name as of October 31, 2008. The fair value of NMPs goodwill and trade name was estimated using a discounted cash flow methodology based on managements judgments about NMPs expected future cash flows. Based
on the results of these annual impairment tests, Sothebys recognized a further impairment loss of $13.2 million in the fourth quarter of 2008 related to NMPs goodwill ($11.1 million) and trade name ($2.1 million). This impairment loss is principally due to a reduction in managements future cash flow
estimates for NMP.
(See Notes G and H of Notes to Consolidated Financial Statements.)
Restructuring Plan and Related Charges
Due to the downturn in the international art market that began in September 2008, as well as the current uncertain and challenging economic environment, in the fourth quarter of 2008 management began a strategic review of its operations with the goal of materially recalibrating Sothebys cost base
through a restructuring plan impacting its operations globally (defined above as the Restructuring Plan).
On December 1, 2008, the Executive Committee approved the first phase of the Restructuring Plan that is resulting in headcount reductions impacting Sothebys Auction segment in North America, as well as certain corporate departments. This decision resulted in employee-related restructuring
charges for severance and related benefits of $4.3 million in the fourth quarter of 2008. As of December 31, 2008, no payments were made against the $4.3 million accrued restructuring liability.
On February 26, 2009, Sothebys Board of Directors approved the second phase of the Restructuring Plan impacting Sothebys Auction segment in the U.K. and Continental Europe. This phase of the Restructuring Plan will result in headcount reductions and, subject to the completion of the required
legal processes, a reduction in Sothebys selling activities in Amsterdam and the vacating of certain premises in connection with a reorganization of Sothebys European sourcing network. This decision will result in employee-related restructuring charges of approximately $6 million in the first quarter of
2009, as well as approximately $3 million of lease exit and facilities-related costs that will be recognized in 2009.
31
Following the full implementation of the Restructuring Plan in the first quarter of 2010, management expects to achieve annual cost savings of approximately $17 million in salaries and related costs, resulting from a 15% reduction in global headcount, and approximately $4 million in savings for
facilities-related costs. Of these expected annual cost savings, approximately $15 million is expected to be realized in 2009, with approximately $13 million related to salaries and related costs and $2 million related to facilities-related costs. The overall cost savings expected to be achieved as a result of the
Restructuring Plan is expected to be partially offset by a decrease in gross profit (i.e., auction commission revenues less direct costs of sales) of approximately $4 million as a result of the reduction in Sothebys selling activities in Amsterdam.
In
addition to the Restructuring Plan noted above, management is implementing
a number of other cost savings initiatives impacting all areas of expense.
As a result of these cost savings initiatives, management has targeted savings
of approximately $100 million in 2009 versus 2008, to be achieved in direct
costs of services, marketing expenses, salaries and related costs and general
and administrative expenses. A portion of the expected savings is the result
of favorable changes in foreign exchange rates versus 2008 and a lower expected
volume of Net Sales. This $100 million savings target includes the expected
2009 savings noted above as a result of the Restructuring Plan.
(See statement on Forward Looking Statements.)
Antitrust Related Matters
In April 1997, the U.S. Department of Justice (the DOJ) began an investigation of certain art dealers and major auction houses, including Sothebys and its principal competitor, Christies. In October 2000, Sothebys pled guilty to a violation of U.S. antitrust laws in connection with a conspiracy to
fix auction commission rates charged to sellers in the U.S. and elsewhere. In February 2001, the U.S. District Court for the Southern District of New York imposed on Sothebys a fine of $45 million payable to the DOJ without interest over a period of five years. In the third quarter of 2000, Sothebys
recorded a charge of $34.1 million, representing the present value of the fine payable to the DOJ. The $10.9 million discount on the fine payable was amortized to interest expense over the five-year period during which the fine was paid. The final payment of $15 million owed under the fine was paid by
Sothebys on February 6, 2006, and the liability to the DOJ was extinguished.
In conjunction with the settlement of certain civil litigation related to the investigation by the DOJ, in May 2003, Sothebys and Christies issued to the class of plaintiffs vendors commission discount certificates (Discount Certificates) with a face value of $125 million, of which Sothebys was
responsible for funding the redemption of $62.5 million. The court determined that the $62.5 million face value had a fair market value of not less than $50 million, which is the amount of expense that was recognized by Sothebys as a special charge in the third quarter of 2000. The $12.5 million discount
on the face value of the Discount Certificates was amortized to interest expense over the four-year period between the date of issuance and May 15, 2007, the date after which any unused Discount Certificates were redeemable for cash.
The Discount Certificates were fully redeemable in connection with any auction conducted by Sothebys or Christies in the U.S. or in the U. K. and were able to be used to satisfy consignment charges involving vendors commission, risk of loss and/or catalogue illustration.
The Discount Certificates expired on May 14, 2008 and, therefore, can no longer be redeemed. As a result of the expiration of the Discount Certificates, Sothebys reversed the remaining related liability and recognized an income statement benefit of $18.4 million in the second quarter of 2008.
Gain on Sale of Land and Buildings
In March 2007, Sothebys completed the sale of land and buildings at Billingshurst, West Sussex, which previously housed a U.K. auction salesroom. As a result of this sale, Sothebys recognized a gain of $4.8 million in the first quarter of 2007, for which there was no comparable transaction or gain
in 2008.
32
Net Interest Expense
For the year ended December 31, 2008, net interest expense increased $14.2 million, or 100%, when compared to the prior year primarily due to the incremental interest expense related to the Convertible Notes and Senior Notes issued on June 17, 2008 (see Liquidity and Capital Resources below),
as well as lower interest income which was a direct result of lower average balances of cash and short-term investments and lower interest rates earned on these balances throughout the year. The lower average balances of cash and short-term investments are the result of the funding requirements for the
advance and settlement of auction guarantees, the timing of the settlement of certain client receivables and the $50 million initial payment made in January 2008 as part of the contract to purchase the York Property.
Extinguishment of Debt (Net)
For the year ended December 31, 2008, Sothebys recognized a $5.4 million net benefit on the extinguishment of debt related to the events described below.
Redemption of 6.98% Senior NotesOn July 18, 2008, Sothebys redeemed its 6.98% Senior Notes with a face value of $100 million for $105.7 million. The $105.7 million paid upon redemption includes $102.5 million for the present value of the remaining principal and interest and $3.2 million for
accrued and unpaid interest through the date of redemption. As a result, Sothebys recognized a bond redemption cost of $2.5 million in the third quarter of 2008.
Repurchase of 7.75% Senior NotesOn December 23, 2008, Sothebys repurchased an aggregate principal amount of $19 million of its $150 million aggregate outstanding 7.75% Senior Notes, due June 15, 2015, for a purchase price of $10.5 million (representing 56% of the aggregate principal amount
repurchased). This repurchase resulted in a non-cash benefit of $7.8 million, which was recognized in the fourth quarter of 2008.
On January 27, 2009, the Company repurchased an additional $2.8 million of its 7.75% Senior Notes for a purchase price of $1.6 million (representing 59% of the aggregate principal amount repurchased). This repurchase resulted in a non-cash benefit of approximately $1.1 million, which will be
reflected in the Companys results for the first quarter of 2009.
Management will continue to monitor the market for its 7.75% Senior Notes and may purchase additional bonds opportunistically, as and when pricing is favorable, subject to the $40 million limitation imposed by the Companys senior secured credit agreement. (See statement on Forward Looking
Statements.)
Other (Expense) Income
For the year ended December 31, 2008, Sothebys results include other expense of $3 million, as compared to other income of $1.4 million in the prior year. The comparison to the prior year is unfavorably impacted by net losses in 2008 of $5.1 million in the fair value of trust assets related to the
DCP (see Note N of Notes to Consolidated Financial Statements for more information on the DCP.) In the prior year, other income included gains of $1.9 million from the changes in the fair value of these assets.
Income Tax Expense
The effective tax rate related to continuing operations was approximately 46.1% in 2008, compared to approximately 25.6% in 2007. The increase in the effective tax rate is primarily the result of increased income tax reserves related to various U.S. and international tax issues, a non-deductible
goodwill impairment loss related to NMP and a non-recurring benefit recognized in 2007. These factors are offset by a shift in the mix of income earned at tax rates lower than the U.S. tax rate. The non-recurring benefit recognized in 2007 was related to the reversal of the valuation allowance established
against state operating losses and other deferred tax assets in prior years.
(See Item 1A, Risk Factors, and Notes J and K of Notes to Consolidated Financial Statements.)
33
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Note C (Segment Reporting) of Notes to Consolidated Financial Statements should be read in conjunction with this discussion.
Overview
For the year ended December 31, 2007, income from continuing operations increased $105.8 million to $213.1 million, nearly doubling the results from the prior year. This improvement reflected the strength of the art market during 2007, as Net Auction Sales and Private Sales increased significantly
from 2006. Total revenues for the year ended December 31, 2007 increased $252.9 million, or 38%, largely as a result of this higher level of sales activity. The increase in total revenues was partially offset by a higher level of operating expenses, which increased $174.3 million, or 37%, when compared to
2006. Results for the year ended December 31, 2007 also include an impairment loss ($15 million) and insurance recovery ($20 million) related to Noortman Master Paintings (see Impairment Loss and Insurance Recovery below), as well as a $4.8 million gain on the sale of land and buildings (see
Gain on Sale of Land and Buildings below).
Sothebys results from continuing operations for the years ended December 31, 2007 and 2006 are summarized below (in thousands of dollars):
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2007 |
|
2006 |
|
Favorable/(Unfavorable) |
|
$ Change |
|
% Change |
Revenues: |
|
|
|
|
|
|
|
|
Auction and related revenues |
|
|
$ |
|
833,128 |
|
|
|
$ |
|
631,344 |
|
|
|
$ |
|
201,784 |
|
|
|
|
32.0 |
% |
|
Finance revenues |
|
|
|
17,025 |
|
|
|
|
15,864 |
|
|
|
|
1,161 |
|
|
|
|
7.3 |
% |
|
Dealer revenues |
|
|
|
62,766 |
|
|
|
|
12,776 |
|
|
|
|
49,990 |
|
|
|
|
* |
|
License fee revenues |
|
|
|
2,960 |
|
|
|
|
2,922 |
|
|
|
|
38 |
|
|
|
|
1.3 |
% |
|
Other revenues |
|
|
|
1,843 |
|
|
|
|
1,903 |
|
|
|
|
(60 |
) |
|
|
|
|
(3.2 |
%) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
917,722 |
|
|
|
|
664,809 |
|
|
|
|
252,913 |
|
|
|
|
38.0 |
% |
|
Expenses** |
|
|
|
641,940 |
|
|
|
|
467,651 |
|
|
|
|
(174,289 |
) |
|
|
|
|
(37.3 |
%) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
275,782 |
|
|
|
|
197,158 |
|
|
|
|
78,624 |
|
|
|
|
39.9 |
% |
|
Net interest expense |
|
|
|
(14,166 |
) |
|
|
|
|
(27,148 |
) |
|
|
|
|
12,982 |
|
|
|
|
47.8 |
% |
|
Insurance recovery |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
N/A |
|
Other income (expense). |
|
|
|
1,403 |
|
|
|
|
(4,227 |
) |
|
|
|
|
5,630 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes |
|
|
|
283,019 |
|
|
|
|
165,783 |
|
|
|
|
117,236 |
|
|
|
|
70.7 |
% |
|
Income tax expense |
|
|
|
72,512 |
|
|
|
|
60,050 |
|
|
|
|
(12,462 |
) |
|
|
|
|
(20.8 |
%) |
|
Equity in earnings of investees, net of taxes |
|
|
|
2,632 |
|
|
|
|
1,626 |
|
|
|
|
1,006 |
|
|
|
|
61.9 |
% |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
$ |
|
213,139 |
|
|
|
$ |
|
107,359 |
|
|
|
$ |
|
105,780 |
|
|
|
|
98.5 |
% |
|
|
|
|
|
|
|
|
|
|
Key performance indicators: |
|
|
|
|
|
|
|
|
Aggregate Auction Sales (a) |
|
|
$ |
|
5,391,628 |
|
|
|
$ |
|
3,747,854 |
|
|
|
$ |
|
1,643,774 |
|
|
|
|
43.9 |
% |
|
Net Auction Sales (b). |
|
|
$ |
|
4,625,914 |
|
|
|
$ |
|
3,234,526 |
|
|
|
$ |
|
1,391,388 |
|
|
|
|
43.0 |
% |
|
Private Sales (c) |
|
|
$ |
|
729,988 |
|
|
|
$ |
|
327,884 |
|
|
|
$ |
|
402,104 |
|
|
|
|
* |
|
Consolidated Sales (d) |
|
|
$ |
|
6,184,382 |
|
|
|
$ |
|
4,088,514 |
|
|
|
$ |
|
2,095,868 |
|
|
|
|
51.3 |
% |
|
Auction commission margin (e) |
|
|
|
16.5 |
% |
|
|
|
|
17.0 |
% |
|
|
|
|
N/A |
|
|
|
|
(2.9 |
%) |
|
Average loan portfolio (f) |
|
|
$ |
|
171,286 |
|
|
|
$ |
|
158,021 |
|
|
|
$ |
|
13,265 |
|
|
|
|
8.4 |
% |
|
EBITDA (g) |
|
|
$ |
|
323,606 |
|
|
|
$ |
|
217,879 |
|
|
|
$ |
|
105,727 |
|
|
|
|
48.5 |
% |
|
Legend:
|
* |
|
|
|
Represents a change in excess of 100%. |
|
** |
|
|
|
Expenses for 2007 include an impairment loss of $15 million related to goodwill and intangible assets and a $4.8 million gain on the sale of land and buildings. |
|
(a) |
|
|
|
Represents the hammer (sale) price of property sold at auction plus buyers premium. |
|
(b) |
|
|
|
Represents the hammer (sale) price of property sold at auction.
|
34
|
(c) |
|
|
|
Represents the total purchase price of property sold in private sales brokered by Sothebys. |
|
(d) |
|
|
|
Represents the sum of Aggregate Auction Sales, Private Sales and Dealer revenues. |
|
(e) |
|
|
|
Represents total auction commission revenues as a percentage of Net Auction Sales. |
|
(f) |
|
|
|
Represents the average loan portfolio of Sothebys Finance segment. |
|
(g) |
|
|
|
See Use of Non-GAAP Financial Measures above and related reconciliation below.
|
Reconciliation of Non-GAAP Financial Measures
The following is a reconciliation of net income to EBITDA for the years ended December 31, 2007 and 2006:
|
|
|
|
|
Year Ended December 31 |
|
2007 |
|
2006 |
Net income |
|
|
$ |
|
213,139 |
|
|
|
$ |
|
107,049 |
|
Income tax benefit related to discontinued operations |
|
|
|
|
|
|
|
|
(194 |
) |
|
Income tax expense related to continuing operations |
|
|
|
72,512 |
|
|
|
|
60,050 |
|
Income tax expense related to earnings from equity investees |
|
|
|
1,688 |
|
|
|
|
1,043 |
|
Net interest expense |
|
|
|
14,166 |
|
|
|
|
27,148 |
|
Depreciation and amortization expense |
|
|
|
22,101 |
|
|
|
|
22,783 |
|
|
|
|
|
|
EBITDA |
|
|
$ |
|
323,606 |
|
|
|
$ |
|
217,879 |
|
|
|
|
|
|
Impact of Foreign Currency Translations
For the year ended December 31, 2007, foreign currency translations had a net favorable impact of approximately $12.5 million on Sothebys income from continuing operations before taxes. The components of this favorable impact are as follows (in thousands of dollars):
|
|
|
Year Ended December 31, 2007 |
|
Favorable/ (Unfavorable) |
Total revenues |
|
|
$ |
|
37,387 |
|
Total expenses |
|
|
|
(25,023 |
) |
|
|
|
|
Operating income |
|
|
|
12,364 |
|
Net interest expense and other |
|
|
|
125 |
|
|
|
|
Impact of foreign currency translations on income from continuing operations before taxes |
|
|
$ |
|
12,489 |
|
|
|
|
35
Revenues
For the years ended December 31, 2007 and 2006, revenues consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2007 |
|
2006 |
|
Favorable/(Unfavorable) |
|
$ Change |
|
% Change |
Auction and related revenues: |
|
|
|
|
|
|
|
|
Auction commission revenues |
|
|
$ |
|
761,181 |
|
|
|
$ |
|
551,230 |
|
|
|
$ |
|
209,951 |
|
|
|
|
38.1 |
% |
|
Auction expense recoveries |
|
|
|
18,269 |
|
|
|
|
17,467 |
|
|
|
|
802 |
|
|
|
|
4.6 |
% |
|
Private sale commissions ** |
|
|
|
54,821 |
|
|
|
|
25,790 |
|
|
|
|
29,031 |
|
|
|
|
* |
|
Principal activities ** |
|
|
|
(22,409 |
) |
|
|
|
|
13,640 |
|
|
|
|
(36,049 |
) |
|
|
|
|
* |
|
Catalogue subscription revenues |
|
|
|
8,452 |
|
|
|
|
8,753 |
|
|
|
|
(301 |
) |
|
|
|
|
(3.4 |
%) |
|
Other |
|
|
|
12,814 |
|
|
|
|
14,464 |
|
|
|
|
(1,650 |
) |
|
|
|
|
(11.4 |
%) |
|
|
|
|
|
|
|
|
|
|
Total auction and related revenues |
|
|
|
833,128 |
|
|
|
|
631,344 |
|
|
|
|
201,784 |
|
|
|
|
32.0 |
% |
|
|
|
|
|
|
|
|
|
|
Other revenues: |
|
|
|
|
|
|
|
|
Finance revenues |
|
|
|
17,025 |
|
|
|
|
15,864 |
|
|
|
|
1,161 |
|
|
|
|
7.3 |
% |
|
Dealer revenues ** |
|
|
|
62,766 |
|
|
|
|
12,776 |
|
|
|
|
49,990 |
|
|
|
|
* |
|
License fee revenues |
|
|
|
2,960 |
|
|
|
|
2,922 |
|
|
|
|
38 |
|
|
|
|
1.3 |
% |
|
Other |
|
|
|
1,843 |
|
|
|
|
1,903 |
|
|
|
|
(60 |
) |
|
|
|
|
(3.2 |
%) |
|
|
|
|
|
|
|
|
|
|
Total other revenues |
|
|
|
84,594 |
|
|
|
|
33,465 |
|
|
|
|
51,129 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
$ |
|
917,722 |
|
|
|
$ |
|
664,809 |
|
|
|
$ |
|
252,913 |
|
|
|
|
38.0 |
% |
|
|
|
|
|
|
|
|
|
|
Legend:
|
* |
|
|
|
Represents a change in excess of 100%. |
|
** |
|
|
|
In the fourth quarter of 2006, due to the acquisition of NMP (see Note H of Notes to Consolidated Financial Statements) and the resulting increase in Sothebys Dealer activities, certain activities, which were previously reported as part of the Auction segment, were realigned with NMP and
aggregated into a newly established Dealer segment. Such activities principally include:
|
|
|
|
|
|
The investment in and resale of art and other collectibles directly by Sothebys. |
|
|
|
|
|
The investment in art through unsecured loans made by Sothebys to unaffiliated art dealers. (See Note D of Notes to Consolidated Financial Statements.) |
|
|
|
|
|
The activities of certain equity investees, including Acquavella Modern Art. (See Note E of Notes to Consolidated Financial Statements.) |
|
|
|
|
|
The purchase and resale of art and the brokering of private sale transactions through an art dealer whose results are required to be consolidated with Sothebys results under generally accepted accounting principles. Sothebys had no equity investment in this entity. On May 12, 2008, Sothebys
existing arrangements with this entity terminated. As a result, the entity is no longer consolidated as part of Sothebys Dealer segment. (See Note R of Notes to Consolidated Financial Statements.)
|
Auction and Related Revenues
For the year ended December 31, 2007, auction and related revenues increased $201.8 million, or 32%, when compared to the prior year. This increase was principally due to increased auction commission revenues, and, to a much lesser extent, a higher level of private sale commissions. The overall
increase in auction and related revenues was partially offset by losses reflected in principal activities related to certain works offered under auction guarantees. For the year ended December 31, 2007, auction and related revenues were impacted by changes in foreign currency exchange rates, which
contributed $33.3 million to the overall increase. The significant factors impacting the increase in auction and related revenues are explained in more detail below.
36
Auction Commission RevenuesFor the year ended December 31, 2007, auction commission revenues increased $210 million, or 38%, when compared to the prior year, principally due to an increase in Net Auction Sales, partially offset by a slight decrease in auction commission margin. (See Net
Auction Sales and Auction Commission Margin below for a discussion of these key performance indicators.) For the year ended December 31, 2007, auction commission revenues were impacted by changes in foreign currency exchange rates, which contributed $30.2 million to the overall increase.
Net Auction SalesFor the year ended December 31, 2007, Net Auction Sales increased $1.4 billion, or 43%, to $4.6 billion, when compared to the prior year. During 2007, Net Auction Sales were impacted by changes in foreign currency exchange rates, which contributed approximately $161.3 million
to the overall increase. The remainder of the increase was primarily due to the following factors:
|
|
|
|
|
A $551 million, or 100%, improvement in results from the Contemporary Art sales in New York and Europe held in 2007, which included auction records for numerous artists. Throughout 2007, individual works sold at significantly higher average prices than in 2006. In addition, 2007 Net
Auction Sales included results from the inaugural December evening sale of Contemporary Art in Paris, which brought the then highest total ever for a sale in this collecting category at a Sothebys salesroom in France. |
|
|
|
|
|
A $162 million, or 20%, increase in Impressionist Art sales in New York and Europe, which reflected the strength of this market in 2007. In 2007, Impressionist works sold at higher average selling prices than in 2006, despite lacking a marquee painting on the scale of Picassos Dora Maar with
Cat, which sold for $85 million (hammer price) in 2006. |
|
|
|
|
|
A $91 million increase in Antiquities sales in New York, which in 2007 included the record sales of The Guennol Lioness for $51 million and a bronze figure of Artemis and the Stag for $25.5 million. There were no comparably priced Antiquities offerings in 2006. |
|
|
|
|
|
A $90 million, or 36%, increase in sales in Sothebys Asian salerooms, which includes auctions conducted in Hong Kong, Singapore and Australia. |
|
|
|
|
|
A $65 million, or 32%, increase in sales of Old Master Paintings and Drawings, highlighted by the sale of Rembrandts Saint James the Greater for $23 million in New York in January 2007, for which there was no comparably priced painting sold in this collecting category in 2006. |
|
|
|
|
|
A $58 million, or 56%, increase in sales of Jewelry, primarily attributable to a $34.9 million increase in results from the Magnificent Jewels sales in Switzerland, which included the sale of the Chloe Diamond for $14.4 million. |
|
|
|
|
|
A $46 million, or 55%, increase in Asian art sales in New York, which reflected the growth of this market in 2007, especially in Chinese Contemporary Art. |
|
|
|
|
|
A $42 million, or 97%, increase in sales of Russian Art in London, which reflected the growth of this market in 2007. Results for 2007 included the inaugural Autumn sale of Russian Art in London, which set twelve new records for Russian artists and achieved the highest total ever for auction
sales of Russian Art conducted anywhere in the world. |
|
|
|
|
|
A $35 million, or 81%, increase in sales of French & Continental Furniture, primarily due to the Galerie Ariane Dandois single-owner sale in New York, for which there was no comparable sale in this collecting category in 2006.
|
Auction Commission MarginEffective January 12, 2007, Sothebys increased its buyers premium charged on certain auction sales. In salesrooms in the U.S., the buyers premium was increased to 20% on the first $500,000 of the hammer (sale) price and 12% of any remaining amount over $500,000. In
foreign salesrooms, these U.S. dollar thresholds were generally translated into an appropriate fixed local currency amount. Previously, for 2006 auction sales, the buyers premium charged on auction sales was generally 20% of the hammer price on the first $200,000 and 12% of any remaining amount over
$200,000.
37
Effective September 1, 2007, Sothebys again increased its buyers premium charged on certain auction sales. In salesrooms in the U.S., the buyers premium became 25% of the hammer (sale) price on the first $20,000, 20% of the hammer (sale) price above $20,000 up to and including $500,000 and
12% of any remaining amount over $500,000. In foreign salesrooms, with certain exceptions, these U.S. dollar thresholds have been translated into an appropriate fixed local currency amount.
As detailed in the chart above under Key Performance Indicators, for the year ended December 31, 2007, Sothebys experienced a slight decrease in auction commission margin when compared to 2006. The comparison of auction commission margin to 2006 is influenced by the following factors:
|
|
|
|
|
A change in sales mix, as a more significant portion of Net Auction Sales in 2007 was at the high-end of Sothebys business where auction commission margins are traditionally lower. |
|
|
|
|
|
The favorable impact of the increases to the buyers premium rate structure discussed above which became effective in January and September 2007, and which largely offset the impact of the change in sales mix discussed above.
|
Principal ActivitiesAs the market for high-end collecting categories grew considerably between 2005 and 2007, competition between Sothebys and, its principal competitor, Christies, greatly increased. As a result of this competitive landscape, Sothebys use of auction guarantees as a means of securing
consignments increased significantly during this period, enabled in part by Sothebys profitability and related improvement in its liquidity and financial condition from 2004 to 2007. Accordingly, for the years ended December 31, 2007, 2006 and 2005, the total amount of auction guarantees issued by
Sothebys, net of the impact of risk sharing arrangements with partners, was approximately $902 million, $450 million and $131 million, respectively.
For the year ended December 31, 2007, principal activities decreased $36 million when compared to 2006 resulting in a principal activities loss of $22.4 million; which was largely due to $19.1 million of net losses principally related to certain works offered or sold under auction guarantees during 2007.
Also unfavorably impacting the comparison of principal activities between 2007 and 2006 is $9 million in revenue related to auction guarantees earned in 2006 as a result of Sothebys sharing in a significant portion of the hammer price on a guaranteed property sold at auction in that period. The
comparison to 2006 was further unfavorably impacted by a $6.3 million gain recognized in 2006 on the sale of a guaranteed painting that had failed to sell at auction in 2004. No comparable gain was recognized in 2007.
When evaluating the performance of Sothebys portfolio of auction guarantees, management takes into consideration the overall revenues earned on guarantees, which includes auction commission revenues, as well as any net guarantee gains or losses reflected in principal activities. Accordingly, the
impact of the net auction guarantee loss in 2007 was more than offset by $76.9 million in auction commission revenues earned from property sold under auction guarantees during 2007. Therefore, in 2007, Sothebys recognized net revenues related to property offered or sold under auction guarantees of
approximately $57.8 million. By comparison, in 2006, Sothebys recognized a net auction guarantee gain of $15.3 million in addition to $47.5 million of auction commission revenues earned from property offered or sold under auction guarantees. Therefore, in 2006, Sothebys recognized net revenues
related to property sold under auction guarantees of approximately $62.8 million. (Auction commission revenues are reported in the table above within Auction Commission Revenues and are not a component of Principal Activities.)
Private Sale CommissionsFor the year ended December 31, 2007, private sales commissions increased $29 million, or 113%, when compared to 2006. This significant increase was largely due to managements pursuit of private sale opportunities in the strong international art market in 2007. Included in
2007 private sale commissions is the private sale of the Rostropovich-Vishnevskaya Collection of Russian Art in September 2007, which was originally scheduled to be sold at auction in September 2007 and for which there was no comparable individual private sale in 2006.
38
Finance Revenues
For the year ended December 31, 2007, Finance revenues increased $1.2 million, or 7%, when compared to 2006. This increase was principally the result of an 8% increase in the average loan portfolio balance (from $158 million to $171.3 million) and higher interest rates earned on the loan portfolio.
For the years ended December 31, 2007 and 2006, Finance segment results included revenues of $3.7 million and $5.5 million, respectively, related to $58.6 million of term loans made to one borrower during 2005 and 2006. These loans were fully repaid in the fourth quarter of 2007.
Dealer Revenues
For the year ended December 31, 2007, Dealer revenues increased $50 million when compared to the prior year, due to $21.4 million in incremental revenues contributed by NMP, which was acquired by Sothebys in June 2006, and revenues associated with the sale of several significant investment
properties through Sothebys other Dealer activities for which there were no comparable sales in the prior year. For the years ended December 31, 2007 and 2006, Dealer revenues of $62.8 million and $12.8 million, respectively, are partially offset by Dealer cost of sales of $49.2 million and $6.1 million,
respectively, resulting in a Dealer profit of $13.6 million and $6.7 million, respectively.
(See Note H of Notes to Consolidated Financial Statements for additional information related to NMP.)
Expenses
For the years ended December 31, 2007 and 2006, expenses consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2007 |
|
2006 |
|
Favorable/(Unfavorable) |
|
$ Change |
|
% Change |
Direct costs of services |
|
|
$ |
|
80,400 |
|
|
|
$ |
|
63,303 |
|
|
|
|
($17,097 |
) |
|
|
|
|
(27.0 |
%) |
|
Dealer cost of sales |
|
|
|
49,161 |
|
|
|
|
6,060 |
|
|
|
|
(43,101 |
) |
|
|
|
|
* |
|
Marketing expenses |
|
|
|
19,792 |
|
|
|
|
12,851 |
|
|
|
|
(6,941 |
) |
|
|
|
|
(54.0 |
%) |
|
Salaries and related costs |
|
|
|
293,720 |
|
|
|
|
226,410 |
|
|
|
|
(67,310 |
) |
|
|
|
|
(29.7 |
%) |
|
General and administrative expenses |
|
|
|
166,539 |
|
|
|
|
136,244 |
|
|
|
|
(30,295 |
) |
|
|
|
|
(22.2 |
%) |
|
Depreciation and amortization expense |
|
|
|
22,101 |
|
|
|
|
22,783 |
|
|
|
|
682 |
|
|
|
|
3.0 |
% |
|
Impairment loss |
|
|
|
14,979 |
|
|
|
|
|
|
|
|
|
(14,979 |
) |
|
|
|
|
N/A |
|
Gain on sale of land and buildings |
|
|
|
(4,752 |
) |
|
|
|
|
|
|
|
|
|
4,752 |
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
$ |
|
641,940 |
|
|
|
$ |
|
467,651 |
|
|
|
|
($174,289 |
) |
|
|
|
|
(37.3 |
%) |
|
|
|
|
|
|
|
|
|
|
Legend:
|
* |
|
|
|
Represents a change in excess of 100%.
|
Direct Costs of Services
For the year ended December 31, 2007, direct costs of services increased $17.1 million, or 27%. This increase was consistent with the level and composition of Sothebys auction offerings and private sales during 2007. In particular, there were higher catalogue and sale promotion costs, as well as
higher shipping costs for property sold in the New York and London Impressionist and Contemporary sales during 2007, in addition to increased promotional efforts in the U.K. related to Private Sale activities. The overall increase in direct costs of services during 2007 was partially offset by lower selling
costs at Sothebys Olympia salesroom in London, where regular auctions were discontinued in July 2007.
For the year ended December 31, 2007, direct costs of services were impacted by changes in foreign currency exchange rates, which contributed $3.6 million to the overall increase in direct costs of services.
39
Marketing Expenses
For the year ended December 31, 2007, marketing expenses increased $6.9 million, or 54%. This increase was principally attributable to the cost of special events to promote the Sothebys brand in new and expanding markets, as well the cost of a sponsorship commitment to the Tate Britain Duveens
Gallery. Also contributing to the increase in marketing expenses are costs associated with certain strategic client service initiatives.
For the year ended December 31, 2007, marketing expenses were impacted by changes in foreign currency exchange rates, which contributed $0.7 million to the overall increase in marketing expenses.
Salaries and Related Costs
For the year ended December 31, 2007 and 2006, salaries and related costs consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
2007 |
|
2006 |
|
Favorable/(Unfavorable) |
|
$ Change |
|
% Change |
Full-time salaries |
|
|
$ |
|
126,737 |
|
|
|
$ |
|
110,882 |
|
|
|
|
($15,855 |
) |
|
|
|
|
(14.3 |
%) |
|
Incentive bonus costs |
|
|
|
65,844 |
|
|
|
|
41,970 |
|
|
|
|
(23,874 |
) |
|
|
|
|
(56.9 |
%) |
|
Stock compensation expense |
|
|
|
26,995 |
|
|
|
|
13,335 |
|
|
|
|
(13,660 |
) |
|
|
|
|
* |
|
Employee benefits |
|
|
|
36,241 |
|
|
|
|
25,641 |
|
|
|
|
(10,600 |
) |
|
|
|
|
(41.3 |
%) |
|
Payroll taxes |
|
|
|
21,160 |
|
|
|
|
17,883 |
|
|
|
|
(3,277 |
) |
|
|
|
|
(18.3 |
%) |
|
Option Exchange ** |
|
|
|
1,168 |
|
|
|
|
2,484 |
|
|
|
|
1,316 |
|
|
|
|
53.0 |
% |
|
Other *** |
|
|
|
15,575 |
|
|
|
|
14,215 |
|
|
|
|
(1,360 |
) |
|
|
|
|
(9.6 |
%) |
|
|
|
|
|
|
|
|
|
|
Total salaries and related costs |
|
|
$ |
|
293,720 |
|
|
|
$ |
|
226,410 |
|
|
|
|
($67,310 |
) |
|
|
|
|
(29.7 |
%) |
|
|
|
|
|
|
|
|
|
|
Key Performance Indicator: |
|
|
|
|
|
|
|
|
Salaries and related costs as a % of total revenues |
|
32.0% |
|
34.1% |
|
|
|
N/A |
|
|
|
|
6.2 |
% |
|
Legend:
|
* |
|
|
|
Represents a change in excess of 100%. |
|
** |
|
|
|
Includes the amortization of costs related to an exchange offer in 2004 of cash or restricted stock for certain stock options held by eligible employees under the Stock Option Plan. |
|
*** |
|
|
|
Principally includes the cost of temporary labor and overtime.
|
As discussed above in Managements Discussions and Analysis of results of operations for the years ended December 31, 2008 and 2007, Sothebys compensation strategy provides for variability in pay, commensurate with Sothebys financial performance. This was reflected in the $67.3 million, or
30%, increase in salaries and related costs during 2007, as the significant factors contributing to this increase included higher levels of cash incentive bonus costs and stock compensation expense due to the significant profitability of Sothebys in 2007 and 2006. In 2007, the level of salaries and related costs
was also impacted by strategic headcount additions in certain departments and higher employee benefits. The comparison to 2006 is also unfavorably impacted by changes in foreign currency exchange rates, which contributed $10.7 million to the overall increase. See discussion below for a more detailed
explanation of each of these factors.
Incentive Bonus CostsFor the year ended December 31, 2007, accrued incentive bonus costs increased $23.9 million, or 57%, to $65.8 million, when compared to 2006, due to Sothebys strong financial performance in 2007.
Full-Time SalariesFor the year ended December 31, 2007, full-time salaries increased $15.9 million, or 14%, when compared to 2006. This increase was principally due to strategic headcount additions, as well as limited salary increases to existing employees. Full-time salaries were also impacted by
changes in foreign currency exchange rates, which contributed $5.3 million to the overall increase.
40
Stock Compensation ExpenseFor the year ended December 31, 2007, stock compensation expense (excluding costs related to the Option Exchange) increased $13.7 million when compared to the prior year. This increase was principally attributable to incremental costs related to restricted stock
awarded in February 2007, as well as stock compensation costs resulting from employment arrangements with certain senior executives consummated in the second and third quarters of 2006.
Employee BenefitsFor the year ended December 31, 2007, employee benefit costs increased $10.6 million, or 41%, when compared to 2006. This increase was primarily the result of:
|
|
|
|
|
Increased costs related to Sothebys U.K. Pension Plan. |
|
|
|
|
|
An incremental cost of $1.9 million related to Sothebys Deferred Compensation Plan that was initiated in 2007. Such costs are the result of net gains in deemed participant investments during 2007 and are more than offset by net gains during the period resulting from the increase in the fair value
of the trust assets related to the deferred compensation plan. Such offsetting gains are recorded within other (expense) income in Sothebys Consolidated Income Statements. |
|
|
|
|
|
The impact of the headcount and salary increases discussed above. |
|
|
|
|
|
An increase of approximately $1.7 million as a result of changes in foreign currency exchange rates.
|
(See Note N for information on Sothebys material retirement plans.)
General and Administrative Expenses
For the year ended December 31, 2007, general and administrative expenses increased $30.3 million, or 22%, when compared to 2006. During the year, general and administrative expenses increased approximately $6.2 million, as a result of changes in foreign currency exchange rates. The remainder of
the overall increase was largely attributable to the following factors:
|
|
|
|
|
A $12.8 million, or 33%, increase in professional fees, due in part to $3.7 million of costs associated with Sothebys assessment of its rights and options with respect to the York Property (see York Property below), for which there were no comparable costs in the prior year. Also contributing to
the higher level of professional fees were increases of $2.7 million in tax staffing support fees and $1.6 million in costs associated with Sothebys outsourced catalogue production operations, as well as higher consulting and legal fees, partially in support of various strategic initiatives. |
|
|
|
|
|
A $6.4 million, or 28%, increase in travel and entertainment costs principally due to the higher level of travel for pursuing business opportunities during the year. Also contributing to the increase in travel and entertainment costs during the year were price increases for airfares and other travel
costs. |
|
|
|
|
|
A $2.6 million increase in facilities and office related expenses. |
|
|
|
|
|
A $1.5 million increase in client goodwill gestures, authenticity claims, litigation costs and other related charges. |
|
|
|
|
|
$1.1 million in incremental costs related to NMP, which was acquired in June 2006.
|
For the year ended December 31, 2007, the comparison of general and administrative expenses to 2006 was also unfavorably impacted by a one-time benefit recorded in the second quarter of 2006 associated with the recovery of $2.4 million in administrative expenses related to the settlement of the
International Antitrust Litigation, for which there was no comparable event in 2007. The unfavorable impact of this recovery on the comparison to 2006 was partially offset by a $0.7 million expense recorded in the first half of 2006 related to the settlement of an investigation by the Canadian Competition
Bureau, as well as a decrease of $0.8 million in other runoff professional fees related to antitrust matters. (See Note Q of Notes to Consolidated Financial Statements.)
The overall increase in general and administrative expenses was also partially offset by a $1.2 million reduction in Sothebys insurance costs.
41
Impairment Loss and Insurance Recovery
Robert C. Noortman, who was the Managing Director of Noortman Master Paintings, died unexpectedly on January 14, 2007. As a result of Mr. Noortmans death, in the first quarter of 2007, Sothebys recorded an impairment loss of approximately $15 million in the Dealer segment related to NMPs
goodwill ($7.3 million), customer relationships ($6 million) and trade name ($0.8 million), as well as Mr. Noortmans non-compete agreement ($0.9 million). (See Notes G and H of Notes to Consolidated Financial Statements.)
Also as a result of Mr. Noortmans death, Sothebys became entitled to a $20 million death benefit under a key man life insurance policy that Sothebys had purchased in conjunction with the acquisition of NMP. Accordingly, in the first quarter of 2007, Sothebys recognized a $20 million insurance
recovery within other income. The Company collected these insurance proceeds in April 2007.
Gain on Sale of Land and Buildings
In March 2007, Sothebys completed the sale of land and buildings at Billingshurst, West Sussex, which previously housed a U.K. auction salesroom. As a result of this sale, Sothebys recognized a gain of $4.8 million in the first quarter of 2007, for which there was no comparable transaction or gain
in 2006.
Net Interest Expense
Due to the substantial improvement in its operating results during 2007, Sothebys maintained significantly higher average cash balances and short-term investments and a lower level of outstanding revolving credit facility borrowings, when compared with 2006. As a result, for the year ended
December 31, 2007, net interest expense decreased $13 million, or 48%, when compared to 2006. This improvement consists of an increase in interest income of $8.6 million and a decrease in interest expense of $4.4 million.
Other Income (Expense)
For the year ended December 31, 2007, Sothebys results include other income of $1.4 million, as compared to $4.2 million of other expense recorded in 2006. Other income for 2007 includes net gains of $1.9 million from changes in the fair value of trust assets related to the Sothebys Deferred
Compensation Plan, which became effective on January 1, 2007 (see Note N of Notes to Consolidated Financial Statements). The comparison of other income (expense) to 2006 is also favorably impacted by the recognition of net losses relating to the revaluation and settlement of certain forward exchange
contracts during 2006, for which there were no comparable losses experienced in 2007. Such forward exchange contracts were principally used as cash flow hedges of Sothebys exposure to foreign currency denominated future guarantee obligations. These contracts are not designated as hedging instruments
under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and are recorded in the Consolidated Balance Sheets at their fair value, which is based on referenced market rates (see Note B of Notes to Consolidated Financial Statements).
Income Tax Expense
In 2007, as part of Sothebys ongoing evaluation of the utilization of state, federal and foreign operating losses, it was determined that it was more likely than not that its state deferred tax assets could be utilized and hence the valuation allowance established against state operating losses and other
deferred tax assets in prior years was significantly reduced, and a net income tax benefit of approximately $16 million was recorded in 2007. In assessing the need for the valuation allowance, management considered, among other things, its projections of future taxable income and ongoing, prudent and
feasible tax planning strategies.
42
Largely as a result of the reduction in the valuation allowance discussed above, the effective tax rate related to continuing operations decreased significantly from 36.2% in 2006 to 25.6% in 2007. Also contributing to the decrease in the effective tax rate in 2007 was the fact that the $20 million in
proceeds from the key man life insurance policy covering Robert C. Noortman were not subject to tax (see Impairment Loss and Insurance Recovery above). The impact of these factors was partially offset by higher income tax reserves principally for the correction of immaterial prior period errors
(totaling to $2.6 million) related to an increase in the liability for unrecorded foreign tax benefits arising in periods prior to 2007, as well as the fact that the $15 million impairment loss related to NMP was not tax deductible (see Impairment Loss and Insurance Recovery above).
The Companys effective tax rate for 2007 was lower than the U.S. combined Federal & State tax rate due to the impact of lower tax rates applying to operations outside the U.S., as well as the non-taxable insurance proceeds and the valuation allowance reduction referred to above.
(See Notes J and K of Notes to Consolidated Financial Statements.)
FINANCIAL CONDITION AS OF DECEMBER 31, 2008
This discussion should be read in conjunction with Sothebys Consolidated Statements of Cash Flows (see Financial Statements and Supplementary Data). For the year ended December 31, 2008, total cash and cash equivalents decreased approximately $94.8 million to $253.5 million primarily due to
the factors discussed below.
Cash Used by Operating ActivitiesNet cash used by operating activities of $175.5 million for the year ended December 31, 2008 was principally attributable to the following factors:
|
|
|
|
|
A $103.1 million decrease in the net amount owed to clients principally due to the timing of when auction and private sales occurred and settled. |
|
|
|
|
|
Approximately $82 million in tax payments made in 2008 (see Note J of Notes to Consolidated Financial Statements). |
|
|
|
|
|
A $73.6 million decrease in accounts payable and accrued liabilities and other liabilities, mostly due to the funding of incentive bonuses accrued in 2007. |
|
|
|
|
|
A $20.9 million net increase in inventory principally due to the acquisition of works of art offered under auction guarantees that did not sell at auction during the year, as well as investments made by Sothebys Dealer segment. The overall increase in inventory was partially offset by sales of
inventory throughout the year.
|
These cash outflows from operations were also partially offset by Sothebys net income of $28.3 million earned in 2008.
Cash Used by Investing ActivitiesNet cash used by investing activities of $83.7 million for the year ended December 31, 2008 is principally due to the following factors:
|
|
|
|
|
A $50 million deposit made in advance of Sothebys February 2009 purchase of the York Property. |
|
|
|
|
|
Capital expenditures of $24.2 million, approximately $4.4 million of which related to the refurbishment of Sothebys New Bond Street premises in the U.K. |
|
|
|
|
|
An $8.8 million increase in restricted cash. |
|
|
|
|
|
A $5.8 million net increase in client loans.
|
These cash outflows from investing activities were partially offset by $5.3 million in cash distributions from an equity investee.
Cash Provided by Financing ActivitiesNet cash provided by financing activities of $170.3 million for the year ended December 31, 2008 was principally due to $340 million of net proceeds received from the issuance of the 3.125% Convertible Notes and 7.75% Senior Notes on June 17, 2008. The
impact of these proceeds was partially offset by the early redemption of the $100 million 6.98% Senior Notes in July 2008 and an $18.3 million net cash outflow related to the Convertible Note Hedge and Warrant transactions completed in conjunction with the issuance of the 3.125%
43
Convertible Notes. Additionally, net cash provided by financing activities was also partially offset by $40.7 million in dividend payments and $10.6 million in repurchases of 7.75% Senior Notes in December 2008. (See Liquidity and Capital Resources below.)
BASIC AND DILUTED SHARES OUTSTANDING
The following table summarizes Sothebys basic and diluted weighted average shares outstanding for quarter and year ended December 31, 2008 (in millions):
|
|
|
|
|
|
|
Quarter Ended December 31, 2008 |
|
Year Ended December 31, 2008 |
Basic weighted average shares outstanding |
|
|
|
64.7 |
|
|
|
|
64.6 |
|
Diluted weighted average shares outstanding |
|
|
|
65.0 |
|
|
|
|
65.5 |
|
Management expects diluted weighted average shares outstanding for the year ended December 31, 2009 to be in the range of approximately 66 million. (See statement on Forward Looking Statements.)
YORK PROPERTY
On February 7, 2003, Sothebys sold the York Property to an affiliate of RFR Holding Corp. In conjunction with this sale, the Company leased the York Property back from RFR for an initial 20-year term, with options for Sothebys to extend the lease for two additional 10-year terms. The resulting
lease was accounted for as a capital lease, with the related asset being amortized over the initial 20-year lease term.
On January 11, 2008, Sothebys entered into a contract to reacquire the York Property from RFR for an aggregate purchase price of $370 million (the Purchase and Sale Agreement). Sothebys also agreed to give the principals of RFR certain terms for future sales of works of art at Sothebys
auctions. The sale of the York Property was originally scheduled to take place on July 1, 2009, subject to RFRs right under the Purchase and Sale Agreement to accelerate the closing to an earlier date. On November 21, 2008, RFR exercised its right to accelerate the closing, which occurred on February
6, 2009. Appraisals of the York Property were performed in January 2009, which confirmed that the value of the York Property was approximately $390 million.
Sothebys financed the $370 million purchase price through an initial $50 million cash payment made in conjunction with the signing of the Purchase and Sale Agreement on January 11, 2008, an $85 million cash payment made at closing on February 6, 2009 and the assumption of an existing $235
million mortgage on the York Property. The mortgage loan matures on July 1, 2035, with an optional pre-payment date of July 1, 2015, and bears an annual rate of interest of approximately 5.6%, which increases subsequent to July 1, 2015. It is Sothebys current intention to pre-pay the mortgage on or
about July 1, 2015.
As a result of the closing of the transaction on February 6, 2009, the existing York Property capital lease obligation of $167.2 million, which had an effective interest rate of 10.4%, and the related $122.6 million net capital lease asset, as well as a $16 million deferred gain related to the sale of the
York Property in 2003 will be derecognized and the net effect will be deducted from the cost recorded in the Consolidated Balance Sheet. Accordingly, the land and building acquired will be recorded on the Consolidated Balance Sheet at an initial carrying value of approximately $320 million.
Additionally, Sothebys will recognize the $235 million York Property mortgage obligation on its Consolidated Balance Sheet.
As a result of the closing of the transaction on February 6, 2009 and the assumption of the York Property mortgage obligation, Sothebys expects net decreases in depreciation expense and interest expense of approximately $2 million and $4 million, respectively, for the year ending December 31,
2009, when compared to 2008. The expected net decrease in depreciation expense is principally the result of the difference between depreciable lives of the purchased York Property building and the derecognized York Property capital lease asset. The expected net decrease in interest expense is
principally the result of the lower interest rate associated with the assumed York
44
Property mortgage obligation (5.6%) when compared to the derecognized York Property capital lease obligation (10.4%). (See statement on Forward Looking Statements.)
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table summarizes Sothebys material contractual obligations and commitments as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Total |
|
Less Than One Year |
|
1 to 3 Years |
|
3 to 5 Years |
|
After 5 Years |
|
|
(Thousands of dollars) |
Unsecured debt (1) |
|
|
|
|
|
|
|
|
|
|
Principal payments |
|
|
$ |
|
331,000 |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
200,000 |
|
|
|
$ |
|
131,000 |
|
Interest payments |
|
|
|
94,119 |
|
|
|
|
16,403 |
|
|
|
|
32,806 |
|
|
|
|
29,681 |
|
|
|
|
15,229 |
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
425,119 |
|
|
|
|
16,403 |
|
|
|
|
32,806 |
|
|
|
|
229,681 |
|
|
|
|
146,229 |
|
|
|
|
|
|
|
|
|
|
|
|
Other commitments: |
|
|
|
|
|
|
|
|
|
|
York Property capital lease (2) |
|
|
|
331,097 |
|
|
|
|
20,614 |
|
|
|
|
41,274 |
|
|
|
|
44,137 |
|
|
|
|
225,072 |
|
Operating lease obligations (3) |
|
|
|
98,511 |
|
|
|
|
16,486 |
|
|
|
|
23,689 |
|
|
|
|
11,338 |
|
|
|
|
46,998 |
|
Note payable to Arcimboldo (4) |
|
|
|
5,810 |
|
|
|
|
5,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment arrangements (5) |
|
|
|
10,496 |
|
|
|
|
5,136 |
|
|
|
|
5,360 |
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
450,514 |
|
|
|
|
52,646 |
|
|
|
|
70,323 |
|
|
|
|
55,475 |
|
|
|
|
272,070 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$ |
|
875,633 |
|
|
|
$ |
|
69,049 |
|
|
|
$ |
|
103,129 |
|
|
|
$ |
|
285,156 |
|
|
|
$ |
|
418,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
|
|
Represents the aggregate outstanding principal and semi-annual interest payments due on Sothebys senior unsecured debt. (See Liquidity and Capital Resources below for information related to Sothebys senior unsecured debt.) |
|
(2) |
|
|
|
Represents rental payments due under the York Property capital lease obligation. On February 6, 2009, Sothebys purchased the York Property and assumed an existing $235 million mortgage on the York Property. As a result of this transaction, Sothebys will derecognize the capital lease obligation
and recognize the York Property mortgage obligation in its Consolidated Balance Sheet in the first quarter of 2009. (See York Property above.) |
|
(3) |
|
|
|
Represents rental payments due under Sothebys operating lease obligations. |
|
(4) |
|
|
|
Represents the remaining payment due under the sale and purchase agreement related to the acquisition of Noortman Master Paintings. |
|
(5) |
|
|
|
Represents the remaining commitment for future salaries related to employment arrangements with seven employees, which expire at various points between June 2009 and June 2011, excluding incentive bonuses and equity grants. Such arrangements provide, among other benefits, for minimum salary
levels and for incentive bonuses under the Companys incentive compensation programs which are payable only if specified Company and individual goals are attained. Additionally, certain of these arrangements provide for annual equity grants, the accelerated vesting of certain equity grants,
severance payments, and continuation of benefits upon termination of employment under certain circumstances. |
|
(6) |
|
|
|
Sothebys liability for uncertain tax positions that would be settled by cash payments to the respective taxing authorities is $16 million, which is classified as long-term in the December 31, 2008 Consolidated Balance Sheet. This amount is excluded from the contractual obligations table above as
management is unable to make reliable estimates of the period of settlement with the respective taxing authorities. (See Note K of Notes to Consolidated Financial Statements for more detailed information on uncertain tax positions.)
|
45
OFF-BALANCE SHEET ARRANGEMENTS
Auction Guarantees
From time to time in the ordinary course of its business, Sothebys will guarantee to consignors a minimum price in connection with the sale of property at auction (an auction guarantee). In the event that the property sells for less than the minimum guaranteed price, Sothebys must perform under
the auction guarantee by funding the difference between the sale price at auction and the amount of the auction guarantee. If the property does not sell, the amount of the guarantee must be paid, but Sothebys has the right to recover such amount through the future sale of the property. In some cases,
the sale proceeds ultimately realized by Sothebys exceed the amount of any losses previously recognized on the auction guarantee. Additionally, Sothebys is generally entitled to a share of excess proceeds if the property under the auction guarantee sells above a minimum price. In addition, Sothebys is
obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. In certain situations, Sothebys reduces its financial exposure under auction guarantees through auction commission sharing arrangements with partners. Sothebys counterparties to
these risk sharing arrangements are typically major international art dealers or major art collectors. Sothebys could be exposed to credit-related losses in the event of nonperformance by these counterparties.
Under the terms of one auction guarantee where Sothebys incurred and recorded losses in the second and third quarters of 2008, Sothebys has the right to receive future auction consignments beginning in 2009 to recoup up to $5 million of the losses incurred. Sothebys has not recorded any benefit
with respect to this gain contingency but will do so once the gain contingency is realized.
As
of December 31, 2008, Sothebys had outstanding auction guarantees totaling
$12.5 million, with the related property having pre-sale low and high estimates
(1) of $13.1 million and $19.2 million, respectively. Sothebys financial
exposure under these auction guarantees is reduced by $6.5 million as a result
of risk sharing arrangements with unaffiliated partners. The property related
to such auction guarantees is being offered at auctions in the first half
of 2009. As of December 31, 2008, $1.4 million of the guaranteed amount had
been advanced by Sothebys and was recorded within Notes
Receivable and Consignor Advances in the Consolidated Balance Sheet (see Note
D of Notes to Consolidated Financial Statements). As of December 31, 2008
and 2007, the carrying amount of the liability representing the estimated
fair value of Sothebys obligation to perform under its auction
guarantees was approximately $0.2 million and $4.3 million, respectively, and
was reflected in the Consolidated Balance Sheets within Accounts Payable
and Accrued Liabilities. In the fourth quarter of 2008, the Company recognized
auction guarantee losses of approximately $0.6 million related to sales occurring
in February 2009 for auction guarantees that were entered into
on or before December 31, 2008.
For the year ended December 31, 2008, Sothebys recognized auction guarantee losses of approximately $78 million. A significant portion of these losses were recognized in the second half of 2008, due in large part to the downturn in the international art market that began in September 2008 and
were concentrated in the autumn sales of Contemporary, Impressionist and Asian Art.
As of February 18, 2009, Sothebys had outstanding auction guarantees totaling $7.5 million, with the related property having pre-sale low and high estimates (1) of $7.5 million and $11.1 million, respectively. Sothebys financial exposure under these auction guarantees is reduced by $6.4 million as a
result of risk sharing arrangements with third parties. Substantially all of the property related to such auction guarantees is being offered at auctions in the first half of 2009. As of February 18, 2009, $0.3 million of the guaranteed amount had been advanced by Sothebys and will be recorded within Notes
Receivable and Consignor Advances.
In response to the downturn in the international art market that began in September 2008, as well as the current uncertain and challenging economic environment, Sothebys has substantially reduced its use of auction guarantees for sales occurring in January and February 2009 when compared to the
comparable sales occurring in 2008 and 2007. Sothebys expects to continue to significantly limit its use of auction guarantees for the foreseeable future. (See statement on Forward Looking Statements.)
46
|
(1) |
|
|
|
Pre-sale estimates are not always accurate predictions of auction sale results or the fair value of the guaranteed property.
|
Lending Commitments
Sothebys enters into legally binding arrangements to lend, primarily on a collateralized basis and subject to certain limitations and conditions, to potential consignors and other individuals who have collections of fine art or other objects. Unfunded commitments to extend additional credit were $1.6
million at December 31, 2008, of which $1 million is committed to an employee of Sothebys.
DERIVATIVE FINANCIAL INSTRUMENTS
In almost all cases, Sothebys utilizes forward exchange contracts to hedge cash flow exposures related to foreign currency risks, which primarily arise from short-term foreign currency denominated intercompany balances and, to a lesser extent, foreign currency denominated client payable balances and
foreign currency denominated future auction guarantee obligations. Such forward exchange contracts are typically short-term with settlement dates less than one year from their inception.
Additionally, in the first quarter of 2008, Sothebys purchased a foreign currency option contract to hedge the foreign currency risk associated with an amount that became payable to a consignor as a result of the sale of property at auction in the second quarter of 2008. In May 2008, Sothebys
realized a $3.7 million gain as a result of the exercise of this option contract and recognized a related $3.5 million foreign currency loss on the settlement of the underlying consignor payable. The $3.7 million gain realized in the second quarter of 2008 was largely recognized as an unrealized gain in the
first quarter of 2008 reflecting the change in fair value of the option contract during that period.
Exposures related to Sothebys foreign currency risks are centrally managed by its global treasury function. Sothebys outstanding forward exchange contracts and foreign currency option contracts, if any, are not designated as hedging instruments under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, and are recorded in the Consolidated Balance Sheets at their fair values (see Note S of Notes to Consolidated Financial Statements). Changes in the fair value of these derivative financial instruments are recognized in the Consolidated Income Statements
within Other Income (Expense).
At December 31, 2008, Sothebys had $154.8 million of notional value forward exchange and foreign currency option contracts outstanding. Notional amounts do not quantify risk or represent assets or liabilities of Sothebys, but are used in the calculation of cash settlements under such contracts.
Sothebys is exposed to credit-related losses in the event of nonperformance by the three counterparties to its forward exchange contracts, but Sothebys does not expect any counterparties to fail to meet their obligations given their high short-term (A1/P1) credit ratings.
As of December 31, 2008, Sothebys Consolidated Balance Sheets included liabilities of $2.6 million recorded within Accounts Payable and Accrued Liabilities reflecting the aggregate fair value of Sothebys outstanding forward exchange and foreign currency option contracts on that date. As of
December 31, 2007, Sothebys Consolidated Balance Sheets included an asset of $0.5 million recorded within Prepaid Expenses and Other Current Assets reflecting the aggregate fair value of Sothebys outstanding forward exchange contracts on that date.
CONTINGENCIES
For information related to Contingencies, see Note O of Notes to Consolidated Financial Statements.
UNCERTAIN TAX POSITIONS
For information related to Uncertain Tax Positions, see Note K of Notes to Consolidated Financial Statements.
47
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash EquivalentsAs of December 31, 2008 Sothebys had cash and cash equivalents of approximately $253.5 million, which are invested on a short-term basis in the highest rated AAA U.S. Treasury money market funds and the highest rated overnight time deposits with major banks.
Bank Credit FacilitySothebys has a senior secured credit agreement with an international syndicate of lenders arranged by Bank of America Securities N.A. (BofA) (the BofA Credit Agreement) that expires on September 7, 2010.
As of December 31, 2008, there were no outstanding borrowings under the BofA Credit Agreement and the amount of unused borrowing capacity was $300 million. For the year ended December 31, 2008, the weighted average interest rate charged on outstanding borrowings under the BofA Credit
Agreement was approximately 5.0%.
The borrowing capacity available under the BofA Credit Agreement is limited to a borrowing base, which is generally equal to 100% of eligible loans (i.e., notes receivable and consignor advances) made by Sothebys in the U.S. and the U.K. plus 15% of Sothebys net tangible assets, as defined by
the BofA Credit Agreement. Borrowings under the BofA Credit Agreement are secured by substantially all of the non-real estate assets of the Companys subsidiaries in the U.S. and the U.K. Additionally, the BofA Credit Agreement contains financial covenants which limit capital expenditures and
dividend payments, and which require Sothebys to maintain certain quarterly interest and leverage ratios. The BofA Credit Agreement also has certain non-financial covenants and restrictions. Management believes that Sothebys is in compliance with these covenants.
On February 4, 2009, as a result of the acceleration by RFR of the closing date of Sothebys purchase of the York Property (see York Property above) and the significant auction guarantee losses incurred by Sothebys in the second half of 2008, the BofA Credit Agreement was amended to provide
for the following:
|
|
|
|
|
An increase in the maximum consolidated leverage ratio (as defined in the BofA Credit Agreement) from 3.5 to 4.25 for the twelve months ending March 31, 2009, 4.75 for the twelve months ending June 30, 2009, 5.0 for the twelve months ending September 30, 2009 and 3.75 for the twelve months
ending December 31, 2009. In the first quarter of 2010, the maximum leverage ratio reverts to 3.5 for the remaining term of the BofA Credit Agreement. |
|
|
|
|
|
A one-time adjustment to the calculation of the consolidated leverage ratio to exclude $53 million of auction guarantee losses incurred in the second half of 2008. |
|
|
|
|
|
An increase of $15 million (from $10 million to $25 million) in the amount of cash payments related to certain non-recurring expenses that may be excluded from the calculation of Consolidated EBITDA, as defined by the BofA Credit Agreement. |
|
|
|
|
|
An increase of $20 million (from $20 million to $40 million) in the available capacity for cash payments to repurchase long-term debt. |
|
|
|
|
|
An increase in the interest rate charged on outstanding borrowings, which will now be LIBOR plus a margin between 3.25% and 4.5%, determined by reference to Sothebys leverage ratio. Prior to this amendment, the interest rate charged on outstanding borrowings was LIBOR plus 1.75%. |
|
|
|
|
|
A reduction in the total borrowing capacity from $300 million to $250 million.
|
As a result of this amendment, Sothebys incurred fees of approximately $2 million, which will be amortized to interest expense over the remaining term of the BofA Credit Agreement.
Convertible NotesOn June 17, 2008, Sothebys issued $200 million aggregate principal amount of 3.125% Convertible Senior Notes, due June 15, 2013 (the Convertible Notes). The net proceeds from the issuance of the Convertible Notes were approximately $194.3 million, after deducting transaction
costs.
The Convertible Notes bear interest at a rate of 3.125% per year, payable semi-annually in cash on June 15 and December 15 of each year. The principal amount of the Convertible Notes is payable in cash, shares of Sothebys common stock (Common Stock), or a combination thereof, at
48
the option of Sothebys, based on an initial conversion rate of 29.4122 shares of Common Stock per $1,000 principal amount of Convertible Notes which is equivalent to a conversion price of approximately $34 per share (the Conversion Price). The conversion rate for the Convertible Notes is subject to
adjustment for certain events. The maximum number of shares of Common Stock that may be issued upon conversion is approximately 5.8 million shares. The Convertible Notes may be converted at any time beginning on March 15, 2013 and ending on the close of business on June 14, 2013. Prior to
March 15, 2013, the Convertible Notes may only be converted: (1) during any fiscal quarter after the fiscal quarter ending September 30, 2008 (and only during such fiscal quarter), if, the closing price of the Common Stock exceeds 130% of the Conversion Price during a defined period at the end of the
previous quarter, (2) if the trading price of the Convertible Notes falls below a certain threshold over a defined period, or (3) upon the occurrence of certain specified corporate transactions (as set forth in the Convertible Notes Indenture). As of December 31, 2008, none of these conversion criteria have
been met.
Upon conversion, Sothebys will pay or deliver, as the case may be, cash, shares of Common Stock or a combination thereof at its election. It is Sothebys current intent and policy to settle up to the principal amount of the Convertible Notes in cash.
Each of Sothebys existing and future domestic subsidiaries have jointly, severally, fully and unconditionally guaranteed the Convertible Notes on a senior unsecured basis to the extent such subsidiaries guarantee borrowings under the BofA Credit Agreement.
Senior NotesOn June 17, 2008, Sothebys issued $150 million aggregate principal amount of 7.75% Senior Notes (the Senior Notes), due June 15, 2015. The net proceeds from the issuance of the Senior Notes were approximately $145.9 million, after deducting the initial purchasers discounts and
fees. The Senior Notes were issued at a discount and have an effective interest rate of 8%. Interest on the Senior Notes is payable semi-annually in cash on June 15 and December 15 of each year.
On December 23, 2008, Sothebys repurchased an aggregate principal amount of $19 million of its Senior Notes for a purchase price of $10.5 million (representing 56% of the aggregate principal amount repurchased). This repurchase resulted in a non-cash benefit of $7.8 million, which was recognized
within Extinguishment of Debt (Net) in the Consolidated Income Statements in the fourth quarter of 2008. Additionally, Sothebys will realize annual interest expense savings of approximately $1.5 million beginning in 2009.
On January 27, 2009, Sothebys repurchased an additional $2.8 million of its Senior Notes for a purchase price of $1.6 million (representing 59% of the aggregate principal amount repurchased). This repurchase resulted in a non-cash benefit of approximately $1 million, which will be reflected in
Sothebys results in the first quarter of 2009.
Management will continue to monitor the market for its Senior Notes and may purchase additional Senior Notes opportunistically, as and when pricing is favorable, subject to the $40 million limitation imposed by the BofA Credit Agreement. (See statement on Forward Looking Statements.)
At any time before June 15, 2015, the Senior Notes will only be redeemable at the price specified in the Senior Notes Indenture, plus accrued and unpaid interest. In addition, at any time prior to June 15, 2011, Sothebys may redeem up to 35% of the aggregate principal amount of the Senior Notes
with the net cash proceeds of certain equity offerings at the redemption price of 107.75% plus accrued and unpaid interest. Also, if Sothebys experiences a Change of Control, Sothebys must offer to repurchase all of the Senior Notes then outstanding at 101% of the aggregate principal amount of the
Senior Notes repurchased, plus accrued and unpaid interest.
The Senior Notes Indenture also contains covenants that limit, among other things, Sothebys and its subsidiaries ability to: grant liens on their assets; enter into certain sale and leaseback transactions; and merge, consolidate or transfer or dispose of substantially all of their assets. Management
believes that Sothebys is in compliance with these covenants.
Each of Sothebys existing and future domestic subsidiaries have jointly, severally, fully and unconditionally guaranteed the Senior Notes on a senior unsecured basis to the extent such subsidiaries guarantee borrowings under the BofA Credit Agreement.
49
York Property MortgageAs discussed above, on February 6, 2009, Sothebys purchased the York Property from RFR for an aggregate purchase price of $370 million. Sothebys financed the purchase price through $135 million in cash payments and the assumption of an existing $235 million mortgage.
The York Property mortgage matures on July 1, 2035, with an optional pre-payment date of July 1, 2015, and bears an annual rate of interest of approximately 5.6%, which increases subsequent to July 1, 2015. It is Sothebys current intention to pre-pay the mortgage on or about July 1, 2015.
Liquidity RequirementsSothebys generally relies on operating cash flows supplemented by borrowings to meet its liquidity requirements.
Sothebys short-term operating needs and capital requirements include peak seasonal working capital requirements, the funding of notes receivable and consignor advances, other short-term commitments to consignors (including auction guarantees), the funding of capital expenditures, the payment of
any dividends, and interest payments on the York Property mortgage obligation, as well as the short-term commitments to be funded on or before December 31, 2009 included in the table of contractual obligations and commitments above, excluding the York Property capital lease obligation, which was
extinguished on February 6, 2009.
Sothebys long-term operating needs and capital requirements include peak seasonal working capital requirements, the funding of notes receivable and consignor advances, the funding of capital expenditures and principal and interest payments on the York Property mortgage obligation, as well as the
funding of Sothebys presently anticipated long-term contractual obligations and commitments outlined in the table of contractual obligations and commitments, excluding the York Property capital lease obligation, which was extinguished on February 6, 2009.
Management believes that operating cash flows, cash balances and borrowings available under the BofA Credit Agreement through its September 2010 expiration date will be adequate to meet its anticipated short-term and long-term commitments, operating needs and capital requirements. (See
statement on Forward Looking Statements.)
DIVIDENDS
The following table summarizes dividends declared and paid for the years ended December 31, 2008, 2007 and 2006 (in thousands of dollars, except per share data):
|
|
|
|
|
Year Ended |
|
Dividends Per Share |
|
Dividends Declared and Paid |
December 31, 2008 |
|
|
$ |
|
0.60 |
|
|
|
$ |
|
40,651 |
|
December 31, 2007 |
|
|
$ |
|
0.50 |
|
|
|
$ |
|
33,326 |
|
December 31, 2006 |
|
|
$ |
|
0.20 |
|
|
|
$ |
|
12,946 |
|
On
February 26, 2009, Sothebys Board of Directors declared a quarterly
dividend on its common stock of $0.15 per share (approximately $10.2 million),
to be paid on March 16, 2009 to shareholders of record as of March 9, 2009.
Sothebys ability to pay quarterly dividends is assessed by management on a regular basis in reference to prevailing economic, financial, market and other conditions.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company continually evaluates its market risk associated with its financial instruments and derivative financial instruments (see above) during the course of its business. As of December 31, 2008, the Companys financial instruments include cash and cash equivalents, restricted cash, notes
receivable and consignor advances, trust assets related to the deferred compensation liability, the 7.75% Senior Notes, the 3.125% Convertible Notes, the deferred compensation liability and the note payable to Arcimboldo.
The Company believes that its interest rate risk is minimal as a hypothetical 10% increase or decrease in interest rates is immaterial to the Companys cash flow, earnings and fair value related to financial instruments. (See statement on Forward Looking Statements.)
50
As of December 31, 2008, a hypothetical 10% strengthening or weakening of the U.S. dollar relative to all other currencies would result in a decrease or increase in cash flow of approximately $14.9 million.
The Company utilizes forward exchange contracts to manage exposures related to foreign currency risks, which primarily arise from short-term foreign currency denominated intercompany balances and, to a lesser extent, foreign currency denominated client receivable and payable balances, as well as
foreign currency denominated auction guarantee obligations. At December 31, 2008, the Company had $154.8 million of notional value forward 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 is exposed to credit-related losses in the event of nonperformance by the counterparties to its forward exchange and foreign currency option contracts, but the Company does not expect any counterparties to fail to meet their obligations given their high
credit ratings. (See Derivative Instruments above and Note B of Notes to Consolidated Financial Statements.)
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2007, the Financial Accounting Standards Board (the FASB) issued SFAS No. 141(R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. Effective for Sothebys in the first quarter of 2009, SFAS No. 141(R) requires the
acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose all of the
information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that
currently exists in accounting for transactions between an entity and noncontrolling interests by requiring that they be treated as equity transactions. Management is evaluating the impact of adopting SFAS No. 141(R) and SFAS No. 160 on Sothebys Consolidated Financial Statements.
In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157, which defers the effective date of SFAS No. 157, Fair Value Measurements, as it applies to non-financial assets and liabilities from January 1, 2008 to January 1, 2009.
Management is evaluating the impact of adopting SFAS No. 157 as it relates to Sothebys non-financial assets and liabilities, as well as the impact of adopting FASB FSP 157-2.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, which further illustrates key considerations in determining the fair value of a financial asset in an inactive market. FSP 157-3 became effective on October
10, 2008 and is applicable to all periods for which financial statements have not yet been issued. Management has adopted FSP 157-3 and applied its guidance, as applicable.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging ActivitiesAn Amendment of FASB Statement No. 133. Effective for Sothebys in the first quarter of 2009, SFAS No. 161 requires enhanced disclosures about an entitys derivative and hedging
activities. Management is evaluating the impact of adopting SFAS No. 161 on Sothebys Consolidated Financial Statements.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). Effective for Sothebys in the first quarter of 2009, FSP APB 14-1 applies to convertible debt instruments that, by their
stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under SFAS No. 133. FSP APB 14-1 requires the liability and equity components of convertible debt
instruments within its scope to be separately accounted for in a manner that will reflect the entitys nonconvertible debt borrowing rate when interest expense is recognized in subsequent periods. The resulting equity component (the conversion option) is not remeasured as
51
long as it continues to meet the conditions for equity classification in Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock. Early adoption of this standard is not permitted. Upon adoption of
FSP APB 14-1 on January 1, 2009, Sothebys will record a debt discount of approximately $35 million related to the Convertible Notes and an increase to Additional Paid-In Capital of approximately $18 million (net of taxes) to reflect the conversion feature of the Convertible Notes. Sothebys will record
a cumulative effect adjustment of approximately $2 million (net of taxes) to the January 1, 2009 balance of Retained Earnings reflecting the amortization of the debt discount between the date that the Convertible Notes were issued and the date that FSP APB 14-1 is adopted. The remaining debt
discount will subsequently be amortized over the remaining life of the Convertible Notes using the effective interest rate method. For the year ending December 31, 2009, as a result of the adoption of FSP APB 14-1, Sothebys expects an increase in interest expense of approximately $7 million due to the
amortization of the debt discount attributable to the Convertible Notes. (See statement on Forward Looking Statements.)
In March 2008, the FASB issued EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock. Effective for Sothebys in the first quarter of 2009, EITF No. 07-5 defines when adjustment features within contracts are considered to be equity-
indexed. Early adoption of this standard is not permitted. Management does not believe that the adoption of this standard will not have an effect on Sothebys Consolidated Financial Statements.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No.
142 for intangible assets acquired after adoption. Under FSP FAS 142-3 an entity should consider its own historical experience in renewing similar arrangements or market participant assumptions in the absence of historical experience. FSP FAS 142-3 also requires disclosures to enable users of financial
statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entitys intent and/or ability to renew or extend the arrangement. FSP FAS 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2008. Management is evaluating the impact of adopting this standard on Sothebys Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
This Form 10-K contains certain forward looking statements; as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended, relating to future events and the financial performance of Sothebys. 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 management believes could cause the actual results to differ materially from the predicted results in the forward looking statements include, but are not limited to, the factors
listed below under Part I, Item 1A, Risk Factors, which are not ranked in any particular order.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion under the caption contained in Item 7.
52
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
SOTHEBYS
New York, New York
We have audited the accompanying consolidated balance sheets of Sothebys and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of income, cash flows and changes in shareholders equity, for each of the three years in the period ended
December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sothebys and subsidiaries
as of December 31, 2008 and 2007, and the results of their operations and
their cash flows for each of the three years in the period ended December
31, 2008, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note N to the consolidated financial statements, the Company adopted the measurement date provision and the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of Financial Accounting Standards Board Statement No. 87, 88, 106 and 132 (R), effective January 1, 2008 and December 31, 2006, respectively. In addition, as discussed in Note K to the consolidated financial statements, the Company adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109, effective January, 1, 2007.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2009 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ DELOITTE &
TOUCHE LLP
Deloitte & Touche LLP |
New York, New York
February 26, 2009
53
SOTHEBYS
CONSOLIDATED INCOME STATEMENTS
(Thousands of dollars, except per share data)
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
Revenues: |
|
|
|
|
|
|
Auction and related revenues |
|
|
$ |
|
616,625 |
|
|
|
$ |
|
833,128 |
|
|
|
$ |
|
631,344 |
|
Finance revenues |
|
|
|
14,183 |
|
|
|
|
17,025 |
|
|
|
|
15,864 |
|
Dealer revenues |
|
|
|
55,596 |
|
|
|
|
62,766 |
|
|
|
|
12,776 |
|
License fee revenues |
|
|
|
3,438 |
|
|
|
|
2,960 |
|
|
|
|
2,922 |
|
Other revenues |
|
|
|
1,717 |
|
|
|
|
1,843 |
|
|
|
|
1,903 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
691,559 |
|
|
|
|
917,722 |
|
|
|
|
664,809 |
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
Direct costs of services |
|
|
|
95,410 |
|
|
|
|
80,400 |
|
|
|
|
63,303 |
|
Dealer cost of sales |
|
|
|
61,978 |
|
|
|
|
49,161 |
|
|
|
|
6,060 |
|
Marketing expenses |
|
|
|
19,662 |
|
|
|
|
19,792 |
|
|
|
|
12,851 |
|
Salaries and related costs |
|
|
|
240,126 |
|
|
|
|
293,720 |
|
|
|
|
226,410 |
|
General and administrative expenses |
|
|
|
176,004 |
|
|
|
|
166,539 |
|
|
|
|
136,244 |
|
Depreciation and amortization expense |
|
|
|
24,845 |
|
|
|
|
22,101 |
|
|
|
|
22,783 |
|
Impairment loss |
|
|
|
13,189 |
|
|
|
|
14,979 |
|
|
|
|
|
|
Restructuring charges |
|
|
|
4,312 |
|
|
|
|
|
|
|
|
|
|
|
Antitrust related matters |
|
|
|
(18,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of land and buildings |
|
|
|
|
|
|
|
|
(4,752 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
|
617,141 |
|
|
|
|
641,940 |
|
|
|
|
467,651 |
|
|
|
|
|
|
|
|
Operating income |
|
|
|
74,418 |
|
|
|
|
275,782 |
|
|
|
|
197,158 |
|
Interest income |
|
|
|
8,333 |
|
|
|
|
14,456 |
|
|
|
|
5,891 |
|
Interest expense |
|
|
|
(36,682 |
) |
|
|
|
|
(28,622 |
) |
|
|
|
|
(33,039 |
) |
|
Extinguishment of debt (net) |
|
|
|
5,364 |
|
|
|
|
|
|
|
|
|
|
|
Insurance recovery |
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
Other (expense) income |
|
|
|
(2,956 |
) |
|
|
|
|
1,403 |
|
|
|
|
(4,227 |
) |
|
|
|
|
|
|
|
|
Income from continuing operations before taxes |
|
|
|
48,477 |
|
|
|
|
283,019 |
|
|
|
|
165,783 |
|
Income tax expense |
|
|
|
22,347 |
|
|
|
|
72,512 |
|
|
|
|
60,050 |
|
Equity in earnings of investees, net of taxes |
|
|
|
2,139 |
|
|
|
|
2,632 |
|
|
|
|
1,626 |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
28,269 |
|
|
|
|
213,139 |
|
|
|
|
107,359 |
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
Loss from discontinued operations before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
(504 |
) |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
(194 |
) |
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
(310 |
) |
|
|
|
|
|
|
|
|
Net income |
|
|
$ |
|
28,269 |
|
|
|
$ |
|
213,139 |
|
|
|
$ |
|
107,049 |
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
Earnings from continuing operations |
|
|
$ |
|
0.44 |
|
|
|
$ |
|
3.34 |
|
|
|
$ |
|
1.78 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
$ |
|
0.44 |
|
|
|
$ |
|
3.34 |
|
|
|
$ |
|
1.77 |
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
Earnings from continuing operations |
|
|
$ |
|
0.43 |
|
|
|
$ |
|
3.25 |
|
|
|
$ |
|
1.73 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
$ |
|
0.43 |
|
|
|
$ |
|
3.25 |
|
|
|
$ |
|
1.72 |
|
|
|
|
|
|
|
|
Cash dividends paid per common share |
|
|
$ |
|
0.60 |
|
|
|
$ |
|
0.50 |
|
|
|
$ |
|
0.20 |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
|
54
SOTHEBYS
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
ASSETS |
|
|
|
|
Current Assets: |
|
|
|
|
Cash and cash equivalents |
|
|
$ |
|
253,468 |
|
|
|
$ |
|
348,253 |
|
Restricted cash |
|
|
|
25,561 |
|
|
|
|
14,879 |
|
Accounts receivable, net of allowance for doubtful accounts of $9,906 and $6,252 |
|
|
|
544,324 |
|
|
|
|
835,387 |
|
Notes receivable and consignor advances, net of allowance for credit losses of $1,213 and $1,028 |
|
|
|
152,224 |
|
|
|
|
117,642 |
|
Inventory |
|
|
|
186,589 |
|
|
|
|
205,969 |
|
Deferred income taxes |
|
|
|
23,315 |
|
|
|
|
15,529 |
|
Income tax receivable |
|
|
|
20,767 |
|
|
|
|
1,021 |
|
Prepaid expenses and other current assets |
|
|
|
20,661 |
|
|
|
|
26,922 |
|
|
|
|
|
|
Total Current Assets |
|
|
|
1,226,909 |
|
|
|
|
1,565,602 |
|
|
|
|
|
|
Non-Current Assets: |
|
|
|
|
Notes receivable |
|
|
|
24,668 |
|
|
|
|
58,738 |
|
Fixed assets, net of accumulated depreciation and amortization of $182,271 and $178,905 |
|
|
|
206,206 |
|
|
|
|
222,310 |
|
Goodwill |
|
|
|
14,202 |
|
|
|
|
28,080 |
|
Intangible assets, net of accumulated amortization of $3,412 and $1,465 |
|
|
|
3,471 |
|
|
|
|
5,820 |
|
Equity method investments |
|
|
|
18,416 |
|
|
|
|
19,860 |
|
Deferred income taxes |
|
|
|
74,332 |
|
|
|
|
65,948 |
|
Trust assets related to deferred compensation liability |
|
|
|
33,191 |
|
|
|
|
31,818 |
|
Pension asset |
|
|
|
11,221 |
|
|
|
|
14,010 |
|
York Property deposit |
|
|
|
50,000 |
|
|
|
|
|
|
Other assets |
|
|
|
16,715 |
|
|
|
|
7,918 |
|
|
|
|
|
|
Total Assets |
|
|
$ |
|
1,679,331 |
|
|
|
$ |
|
2,020,104 |
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
Current Liabilities: |
|
|
|
|
Due to consignors |
|
|
$ |
|
411,713 |
|
|
|
$ |
|
773,685 |
|
Accounts payable and accrued liabilities |
|
|
|
101,856 |
|
|
|
|
122,896 |
|
Accrued salaries and related costs |
|
|
|
26,713 |
|
|
|
|
79,579 |
|
Settlement liabilities |
|
|
|
|
|
|
|
|
22,651 |
|
Accrued income taxes |
|
|
|
13,606 |
|
|
|
|
67,462 |
|
Deferred income taxes |
|
|
|
1,293 |
|
|
|
|
|
|
Other current liabilities |
|
|
|
8,611 |
|
|
|
|
8,589 |
|
|
|
|
|
|
Total Current Liabilities |
|
|
|
563,792 |
|
|
|
|
1,074,862 |
|
|
|
|
|
|
Long-Term Liabilities: |
|
|
|
|
Long-term debt, net of unamortized discount of $1,626 and $112 |
|
|
|
329,267 |
|
|
|
|
99,888 |
|
York Property capital lease obligation |
|
|
|
163,808 |
|
|
|
|
167,190 |
|
Deferred gain on sale of York Property |
|
|
|
14,859 |
|
|
|
|
15,988 |
|
Pension liabilities |
|
|
|
2,320 |
|
|
|
|
2,454 |
|
Deferred income taxes |
|
|
|
2,947 |
|
|
|
|
5,223 |
|
Accrued income taxes |
|
|
|
13,658 |
|
|
|
|
7,470 |
|
Deferred compensation liability |
|
|
|
31,469 |
|
|
|
|
31,073 |
|
Other liabilities |
|
|
|
3,549 |
|
|
|
|
11,939 |
|
|
|
|
|
|
Total Liabilities |
|
|
|
1,125,669 |
|
|
|
|
1,416,087 |
|
|
|
|
|
|
Commitments and contingencies (see Note O) |
|
|
|
|
Shareholders Equity: |
|
|
|
|
Common Stock, $0.10 par value |
|
|
|
6,718 |
|
|
|
|
6,647 |
|
Authorized shares at December 31, 2008200,000,000 |
|
|
|
|
Issued and outstanding shares at December 31, 200867,279,925 |
|
|
|
|
Issued and outstanding shares at December 31, 200766,563,771 |
|
|
|
|
Additional paid-in capital |
|
|
|
272,694 |
|
|
|
|
249,453 |
|
Retained earnings |
|
|
|
325,478 |
|
|
|
|
338,004 |
|
Accumulated other comprehensive (loss) income |
|
|
|
(51,228 |
) |
|
|
|
|
9,913 |
|
|
|
|
|
|
Total Shareholders Equity |
|
|
|
553,662 |
|
|
|
|
604,017 |
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
|
$ |
|
1,679,331 |
|
|
|
$ |
|
2,020,104 |
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
|
55
SOTHEBYS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
Operating Activities: |
|
|
|
|
|
|
Net income* |
|
|
$ |
|
28,269 |
|
|
|
|
213,139 |
|
|
|
|
107,049 |
|
Adjustments to reconcile net income to cash used by operating activities: |
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
|
24,845 |
|
|
|
|
22,101 |
|
|
|
|
22,783 |
|
Gain on sale of land and buildings |
|
|
|
|
|
|
|
|
(4,752 |
) |
|
|
|
|
|
|
Benefit on extinguishment of debt |
|
|
|
(7,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
Impairment loss |
|
|
|
13,189 |
|
|
|
|
14,979 |
|
|
|
|
|
|
Equity in earnings of investees |
|
|
|
(2,139 |
) |
|
|
|
|
(2,632 |
) |
|
|
|
|
(1,626 |
) |
|
Deferred income tax expense (benefit) |
|
|
|
618 |
|
|
|
|
(25,608 |
) |
|
|
|
|
23,347 |
|
Stock compensation expense |
|
|
|
30,396 |
|
|
|
|
28,163 |
|
|
|
|
15,830 |
|
Net pension (benefit) expense |
|
|
|
(4,045 |
) |
|
|
|
|
11,605 |
|
|
|
|
6,897 |
|
Asset provisions |
|
|
|
34,081 |
|
|
|
|
6,790 |
|
|
|
|
4,320 |
|
Antitrust related matters |
|
|
|
(18,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
Amortization of discount related to antitrust matters |
|
|
|
|
|
|
|
|
941 |
|
|
|
|
2,679 |
|
Excess tax benefits from stock-based compensation |
|
|
|
(1,086 |
) |
|
|
|
|
(15,693 |
) |
|
|
|
|
(14,871 |
) |
|
Other |
|
|
|
(163 |
) |
|
|
|
|
(205 |
) |
|
|
|
|
658 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
|
|
198,020 |
|
|
|
|
(443,307 |
) |
|
|
|
|
(21,653 |
) |
|
Due to consignors |
|
|
|
(301,073 |
) |
|
|
|
|
200,080 |
|
|
|
|
170,458 |
|
Inventory |
|
|
|
(20,923 |
) |
|
|
|
|
(84,859 |
) |
|
|
|
|
(17,177 |
) |
|
Prepaid expenses and other current assets |
|
|
|
(614 |
) |
|
|
|
|
732 |
|
|
|
|
(8,896 |
) |
|
Other long-term assets |
|
|
|
(1,470 |
) |
|
|
|
|
787 |
|
|
|
|
(904 |
) |
|
Trust assets related to the deferred compensation liability |
|
|
|
(1,374 |
) |
|
|
|
|
(30,492 |
) |
|
|
|
|
|
|
Settlement liabilities |
|
|
|
(4,266 |
) |
|
|
|
|
(24,065 |
) |
|
|
|
|
(19,009 |
) |
|
Income tax receivable and deferred income tax assets |
|
|
|
(20,489 |
) |
|
|
|
|
(1,546 |
) |
|
|
|
|
5,105 |
|
Accrued income taxes and deferred income tax liabilities |
|
|
|
(47,465 |
) |
|
|
|
|
62,951 |
|
|
|
|
8,507 |
|
Accounts payable and accrued liabilities and other liabilities |
|
|
|
(73,563 |
) |
|
|
|
|
33,746 |
|
|
|
|
(13,084 |
) |
|
|
|
|
|
|
|
|
Net cash (used) provided by operating activities |
|
|
|
(175,478 |
) |
|
|
|
|
(37,145 |
) |
|
|
|
|
270,413 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
Funding of notes receivable and consignor advances |
|
|
|
(377,216 |
) |
|
|
|
|
(306,241 |
) |
|
|
|
|
(280,735 |
) |
|
Collections of notes receivable and consignor advances |
|
|
|
371,388 |
|
|
|
|
352,381 |
|
|
|
|
219,266 |
|
Purchases of short-term investments |
|
|
|
|
|
|
|
|
(385,275 |
) |
|
|
|
|
(312,183 |
) |
|
Proceeds from maturities of short-term investments |
|
|
|
|
|
|
|
|
511,317 |
|
|
|
|
186,141 |
|
Capital expenditures |
|
|
|
(24,192 |
) |
|
|
|
|
(17,396 |
) |
|
|
|
|
(12,719 |
) |
|
Proceeds from the sale of land and buildings |
|
|
|
|
|
|
|
|
6,163 |
|
|
|
|
|
|
Funding of York Property deposit |
|
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Acquisition, net of cash acquired |
|
|
|
(193 |
) |
|
|
|
|
(1,728 |
) |
|
|
|
|
|
|
Distributions from equity investees |
|
|
|
5,333 |
|
|
|
|
7,568 |
|
|
|
|
5,434 |
|
Increase in restricted cash |
|
|
|
(8,828 |
) |
|
|
|
|
(3,049 |
) |
|
|
|
|
(3,061 |
) |
|
|
|
|
|
|
|
|
Net cash (used) provided by investing activities |
|
|
|
(83,708 |
) |
|
|
|
|
163,740 |
|
|
|
|
(197,857 |
) |
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
Proceeds from revolving credit facility borrowings |
|
|
|
390,000 |
|
|
|
|
|
|
|
|
|
398,673 |
|
Repayments of revolving credit facility borrowings |
|
|
|
(390,000 |
) |
|
|
|
|
|
|
|
|
|
(435,158 |
) |
|
Repayment of 6.98% Senior Unsecured Debt |
|
|
|
(100,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from 3.125% Convertible Senior Notes, net of debt issuance cost of $5,700 |
|
|
|
194,300 |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from 7.75% Senior Notes, net of debt issuance costs and discount of $4,145 |
|
|
|
145,855 |
|
|
|
|
|
|
|
|
|
|
|
Repayment of 7.75% Senior Notes |
|
|
|
(10,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
Premiums paid for the purchase of common stock call options |
|
|
|
(40,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
Proceeds received from sale of common stock warrants |
|
|
|
22,300 |
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
(212 |
) |
|
Dividends paid |
|
|
|
(40,651 |
) |
|
|
|
|
(33,326 |
) |
|
|
|
|
(12,946 |
) |
|
Repayment of acquiree bank debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,531 |
) |
|
Decrease in York Property capital lease obligation |
|
|
|
(1,796 |
) |
|
|
|
|
(1,619 |
) |
|
|
|
|
(1,437 |
) |
|
Proceeds from exercise of employee stock options |
|
|
|
339 |
|
|
|
|
18,557 |
|
|
|
|
66,987 |
|
Excess tax benefits from stock-based compensation |
|
|
|
1,086 |
|
|
|
|
15,693 |
|
|
|
|
14,871 |
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
|
170,255 |
|
|
|
|
(695 |
) |
|
|
|
|
21,247 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
(5,854 |
) |
|
|
|
|
1,259 |
|
|
|
|
2,335 |
|
(Decrease) increase in cash and cash equivalents |
|
|
|
(94,785 |
) |
|
|
|
|
127,159 |
|
|
|
|
96,138 |
|
Cash and cash equivalents at beginning of period |
|
|
|
348,253 |
|
|
|
|
221,094 |
|
|
|
|
124,956 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
$ |
|
253,468 |
|
|
|
$ |
|
348,253 |
|
|
|
$ |
|
221,094 |
|
|
|
|
|
|
|
|
* Net loss from discontinued operations |
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
(310 |
) |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
56
SOTHEBYS
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional Paid-In Capital |
|
Retained Earnings |
|
Deferred Compensation Expense |
|
Accumulated Other Comprehensive Income (Loss) |
|
Total |
Balance at January 1, 2006 |
|
|
$ |
|
5,777 |
|
|
|
$ |
|
73,597 |
|
|
|
$ |
|
65,952 |
|
|
|
$ |
|
(7,876 |
) |
|
|
|
$ |
|
(11,174 |
) |
|
|
|
$ |
|
126,276 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
107,049 |
|
|
|
|
|
|
|
|
107,049 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
12,841 |
|
|
|
|
12,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
119,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of funded status of defined benefit pension plans upon adoption of SFAS No. 158 |
|
|
|
|
|
|
|
|
|
|
|
(63,555 |
) |
|
|
|
|
(63,555 |
) |
|
Repurchase of common stock |
|
|
|
|
|
(212 |
) |
|
|
|
|
|
|
|
|
|
|
(212 |
) |
|
Issuance of common stock in acquisition |
|
|
|
195 |
|
|
|
|
41,180 |
|
|
|
|
|
|
|
|
|
|
41,375 |
|
Stock options exercised |
|
|
|
395 |
|
|
|
|
66,592 |
|
|
|
|
|
|
|
|
|
|
66,987 |
|
Stock option expense |
|
|
|
|
|
1,389 |
|
|
|
|
|
|
|
|
|
|
1,389 |
|
Elimination of deferred compensation expense upon adoption of FASB 123R |
|
|
|
|
|
(7,876 |
) |
|
|
|
|
|
|
7,876 |
|
|
|
|
|
|
|
|
Restricted stock shares issued |
|
|
|
127 |
|
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock shares withheld to satisfy employee tax obligations |
|
|
|
(22 |
) |
|
|
|
|
(5,852 |
) |
|
|
|
|
|
|
|
|
|
|
(5,874 |
) |
|
Restricted stock shares forfeited |
|
|
|
(1 |
) |
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation expense |
|
|
|
|
|
13,226 |
|
|
|
|
|
|
|
|
|
|
13,226 |
|
Net tax benefit associated with stock option exercises and the vesting of restricted stock shares |
|
|
|
|
|
14,871 |
|
|
|
|
|
|
|
|
|
|
14,871 |
|
Shares issued to directors |
|
|
|
2 |
|
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
260 |
|
Cash dividends declared, $0.20 per common share |
|
|
|
|
|
|
|
(12,946 |
) |
|
|
|
|
|
|
|
|
(12,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
|
6,473 |
|
|
|
|
197,047 |
|
|
|
|
160,055 |
|
|
|
|
|
|
|
|
|
(61,888 |
) |
|
|
|
|
301,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
213,139 |
|
|
|
|
|
|
|
|
213,139 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
16,625 |
|
|
|
|
16,625 |
|
Net unrealized gains related to defined benefit pension plans |
|
|
|
|
|
|
|
|
|
|
|
50,804 |
|
|
|
|
50,804 |
|
Amortization of previously unrecognized prior service costs and net losses related to defined benefit pension plans |
|
|
|
|
|
|
|
|
|
|
|
4,372 |
|
|
|
|
4,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
284,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting for uncertainty in income taxes |
|
|
|
|
|
|
|
(1,864 |
) |
|
|
|
|
|
|
|
|
(1,864 |
) |
|
Stock options exercised |
|
|
|
123 |
|
|
|
|
18,434 |
|
|
|
|
|
|
|
|
|
|
18,557 |
|
Stock option expense |
|
|
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
295 |
|
Restricted stock shares issued |
|
|
|
75 |
|
|
|
|
548 |
|
|
|
|
|
|
|
|
|
|
623 |
|
Restricted stock shares withheld to satisfy employee tax obligations |
|
|
|
(23 |
) |
|
|
|
|
(9,323 |
) |
|
|
|
|
|
|
|
|
|
|
(9,346 |
) |
|
Restricted stock shares forfeited |
|
|
|
(1 |
) |
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation expense |
|
|
|
|
|
26,397 |
|
|
|
|
|
|
|
|
|
|
26,397 |
|
Net tax benefit associated with stock option exercises and the vesting of restricted stock shares |
|
|
|
|
|
15,693 |
|
|
|
|
|
|
|
|
|
|
15,693 |
|
Shares issued to directors |
|
|
|
|
|
361 |
|
|
|
|
|
|
|
|
|
|
361 |
|
Cash dividends declared, $0.50 per common share |
|
|
|
|
|
|
|
(33,326 |
) |
|
|
|
|
|
|
|
|
(33,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
$ |
|
6,647 |
|
|
|
$ |
|
249,453 |
|
|
|
$ |
|
338,004 |
|
|
|
$ |
|
|
|
|
|
$ |
|
9,913 |
|
|
|
$ |
|
604,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
28,269 |
|
|
|
|
|
|
|
|
28,269 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
(55,062 |
) |
|
|
|
|
(55,062 |
) |
|
Net unrealized losses related to defined benefit pension plans |
|
|
|
|
|
|
|
|
|
|
|
(6,341 |
) |
|
|
|
|
(6,341 |
) |
|
Amortization of previously unrecognized prior service costs and net losses related to defined benefit pension plans |
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of change in measurement date for defined benefit pension plan in accordance with SFAS No. 158 |
|
|
|
|
|
|
|
(144 |
) |
|
|
|
|
|
|
199 |
|
|
|
|
55 |
|
Stock options exercised |
|
|
|
3 |
|
|
|
|
299 |
|
|
|
|
|
|
|
|
|
|
302 |
|
Stock option expense |
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
14 |
|
Restricted stock shares issued |
|
|
|
101 |
|
|
|
|
1,021 |
|
|
|
|
|
|
|
|
|
|
1,122 |
|
Restricted stock shares withheld to satisfy employee tax obligations |
|
|
|
(28 |
) |
|
|
|
|
(8,152 |
) |
|
|
|
|
|
|
|
|
|
|
(8,180 |
) |
|
Restricted stock shares forfeited |
|
|
|
(5 |
) |
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock compensation expense |
|
|
|
|
|
29,950 |
|
|
|
|
|
|
|
|
|
|
29,950 |
|
Net tax shortfall associated with stock option exercises and the vesting of restricted stock shares |
|
|
|
|
|
(148 |
) |
|
|
|
|
|
|
|
|
|
|
(148 |
) |
|
Shares issued to directors |
|
|
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
451 |
|
Purchases of common stock call options, net of tax |
|
|
|
|
|
(22,499 |
) |
|
|
|
|
|
|
|
|
|
|
(22,499 |
) |
|
Sale of common stock warrants |
|
|
|
|
|
22,300 |
|
|
|
|
|
|
|
|
|
|
22,300 |
|
Cash dividends declared, $0.60 per common share |
|
|
|
|
|
|
|
(40,651 |
) |
|
|
|
|
|
|
|
|
(40,651 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
$ |
|
6,718 |
|
|
|
$ |
|
272,694 |
|
|
|
$ |
|
325,478 |
|
|
|
$ |
|
|
|
|
|
$ |
|
(51,228 |
) |
|
|
|
$ |
|
553,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
57
SOTHEBYS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note AOrganization and Business
Sothebys (or together with its subsidiaries, unless the context otherwise requires, the Company) is one of the worlds two largest auctioneers of authenticated fine art, antiques and decorative art, jewelry and collectibles. In addition to auctioning, the Companys Auction segment is engaged in a
number of related activities, including the brokering of private purchases and sales of fine art, jewelry and collectibles. The Company also operates as a dealer in works of art through its Dealer segment, conducts art-related financing activities through its Finance segment and is engaged, to a lesser extent,
in licensing activities. (See Note C for additional information related to the Companys reportable segments.)
Note BSummary of Significant Accounting Policies
Principles of ConsolidationThe Consolidated Financial Statements include the accounts of Sothebys and its wholly-owned subsidiaries, as well as those of an entity of which the Company was the primary beneficiary prior to May 12, 2008 in accordance with Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, as revised, which was adopted January 1, 2004 (see Note R). Intercompany transactions and balances have been eliminated. Equity investments in which the Company has significant influence over the investee, but
does not have control and is not the primary beneficiary, are accounted for using the equity method (see Note E).
Income Statement PresentationMarketing Expenses are costs related to the promotion of the Sothebys brand and consist of the cost of corporate marketing activities (including the cost of client service initiatives) and the cost of strategic sponsorships of important cultural institutions. For the years
ended December 31, 2008, 2007 and 2006, corporate marketing expenses totaled $16.1 million, $16.4 million and $10.9 million, respectively. For the years ended December 31, 2008, 2007 and 2006, the cost of strategic sponsorships totaled $3.6 million, $3.4 million and $2 million, respectively.
Foreign Currency TranslationAssets and liabilities of foreign subsidiaries are translated at year-end exchange rates. Income statement amounts are translated using weighted average monthly exchange rates during the year. Gains and losses resulting from translating foreign currency financial statements
are recorded in the Consolidated Balance Sheets within Accumulated Other Comprehensive Income (Loss) until the subsidiary is sold or liquidated.
Revenue Recognition (Auction and Related Revenues)The principal components of Auction and Related Revenues are: (1) auction commission revenues, (2) private sale commissions and (3) principal activities. The revenue recognition policy for each of these is described below.
(1) Auction Commission RevenuesIn its role as auctioneer, the Company principally functions as an agent accepting property on consignment from its selling clients. The Company sells property as agent of the consignor, bills the buyer for property purchased, receives payment from the buyer and
remits to the consignor the consignors portion of the buyers payment after deducting the Companys commissions, expenses and applicable taxes and royalties. The Companys commissions include those earned from the buyer (buyers premium) and those earned from the consignor (sellers
commission), both of which are calculated as a percentage of the hammer price of property sold at auction. Buyers premium and sellers commission revenues are recognized at the time of the auction sale (i.e., when the auctioneers hammer falls) and are recorded net of commissions owed to third
parties. Commissions owed to third parties are principally the result of situations when auction commissions are shared with consignors or with the Companys partners in auction guarantees.
(2) Private Sale CommissionsPrivate sale commissions are earned through the brokering of fine art, jewelry and collectible purchases and sales and are recognized when an agreement with the purchaser is finalized and the Company has fulfilled its obligations with respect to the transaction.
58
(3) Principal ActivitiesAuction segment principal activities consist mainly of gains and losses related to auction guarantees including: (i) any share of overage or shortfall recognized when the guaranteed property is offered or sold at auction, (ii) any subsequent writedowns to the carrying value of
guaranteed property that initially failed to sell at auction and (iii) any subsequent recoveries and losses on the sale of guaranteed property that initially failed to sell at auction. The overage or shortfall related to guaranteed property is generally recognized in the period in which the property is offered at
auction. However, a shortfall is recognized prior to the date of the auction if management determines that a loss related to an auction guarantee is probable. Writedowns to the carrying value of previously guaranteed property held in inventory are recognized in the period in which management
determines that a permanent decline in the estimated realizable value of the property has occurred. Recoveries or losses resulting from the subsequent sale of previously guaranteed property are recognized in the period in which the sale is completed; title to the property passes to the purchaser and the
Company has fulfilled its obligations with respect to the transaction.
To a much lesser extent Auction segment principal activities includes gains and losses related to the sale of other Auction segment inventory, as well as any writedowns to the carrying value of such inventory, which consists of objects obtained incidental to the auction process primarily as a result of
defaults by purchasers after the consignor has been paid. Gains and losses related to the sale of such Auction inventory are recognized in the period in which the sale is completed; title to the property passes to the purchaser and the Company has fulfilled its obligations with respect to the transaction.
Writedowns to the carrying value of such Auction segment inventory are recognized in the period in which management determines that a permanent decline in the estimated realizable value of the property has occurred.
Revenue Recognition (Finance Revenues)Finance revenues consist principally of interest income earned on Notes Receivable and Consignor Advances. Such interest income is recognized when earned based on the amount of the outstanding loan and the length of time the loan was outstanding during
the period. Where there is doubt regarding the ultimate collectibility of the principal for impaired loans, interest income is no longer recognized and any cash receipts subsequently received are thereafter directly applied to reduce the recorded investment in the loan.
Revenue Recognition (Dealer Revenues)Dealer Revenues consist of revenues earned from the sale of Dealer segment inventory and the Companys share of gains or losses resulting from the sale of property purchased by art dealers through unsecured loans from the Company. Dealer inventory
consists principally of property held by Noortman Master Paintings (or NMP), an art dealer specializing in Dutch and Flemish Old Master Paintings, as well as French Impressionist and Post-Impressionist paintings, and objects purchased for investment purposes.
Revenues earned from the sale of Dealer inventory are recognized in the period in which the sale is completed; title to the property passes to the purchaser and the Company has fulfilled its obligations with respect to the transaction.
The Companys share of gains resulting from the sale of property purchased by art dealers through unsecured loans from the Company is recognized when the sale is completed and title to the underlying property passes to the purchaser.
Sales, Use and Value Added TaxesSales, use and value added taxes assessed by governmental authorities that are both imposed on and concurrent with revenue-producing transactions between the Company and its clients are reported on a net basis within revenues.
Direct Costs of ServicesDirect costs of services consists largely of sale specific marketing costs such as auction catalogue production and distribution expenses and sale advertising and promotion expenses, which are expensed at the time of the sale. Also included in direct costs of services are sale-
related shipping expenses, which are expensed when incurred.
Stock-Based CompensationOn January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, using the modified prospective method. Under this method, the Company applied SFAS No. 123R to account for compensation
59
expense for all share-based awards granted after the date of adoption and for the unvested portion of previously granted awards that remained outstanding at the date of adoption.
In 2006, the Company elected to adopt the alternative transition method provided in SFAS No. 123R-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards, for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123R. The
alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (the APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of
Cash Flows of the tax effects of employee stock-based compensation awards that were outstanding upon the adoption of SFAS No. 123R.
Stock-based compensation expense related to restricted stock shares and restricted stock units issued pursuant to the Companys Restricted Stock Unit Plan is generally determined based on the closing price of the shares issued on the business day immediately prior to the date of grant. Subsequent to
the date of grant, compensation expense is amortized to Salaries and Related Costs over the corresponding graded vesting period.
Stock compensation expense is also recognized for the value of future restricted stock grants that are contractually guaranteed according to the terms of certain employment arrangements. The guaranteed value of such future restricted stock grants is amortized over a period beginning on the effective
date of the respective employment arrangement and through the final legal vesting date of the grant.
(See Note M for additional information on the Companys restricted stock and employee stock option plans.)
Earnings Per ShareBasic earnings per share is calculated by dividing net income by the weighted average number of outstanding shares of common stock. The weighted average number of shares used for calculating basic and diluted earnings per share, which excludes shares issued as contingent
consideration in the acquisition of NMP, is as follows:
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
|
(In millions) |
Basic weighted average shares outstanding |
|
|
|
64.6 |
|
|
|
|
63.8 |
|
|
|
|
60.3 |
|
Dilutive effect of unvested restricted stock and stock options |
|
|
|
0.9 |
|
|
|
|
1.8 |
|
|
|
|
1.8 |
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
|
65.5 |
|
|
|
|
65.6 |
|
|
|
|
62.1 |
|
|
|
|
|
|
|
|
For the years ended December 31, 2008, 2007 and 2006, there were no reconciling items between the net income used in calculating basic and diluted earnings per share.
Comprehensive
Income (Loss)SFAS No. 130, Reporting Comprehensive Income, requires
certain transactions to be included as adjustments to net income (loss)
in order to report comprehensive income (loss). For the years ended December
31, 2008, 2007 and 2006, the Companys Comprehensive
Income includes the Net Income for the period, as well as Other Comprehensive
Income (Loss), and is reported in the Consolidated Statements of Changes
in Shareholders Equity. For the years ended December 31, 2008, 2007
and 2006, Other Comprehensive Income (Loss) principally includes unrealized
gains and losses related to the Companys defined benefit pension plans
that arise during the period but are not recognized as components of net pension
cost pursuant to SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plansan amendment of FASB
Statements No. 87, 88, 106, and 132(R). (see Note N), as well as the
change in the foreign currency translation adjustment account during the period.
Such amounts are included on a cumulative basis in Accumulated Other Comprehensive
Income (Loss) in the Consolidated Balance Sheets. Unrealized gains or losses
recognized in Accumulated Other Comprehensive Income (Loss) related to the
Companys defined benefit plans are adjusted as they are subsequently
recognized as components of net pension cost pursuant to the recognition and
amortization provisions of SFAS No. 87, Employers Accounting for
Pensions.
Cash and Cash EquivalentsAs of December 31, 2008, Cash equivalents are liquid investments consisting of United States (U.S.) Treasury money market funds with original maturities of three
60
months or less and the highest rated overnight time deposits with major banks. As of December 31, 2007, Cash equivalents were composed primarily of bank and time deposits and other short-term investments with maturities of three months or less when purchased. These investments are carried at cost,
which approximates fair value.
Restricted CashRestricted Cash principally consists of amounts or deposits whose use is restricted by either law or contract and as of December 31, 2008 included net auction proceeds owed to consignors in certain non-U.S. jurisdictions. As of December 31, 2007, Restricted Cash also included deposits
supporting rental obligations in the United Kingdom (the U.K.).
Allowance for Doubtful AccountsManagement evaluates its allowance for doubtful accounts regularly and also evaluates specific accounts receivable balances when it becomes aware of a situation where a client may not be able to meet its financial obligations to the Company. The amount of the
required allowance is based on the facts available to management, including the value of any property held as collateral, and is reevaluated and adjusted as additional information is received. Allowances are also established for probable losses inherent in the remainder of the accounts receivable balance.
Based on available information, management believes that the allowance for doubtful accounts as of December 31, 2008 is adequate to cover uncollectible balances. However, actual losses related to uncollected debts may ultimately exceed the recorded allowance.
Allowance for Credit LossesManagement evaluates its allowance for credit losses regularly and also evaluates specific loans when it becomes aware of a situation where a borrower may not be able to repay the loan. The amount of the required allowance is based on the facts available to management
and is reevaluated and adjusted as additional information is received. Secured loans that may not be collectible are analyzed based on the estimated realizable value of the collateral securing each loan, as well as the ability of the borrower to repay the loan. An allowance is established for secured loans
that management believes are under-collateralized, and with respect to which the under-collateralized amount may not be collectible from the borrower. Unsecured loans are analyzed based on managements estimate of the current collectibility of each loan, taking into account the ability of the borrower
to repay the loan. An allowance is also established for probable losses inherent in the remainder of the loan portfolio based on historical data related to loan losses (See Note D.)
InventoryInventory consists of property owned by the Dealer and Auction segments. Dealer inventory consists principally of property owned by NMP and objects purchased for investment purposes. Auction inventory consists principally of objects obtained as a result of the failure of guaranteed
property to sell at auction and, to a lesser extent, objects obtained incidental to the auction process primarily as a result of defaults by purchasers after the consignor has been paid.
Inventory is valued on a specific identification basis at the lower of cost or managements estimate of realizable value. If management determines that the estimated realizable value of the specific artworks held in inventory is less than the carrying value, the Company records a loss in the Auction or
Dealer segment, as appropriate, to reduce the carrying value of the specific artwork to the lower of its cost or managements estimate of realizable value. Any losses related to Auction segment Inventory are reflected in the Principal Activities line within Auction and Related Revenues, and any losses
related to Dealer segment Inventory are reflected within Dealer Cost of Sales.
As of December 31, 2008 and 2007, the Companys Consolidated Balance Sheets included Inventory with a carrying value of $186.6 million (approximately 11% of total assets) and $206 million (approximately 10% of total assets), respectively. In determining the estimated realizable value of artworks
held in Inventory, management relies upon the opinions of the Companys specialists, who consider the following complex array of factors when valuing artworks:
|
|
|
|
|
Whether the work is expected to be offered at auction or sold privately. |
|
|
|
|
|
The current and expected future demand for the work of art, taking into account changing trends in the art market as to which collecting categories and artists are most sought after.
|
61
|
|
|
|
|
Recent sale prices achieved in the art market for comparable works within a particular collecting category and/or by a particular artist.
|
Due to the inherent subjectivity involved in estimating the value of artworks, managements judgment about the estimated realizable value of specific artworks in the Companys Inventory may prove, with the benefit of hindsight, to be inaccurate.
For the years ended December 31, 2008, 2007 and 2006, the Company recognized total Auction and Dealer segment Inventory writedowns of $33.7 million, $8.2 million and $4.5 million, respectively.
Fixed AssetsFixed Assets are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leaseholds improvements are amortized using the straight-line method over the lesser of the life of the
related lease or the estimated useful life of the improvement. Computer software consists of the capitalized cost of purchased computer software, as well as direct external and internal computer software development costs incurred in the acquisition or development of software for internal use. These costs
are amortized on a straight-line basis over the estimated useful life of the software. (See Note F.)
GoodwillGoodwill represents the excess of the purchase price paid over the fair value of net assets acquired in a business combination. Goodwill is not amortized, but it is tested annually for impairment at the reporting unit level as of October 31 and between annual tests if indicators of potential
impairment exist. An impairment loss is recognized for any amount by which the carrying amount of a reporting units goodwill exceeds its fair value. Fair values are established using a discounted cash flow methodology. (See Note G.)
Intangible AssetsIntangible assets are amortized over their estimated useful lives unless such lives are deemed indefinite. If indicators of potential impairment exist, intangible assets with defined useful lives are tested for impairment based on managements estimates of undiscounted cash flows and, if
impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment as of October 31 and written down to fair value as required. (See Note H.)
Impairment of Long-Lived AssetsLong-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In such situations, long-lived assets are considered impaired when estimated future cash flows
(undiscounted and without interest charges) resulting from the use of the asset and its eventual disposition are less than the assets carrying amount. In such situations, the asset is written down to the present value of the estimated future cash flows.
Valuation of Deferred Tax AssetsThe Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for the valuation allowance, management considers, among other things, its projections of future taxable
income and ongoing prudent and feasible tax planning strategies. (See Note J.)
Auction GuaranteesThe liability related to outstanding auction guarantees represents the estimated fair value of the Companys obligation to perform under such auction guarantees and is recorded within Accounts Payable and Accrued Liabilities in the Consolidated Balance Sheets. The fair value of
the auction guarantee liability is estimated based on an analysis of historical loss experience related to auction guarantees. (See Note P.)
Defined Benefit Pension PlansThe Company sponsors defined benefit pension plans for certain of its employees. Effective December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R). Effective January 1, 2008, the Company adopted the measurement date provision of SFAS No. 158 and revalued the plan assets and benefit obligations of the defined benefit pension plan covering most of its U.K.
employees (the U.K Pension Plan) as of the date of adoption. Prior to the adoption of the measurement date provision of SFAS No. 158, the Company used a September 30th measurement date for the U.K. Pension Plan. (See Note N.)
62
Financial InstrumentsThe Companys financial instruments include Cash and Cash Equivalents, Restricted Cash, Notes Receivable and Consignor Advances (see Note D), trust assets related to the Companys deferred compensation liability (see Note N), Long-Term Debt (see Note I) and the
Companys deferred compensation liability (see Note N).
The carrying amounts of Cash and Cash Equivalents, Restricted Cash and Notes Receivable and Consignor Advances do not materially differ from their estimated fair values due to their nature and the variable interest rates associated with each of these financial instruments.
The Companys deferred compensation liability and the trust assets related to the deferred compensation liability are recorded in the Consolidated Balance Sheets at their fair values.
See Note I for information on the fair value of the Companys Long-Term Debt.
Derivative Financial InstrumentsIn almost all cases, the Company utilizes forward exchange contracts to hedge cash flow exposures related to foreign currency risks, which primarily arise from short-term foreign currency denominated intercompany balances and, to a lesser extent, foreign currency
denominated client payable balances and foreign currency denominated future auction guarantee obligations. Such forward exchange contracts are typically short-term with settlement dates less than one year from their inception.
Additionally, in the first quarter of 2008, the Company purchased a foreign currency option contract to hedge the foreign currency risk associated with an amount that became payable to a consignor as a result of the sale of property at auction in the second quarter of 2008. In May 2008, the
Company realized a $3.7 million gain as a result of the exercise of this option contract and recognized a related $3.5 million foreign currency loss on the settlement of the underlying consignor payable. The $3.7 million gain realized in the second quarter of 2008 was largely recognized as an unrealized
gain in the first quarter of 2008 reflecting the change in fair value of the option contract during that period.
Exposures related to the Companys foreign currency risks are centrally managed by its global treasury function. The Companys outstanding forward exchange contracts and foreign currency option contracts, if any, are not designated as hedging instruments under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, and are recorded in the Consolidated Balance Sheets at their fair values (see Note S). Changes in the fair value of these derivative financial instruments are recognized in the Consolidated Income Statements within Other Income (Expense).
At December 31, 2008, the Company had $154.8 million of notional value forward exchange and foreign currency option 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 is exposed to credit-related losses in the event of nonperformance by the counterparties to its forward exchange and foreign currency option contracts,
As of December 31, 2008, the Consolidated Balance Sheets included liabilities of $2.6 million recorded within Accounts Payable and Accrued Liabilities reflecting the aggregate fair value of the Companys outstanding forward exchange and foreign currency option contracts on that date. As of
December 31, 2007, the Consolidated Balance Sheets included an asset of $0.5 million recorded within Prepaid Expenses and Other Current Assets reflecting the aggregate fair value of the Companys outstanding forward exchange contracts on that date.
Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and could change in the short-term.
Recently Issued Accounting StandardsIn February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure certain financial instruments and
other items at fair value. Unrealized gains and losses on items for which the fair
63
value option has been elected are recognized in earnings at each subsequent reporting date. SFAS No. 159 was effective as of January 1, 2008 for companies that elected to adopt this standard. Management has elected not to adopt SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. Effective for the Company in the first quarter of 2009, SFAS No. 141(R) requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose all of the information needed to evaluate and understand the
nature and financial effect of the business combination. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in their financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring that they be treated as equity transactions. Management is evaluating the impact of adopting SFAS No. 141(R) and SFAS No. 160 on the Companys consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging ActivitiesAn Amendment of FASB Statement No. 133. Effective for the Company in the first quarter of 2009, SFAS No. 161 requires enhanced disclosures about an entitys derivative and
hedging activities. Management is evaluating the impact of adopting SFAS No. 161 on the Companys Consolidated Financial Statements.
In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). Effective for the Company in the first quarter of 2009, FSP APB 14-1 applies to convertible
debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under SFAS No. 133. FSP APB 14-1 requires the liability and equity
components of convertible debt instruments within its scope to be separately accounted for in a manner that will reflect the entitys nonconvertible debt borrowing rate when interest expense is recognized in subsequent periods. The resulting equity component (the conversion option) is not remeasured as
long as it continues to meet the conditions for equity classification in Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock. Early adoption of this standard is not permitted. Upon adoption of
FSP APB 14-1 on January 1, 2009, the Company will record a debt discount of approximately $35 million related to its 3.125% Convertible Notes (see Note I) and an increase to Additional Paid-In Capital of approximately $18 million (net of taxes) to reflect the conversion feature of the 3.125%
Convertible Notes. Additionally, the Company will record a cumulative effect adjustment of approximately $2 million (net of taxes) to the January 1, 2009 balance of Retained Earnings reflecting the amortization of the debt discount between the date that the 3.125% Convertible Notes were issued and
the date that FSP APB 14-1 is adopted. The remaining debt discount will subsequently be amortized over the remaining life of the 3.125% Convertible Notes using the effective interest rate method.
In March 2008, the FASB issued EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock. Effective for the Company in the first quarter of 2009, EITF Issue No. 07-5 defines when adjustment features within contracts are considered to
be equity-indexed. Early adoption of this standard is not permitted. Management does not believe that the adoption of this standard will not have an effect on the Companys Consolidated Financial Statements.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No.
142 for intangible assets acquired after adoption. Under FSP FAS 142-3 an entity should consider its own historical experience in renewing similar arrangements or market participant assumptions in the absence of historical experience. FSP FAS 142-3 also requires disclosures to
64
enable users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entitys intent and/or ability to renew or extend the arrangement. FSP FAS 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2008. Management is evaluating the impact of adopting this standard on the Companys Consolidated Financial Statements.
See Note S for information regarding SFAS No. 157, Fair Value Measurements, and FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157, and FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.
Note CSegment Reporting
The Companys operations are organized under three reportable segmentsAuction, Finance and Dealer. The Companys segments are business units that offer different services and require different resources and strategies. The Companys chief operating decision making group, which is comprised of
the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer and the senior executives of each segment, regularly evaluates financial information about each segment in deciding how to allocate resources and in assessing performance. The performance of each segment is measured
based on its profit or loss from operations before taxes, excluding the unallocated items highlighted below in the reconciliation of segment income to income from continuing operations before taxes.
The Auction segment is an aggregation of Auction operations in North America, Europe and Asia, which have similar economic characteristics and are similar in service, customers and the way in which services are provided.
The Auction segment conducts auctions of fine art, antiques and decorative art, jewelry and collectibles. In its role as an auctioneer, the Auction segment identifies, evaluates and appraises works of art through its international staff of specialists; stimulates purchaser interest through professional
marketing techniques; and matches sellers and buyers through the auction process. In addition to auctioning, the Auction segment is engaged in a number of related activities including the brokering of private purchases and sales of art, jewelry and other collectibles.
The Finance segment provides art-related financing generally secured by works of art that the Company either has in its possession or that the Company permits the borrower to possess.
The Dealer segments activities include:
|
|
|
|
|
The activities of Noortman Master Paintings, an art dealer specializing in Dutch and Flemish Old Master Paintings, as well as French Impressionist and Post-Impressionist paintings, that was acquired in June 2006. NMP is based in Maastricht, The Netherlands. As an art dealer, NMP sells works of
art directly to private collectors and museums and, from time-to-time, acts as a broker in private purchases and sales of art. |
|
|
|
|
|
The investment in and resale of art and other collectibles directly by the Company. |
|
|
|
|
|
The investment in art through unsecured loans made by the Company to unaffiliated art dealers. The property purchased pursuant to such unsecured loans is sold privately or at auction, with any profit or loss shared by Sothebys and the unaffiliated art dealer. |
|
|
|
|
|
The activities of certain equity investees, including Acquavella Modern Art. (See Note E.)
|
All Other primarily includes amounts related to the Companys licensing activities and other ancillary businesses.
The accounting policies of the Companys segments are the same as those described in the summary of significant accounting policies (see Note B). Auction segment revenues are generally attributed to geographic areas based on the location of the actual sale. Dealer segment revenues are generally
attributed to geographic areas based on the location of the entity that holds legal title to the property sold. Finance segment revenues are attributed to geographic areas based on the location of the entity that originated the loan.
65
The following tables present the Companys segment information for the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
Auction |
|
Finance |
|
Dealer |
|
All Other |
|
Reconciling Items* |
|
Total |
|
|
(Thousands of dollars) |
Revenues |
|
|
$ |
|
616,625 |
|
|
|
$ |
|
17,496 |
|
|
|
$ |
|
55,596 |
|
|
|
$ |
|
5,155 |
|
|
|
$ |
|
(3,313 |
) |
|
|
|
$ |
|
691,559 |
|
Interest income |
|
|
$ |
|
14,205 |
|
|
|
$ |
|
(9 |
) |
|
|
|
$ |
|
|
|
|
|
$ |
|
2 |
|
|
|
$ |
|
(5,865 |
) |
|
|
|
$ |
|
8,333 |
|
Interest expense |
|
|
$ |
|
36,209 |
|
|
|
$ |
|
|
|
|
|
$ |
|
473 |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
36,682 |
|
Depreciation and amortization |
|
|
$ |
|
22,679 |
|
|
|
$ |
|
178 |
|
|
|
$ |
|
1,967 |
|
|
|
$ |
|
21 |
|
|
|
$ |
|
|
|
|
|
$ |
|
24,845 |
|
Segment income (loss)** |
|
|
$ |
|
60,471 |
|
|
|
$ |
|
5,194 |
|
|
|
$ |
|
(27,599 |
) |
|
|
|
$ |
|
1,280 |
|
|
|
$ |
|
9,131 |
|
|
|
$ |
|
48,477 |
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
$ |
|
833,128 |
|
|
|
$ |
|
19,129 |
|
|
|
$ |
|
62,766 |
|
|
|
$ |
|
4,803 |
|
|
|
$ |
|
(2,104 |
) |
|
|
|
$ |
|
917,722 |
|
Interest income |
|
|
$ |
|
23,745 |
|
|
|
$ |
|
1 |
|
|
|
$ |
|
|
|
|
|
$ |
|
321 |
|
|
|
$ |
|
(9,611 |
) |
|
|
|
$ |
|
14,456 |
|
Interest expense |
|
|
$ |
|
26,799 |
|
|
|
$ |
|
|
|
|
|
$ |
|
802 |
|
|
|
$ |
|
80 |
|
|
|
$ |
|
941 |
|
|
|
$ |
|
28,622 |
|
Depreciation and amortization |
|
|
$ |
|
19,898 |
|
|
|
$ |
|
220 |
|
|
|
$ |
|
1,968 |
|
|
|
$ |
|
15 |
|
|
|
$ |
|
|
|
|
|
$ |
|
22,101 |
|
Segment income (loss)** |
|
|
$ |
|
268,351 |
|
|
|
$ |
|
4,198 |
|
|
|
$ |
|
(9,940 |
) |
|
|
|
$ |
|
1,020 |
|
|
|
$ |
|
19,390 |
|
|
|
$ |
|
283,019 |
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
$ |
|
631,344 |
|
|
|
$ |
|
16,974 |
|
|
|
$ |
|
12,776 |
|
|
|
$ |
|
4,825 |
|
|
|
$ |
|
(1,110 |
) |
|
|
|
$ |
|
664,809 |
|
Interest income |
|
|
$ |
|
16,309 |
|
|
|
$ |
|
1 |
|
|
|
$ |
|
17 |
|
|
|
$ |
|
7 |
|
|
|
$ |
|
(10,443 |
) |
|
|
|
$ |
|
5,891 |
|
Interest expense |
|
|
$ |
|
29,828 |
|
|
|
$ |
|
|
|
|
|
$ |
|
422 |
|
|
|
$ |
|
110 |
|
|
|
$ |
|
2,679 |
|
|
|
$ |
|
33,039 |
|
Depreciation and amortization |
|
|
$ |
|
20,927 |
|
|
|
$ |
|
62 |
|
|
|
$ |
|
1,779 |
|
|
|
$ |
|
15 |
|
|
|
$ |
|
|
|
|
|
$ |
|
22,783 |
|
Segment income |
|
|
$ |
|
164,962 |
|
|
|
$ |
|
1,622 |
|
|
|
$ |
|
1,681 |
|
|
|
$ |
|
2,061 |
|
|
|
$ |
|
(4,543 |
) |
|
|
|
$ |
|
165,783 |
|
|
* |
|
|
|
The reconciling items related to Revenues represent charges between the Finance segment and the Auction segment for certain client loans. Such charges, which are eliminated in consolidation, are recorded in Finance segment Revenues and in Auction segment Direct Costs. The reconciling items in
Interest Expense represents the amortization of interest charges related to the DOJ antitrust fine and certain related civil litigation (see Note Q). The reconciling items related to segment income are explained in the table below. |
|
** |
|
|
|
Dealer segment results in 2008 and 2007 include impairment losses of $13.2 million and $15 million related to NMPs Goodwill and Intangible Assets (see Notes G and H).
|
The table below presents a reconciliation of segment income to consolidated income from continuing operations before taxes for the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
|
(Thousands of dollars) |
Auction |
|
|
$ |
|
60,471 |
|
|
|
$ |
|
268,351 |
|
|
|
$ |
|
164,962 |
|
Finance |
|
|
|
5,194 |
|
|
|
|
4,198 |
|
|
|
|
1,622 |
|
Dealer |
|
|
|
(27,599 |
) |
|
|
|
|
(9,940 |
) |
|
|
|
|
1,681 |
|
All Other |
|
|
|
1,280 |
|
|
|
|
1,020 |
|
|
|
|
2,061 |
|
|
|
|
|
|
|
|
Segment income |
|
|
|
39,346 |
|
|
|
|
263,629 |
|
|
|
|
170,326 |
|
Unallocated amounts and reconciling items: |
|
|
|
|
|
|
Insurance recovery (see Note G)* |
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
Gain on sale of land and buildings (see Note F) |
|
|
|
|
|
|
|
|
4,752 |
|
|
|
|
|
|
Extinguishment of debt (net) (see Note I) |
|
|
|
(5,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
Antitrust related recoveries (expenses), net (see Note Q) |
|
|
|
18,385 |
|
|
|
|
(101 |
) |
|
|
|
|
806 |
|
Amortization of interest related to Antitrust matters (see Note Q) |
|
|
|
|
|
|
|
|
(941 |
) |
|
|
|
|
(2,679 |
) |
|
Equity in earnings of investees** |
|
|
|
(3,890 |
) |
|
|
|
|
(4,320 |
) |
|
|
|
|
(2,670 |
) |
|
|
|
|
|
|
|
|
Income from continuing operations before taxes |
|
|
$ |
|
48,477 |
|
|
|
$ |
|
283,019 |
|
|
|
$ |
|
165,783 |
|
|
|
|
|
|
|
|
|
* |
|
|
|
In conjunction with the acquisition of Noortman Master Paintings, the Company purchased a key man life insurance policy of $20 million covering Robert C. Noortman, who was the Managing Director of NMP. Mr. Noortman died unexpectedly on January 14, 2007. As a result of Mr. |
66
|
|
|
|
Noortmans death, the Company became entitled to the $20 million death benefit under the policy and, accordingly, recorded this amount as non-operating income in its Consolidated Income Statement in the first quarter of 2007. The Company collected these insurance proceeds in April 2007. |
|
** |
|
|
|
Represents the Companys pre-tax share of earnings related to its equity investees. Such amounts are included above in Dealer segment income, but are presented net of taxes in the Consolidated Income Statements below Income from Continuing Operations Before Taxes.
|
The table below presents geographic information about the Companys revenues for the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
|
(Thousands of dollars) |
United States |
|
|
$ |
|
227,603 |
|
|
|
$ |
|
371,514 |
|
|
|
$ |
|
312,495 |
|
United Kingdom |
|
|
|
296,657 |
|
|
|
|
352,458 |
|
|
|
|
231,462 |
|
China |
|
|
|
52,331 |
|
|
|
|
59,550 |
|
|
|
|
40,498 |
|
France |
|
|
|
41,582 |
|
|
|
|
30,803 |
|
|
|
|
15,318 |
|
Other Countries * |
|
|
|
76,699 |
|
|
|
|
105,501 |
|
|
|
|
66,146 |
|
Reconciling item: |
|
|
|
|
|
|
Intercompany revenue earned by Finance from Auction |
|
|
|
(3,313 |
) |
|
|
|
|
(2,104 |
) |
|
|
|
|
(1,110 |
) |
|
|
|
|
|
|
|
|
Total |
|
|
$ |
|
691,559 |
|
|
|
$ |
|
917,722 |
|
|
|
$ |
|
664,809 |
|
|
|
|
|
|
|
|
|
* |
|
|
|
No other individual country exceeds 5% of total revenues for any of the periods presented.
|
The table below presents assets for the Companys segments, as well as a reconciliation of segment assets to consolidated assets as of December 31, 2008 and 2007:
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
Auction |
|
|
$ |
|
1,258,468 |
|
|
|
$ |
|
1,630,756 |
|
Finance |
|
|
|
182,976 |
|
|
|
|
160,564 |
|
Dealer |
|
|
|
119,320 |
|
|
|
|
145,121 |
|
All Other |
|
|
|
153 |
|
|
|
|
1,165 |
|
|
|
|
|
|
Total segment assets |
|
|
|
1,560,917 |
|
|
|
|
1,937,606 |
|
Unallocated amounts: |
|
|
|
|
Deferred tax assets and income tax receivable |
|
|
|
118,414 |
|
|
|
|
82,498 |
|
|
|
|
|
|
Consolidated assets |
|
|
$ |
|
1,679,331 |
|
|
|
$ |
|
2,020,104 |
|
|
|
|
|
|
Note DReceivables
Accounts ReceivableIn its role as auctioneer, the Company generally functions as an agent accepting property on consignment from its selling clients. The Company bills the buyer for property purchased, receives payment from the buyer and remits to the consignor the consignors portion of the
buyers payment after deducting the Companys commissions, expenses, applicable taxes and royalties. The amounts billed to buyers are recorded as Accounts Receivable in the Consolidated Balance Sheets.
Under the Companys standard payment terms, payments from purchasers are due within 30 days from the sale date and consignor payments are made 35 days from the sale date. However, at times, the Company provides extended payment terms to certain buyers in order to support and market a
sale. At such times, the Company attempts to match the timing of receipt from the buyer with payment to the consignor, but is not always successful in doing so. The amount and length of extended payment terms provided to buyers varies from selling season to selling season.
Under the standard terms and conditions of its auction sales, the Company is not obligated to pay consignors for items that have not been paid for by purchasers. If a purchaser defaults on payment, the Company has the right to cancel the sale and return the property to the owner, re-
67
offer the property at a future auction or negotiate a private sale. Management believes that adequate allowances have been established to provide for potential losses on any uncollected amounts.
In certain situations, under negotiated arrangements or when the buyer takes possession of property before payment is made, the Company is liable to the consignor for the net sale proceeds whether or not the buyer makes payment.
Notes Receivable and Consignor AdvancesThe Finance segment provides certain collectors and art dealers with financing, generally secured by works of art that the Company either has in its possession or permits borrowers to possess. The Finance segments loans are predominantly variable interest
rate loans.
The Finance segment generally makes two types of secured loans: (1) advances secured by consigned property to borrowers who are contractually committed, in the near term, to sell the property at auction (a consignor advance); and (2) general purpose term loans to collectors or art dealers
secured by property not presently intended for sale (a term loan). A 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. Term loans allow the Company to establish or enhance mutually beneficial relationships with art dealers and collectors and sometimes result in auction consignments. Secured loans are made with full recourse against the borrower. To the extent that the Company is looking wholly or partially to
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 a borrower becomes subject to bankruptcy or insolvency laws, the Companys ability to realize on its collateral
may be limited or delayed by the application of such laws.
The target loan to value ratio (principal loan amount divided by the low auction estimate of the collateral) for Finance segment secured loans is 50% or lower. However, certain Finance segment loans are initially made at loan to value ratios higher than 50%. In addition, as a result of the Companys
normal periodic revaluation of loan collateral, the loan-to-value ratio of certain loans may increase above the 50% target loan-to-value ratio due to decreases in the low auction estimates of the collateral. As of December 31, 2008, Finance segment loans with loan-to-value ratios above 50% totaled $93.5
million and represented 53% of net Notes Receivable and Consignor Advances. The property related to such loans has a low auction estimate of approximately $141.5 million.
Under certain circumstances, the Finance segment also finances the purchase of works of art by unaffiliated art dealers through unsecured loans. The property purchased pursuant to such unsecured loans is sold privately or at auction with any profit or loss shared by the Company and the art dealer.
The total of all such unsecured loans was $2.1 million and $2.2 million at December 31, 2008 and 2007, respectively.
At December 31, 2008, a $24.8 million term loan to one borrower comprised approximately 14% of the net Notes Receivable and Consignor Advances balance.
68
As of December 31, 2008 and 2007, Notes Receivable and Consignor Advances consisted of the following:
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
Current: |
|
|
|
|
Consignor advances |
|
|
$ |
|
34,884 |
|
|
|
$ |
|
47,406 |
|
Term loans |
|
|
|
118,553 |
|
|
|
|
71,264 |
|
Allowance for credit losses |
|
|
|
(1,213 |
) |
|
|
|
|
(1,028 |
) |
|
|
|
|
|
|
Sub-total |
|
|
|
152,224 |
|
|
|
|
117,642 |
|
|
|
|
|
|
Non-Current: |
|
|
|
|
Consignor advances |
|
|
|
698 |
|
|
|
|
2,200 |
|
Term loans |
|
|
|
23,970 |
|
|
|
|
56,538 |
|
|
|
|
|
|
Sub-total |
|
|
|
24,668 |
|
|
|
|
58,738 |
|
|
|
|
|
|
Notes receivable and consignor advances (net) |
|
|
$ |
|
176,892 |
|
|
|
$ |
|
176,380 |
|
|
|
|
|
|
The weighted average interest rates charged on Notes Receivable and Consignor Advances were 5.6%, 8.0% and 8.2% for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, 2007 and 2006, Notes Receivable and Consignor Advances included $1.4 million,
$21.6 million and $36 million, respectively, of Auction segment short-term consignor advances related to auction guarantees, which are charged below market interest rates. Excluding the impact of such consignor advances outstanding in each period, substantially all of the remaining balance of Notes
Receivable and Consignor Advances related to Finance segment loans and earned weighted average interest rates of 9.5%, 10.6% and 10.1% for the years ended December 31, 2008, 2007 and 2006, respectively.
Changes in the Allowance for Credit Losses relating to Notes Receivable and Consignor Advances for the years ended December 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
Allowance for credit losses at January 1 |
|
|
$ |
|
1,028 |
|
|
|
$ |
|
1,154 |
|
Change in loan loss provision |
|
|
|
325 |
|
|
|
|
(138 |
) |
|
Foreign currency exchange rate changes |
|
|
|
(140 |
) |
|
|
|
|
12 |
|
|
|
|
|
|
Allowance for credit losses at December 31 |
|
|
$ |
|
1,213 |
|
|
|
$ |
|
1,028 |
|
|
|
|
|
|
Note EEquity Method Investments
On May 23, 1990, the Company purchased the common stock of the Pierre Matisse Gallery Corporation (Matisse) for approximately $153 million. The assets of Matisse consisted of a collection of fine art (the Matisse Inventory). Upon consummation of the purchase, the Company entered into an
agreement with Acquavella Contemporary Art, Inc. (ACA) to form Acquavella Modern Art (AMA), a partnership through which the Matisse Inventory would be sold. The Company contributed the Matisse Inventory to AMA in exchange for a 50% interest in the partnership. Although the original
term of the AMA partnership agreement was for ten years and was due to expire in 2000, it has been renewed on an annual basis since then.
The Company does not control AMA and is not its primary beneficiary; consequently, the Company uses the equity method to account for its investment in AMA and records its share of AMAs earnings or losses, net of taxes, within Equity in Earnings of Investees in the Consolidated Income
Statements. The Companys 50% interest in the net assets of AMA is included in Investments in the Consolidated Balance Sheets. The carrying value of the Companys investment in AMA totaled $14.3 million and $16.2 million as of December 31, 2008 and 2007, respectively. For the years ended
December 31, 2008, 2007 and 2006, the Companys share of AMAs earnings, net of taxes, was $1.9 million, $2.1 million and $1.4 million, respectively.
69
Pursuant to the AMA partnership agreement, upon the death of the majority shareholder of ACA, the successors-in-interest to ACA have the right, but not the obligation, to require the Company to purchase their interest in AMA at a price equal to the fair market value of such interest. The fair
market value shall be determined pursuant to a process and a formula set forth in the partnership agreement that includes an appraisal of the works of art held by AMA at such time. The net assets of AMA consist almost entirely of the Matisse Inventory. At December 31, 2008, the carrying value of
this inventory was $52.4 million.
To the extent that AMA requires working capital, the Company has agreed to lend the same to AMA. For the years ended December 31, 2008 and 2007, the Company did not loan any such amounts to AMA. Additionally, from time-to-time, the Company transacts with the principal shareholder of
ACA in the normal course of its business.
As of December 31, 2008 and 2007, the carrying value of the Companys investment in another affiliate was $4.1 million and $3.6 million, respectively. The Company does not control this affiliate and is not its primary beneficiary; consequently, the Company uses the equity method to account for its
investment. For the years ended December 31, 2008, 2007 and 2006, the Companys share of this affiliates earnings, net of taxes, was $0.2 million, $0.5 million and $0.2 million, respectively.
Note FFixed Assets
As of December 31, 2008 and 2007, Fixed Assets consisted of the following:
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
Land |
|
|
$ |
|
5,954 |
|
|
|
$ |
|
7,976 |
|
York Property capital lease |
|
|
|
173,866 |
|
|
|
|
173,866 |
|
Buildings and building improvements |
|
|
|
8,505 |
|
|
|
|
9,789 |
|
Leasehold improvements |
|
|
|
65,608 |
|
|
|
|
71,877 |
|
Computer hardware and software |
|
|
|
62,774 |
|
|
|
|
63,538 |
|
Furniture, fixtures and equipment |
|
|
|
63,230 |
|
|
|
|
59,292 |
|
Construction in progress |
|
|
|
6,179 |
|
|
|
|
13,333 |
|
Other |
|
|
|
2,361 |
|
|
|
|
1,544 |
|
|
|
|
|
|
|
|
|
|
388,477 |
|
|
|
|
401,215 |
|
Less: accumulated depreciation and amortization |
|
|
|
(182,271 |
) |
|
|
|
|
(178,905 |
) |
|
|
|
|
|
|
Total |
|
|
$ |
|
206,206 |
|
|
|
$ |
|
222,310 |
|
|
|
|
|
|
On February 7, 2003, the Company sold the land and building located at 1334 York Avenue, New York, N.Y. (the York Property) to an affiliate of RFR Holding Corp. (RFR). The York Property is home to the Companys sole North American auction salesroom and its principal North
American exhibition space. In conjunction with this sale, the Company leased the York Property back from RFR for an initial 20-year term, with options for the Company to extend the lease for two additional 10-year terms. The resulting lease was accounted for as a capital lease, with the related asset
being amortized over the initial 20-year lease term.
On January 11, 2008, the Company entered into a contract to reacquire the York Property from RFR for an aggregate purchase price of $370 million (the Purchase and Sale Agreement). The Company also agreed to give the principals of RFR certain terms for future sales of works of art at
Sothebys auctions. The sale of the York Property was originally scheduled to take place on July 1, 2009, subject to RFRs right under the Purchase and Sale Agreement to accelerate the closing to an earlier date. On November 21, 2008, RFR exercised its right to accelerate the closing, which occurred on
February 6, 2009.
The Company financed the $370 million purchase price through an initial $50 million cash payment made in conjunction with the signing of the Purchase and Sale Agreement on January 11, 2008, an $85 million cash payment made at closing on February 6, 2009 and the assumption of an existing
$235 million mortgage on the York Property. The mortgage loan matures on July 1, 2035, with an optional pre-payment date of July 1, 2015, and bears an annual rate of interest of
70
approximately 5.6%, which increases subsequent to July 1, 2015. It is the Companys current intention to pre-pay the mortgage on or about July 1, 2015.
As a result of the closing of the transaction on February 6, 2009, the existing York Property capital lease obligation of $167.2 million, which had an effective interest rate of 10.4%, and the related $122.6 million net capital lease asset, as well as a $16 million deferred gain related to the sale of the
York Property in 2003 will be derecognized and the net effect will be deducted from the cost recorded in the Consolidated Balance Sheet. Accordingly, the land and building acquired will be recorded on the Consolidated Balance Sheet at an initial carrying value of approximately $320 million.
Additionally, the Company will recognize the $235 million York Property mortgage obligation on its Consolidated Balance Sheet.
Additionally, in March 2007, the Company completed the sale of land and buildings at Billingshurst, West Sussex in the U.K., which previously housed an auction salesroom. As a result of this sale, the Company recognized a gain of $4.8 million in the first quarter of 2007.
For the years ended December 31, 2008, 2007 and 2006, Depreciation and Amortization Expense related to Fixed Assets was $22.6 million, $20.6 million and $21.1 million, respectively. As of December 31, 2008 and 2007, Accumulated Depreciation and Amortization related to the York Property
capital lease was $51.2 million and $42.6 million, respectively.
Note GGoodwill
For the years ended December 31, 2008 and 2007, changes in the carrying value of Goodwill were as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
Auction |
|
Dealer |
|
Total |
|
Auction |
|
Dealer |
|
Total |
Balance as of January 1 |
|
|
$ |
|
15,920 |
|
|
|
$ |
|
12,160 |
|
|
|
$ |
|
28,080 |
|
|
|
$ |
|
13,660 |
|
|
|
$ |
|
21,049 |
|
|
|
$ |
|
34,709 |
|
Goodwill acquired |
|
|
|
710 |
|
|
|
|
|
|
|
|
|
710 |
|
|
|
|
1,845 |
|
|
|
|
|
|
|
|
|
1,845 |
|
Allocation of purchase price |
|
|
|
(2,212 |
) |
|
|
|
|
|
|
|
|
|
(2,212 |
) |
|
|
|
|
|
|
|
|
|
(2,844 |
) |
|
|
|
|
(2,844 |
) |
|
Impairment loss |
|
|
|
|
|
|
|
|
(11,106 |
) |
|
|
|
|
(11,106 |
) |
|
|
|
|
|
|
|
|
|
(7,300 |
) |
|
|
|
|
(7,300 |
) |
|
Foreign currency exchange rate changes |
|
|
|
(216 |
) |
|
|
|
|
(1,054 |
) |
|
|
|
|
(1,270 |
) |
|
|
|
|
415 |
|
|
|
|
1,255 |
|
|
|
|
1,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31 |
|
|
$ |
|
14,202 |
|
|
|
$ |
|
|
|
|
|
$ |
|
14,202 |
|
|
|
$ |
|
15,920 |
|
|
|
$ |
|
12,160 |
|
|
|
$ |
|
28,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has Goodwill related to its Auction segment. The Dealer segment Goodwill was solely attributable to Noortman Master Paintings, which was acquired by the Company in June 2006. The Company performs its annual impairment test for Goodwill as of October 31. The Companys
testing approach utilizes a discounted cash flow methodology based on managements judgments on expected future cash flows to determine the fair value of its reporting units.
Robert C. Noortman, who was the Managing Director of NMP, died unexpectedly on January 14, 2007. As a result of Mr. Noortmans death, the Company recorded an impairment loss of $7.3 million related to NMPs Goodwill in the first quarter of 2007.
Based on the results of the October 31, 2008 annual impairment test for NMP, Sothebys recognized a further impairment loss of $11.1 million in the fourth quarter of 2008, eliminating the remainder of NMPs goodwill. This impairment loss is principally due to a reduction in managements future
cash flow estimates for NMP. The Goodwill related to NMP was not tax deductible and, therefore, there is no tax benefit associated with this impairment loss.
In March 2007, the Company acquired an auction house in Paris, France for a purchase price of $1.7 million (net of $3 million in cash acquired) and, as a result, recognized Goodwill of approximately $0.7 million in the first quarter of 2008 upon the completion of the valuation of assets acquired and
liabilities assumed. (See Note H for information on the intangible asset acquired as part of this acquisition.)
71
Note HIntangible Assets
As of December 31, 2008 and 2007, Intangible Assets consisted of the following:
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
Indefinite lived intangible assets: |
|
|
|
|
Trade Name and other |
|
|
$ |
|
324 |
|
|
|
$ |
|
2,281 |
|
Amortizable intangible assets: |
|
|
|
|
Customer Relationships |
|
|
|
6,559 |
|
|
|
|
5,004 |
|
Accumulated amortization |
|
|
|
(3,412 |
) |
|
|
|
|
(1,465 |
) |
|
|
|
|
|
|
|
|
|
|
3,147 |
|
|
|
|
3,539 |
|
|
|
|
|
|
Total |
|
|
$ |
|
3,471 |
|
|
|
$ |
|
5,820 |
|
|
|
|
|
|
The Company acquired Noortman Master Paintings in June 2006 and, in conjunction with the related purchase price allocation, recognized approximately $15.7 million in Intangible Assets related to NMPs customer relationships ($12 million) and trade name ($2.8 million), as well as a non-compete
agreement with Mr. Noortman ($0.9 million). As discussed in Note G, Robert C. Noortman, who was the Managing Director of NMP, died unexpectedly on January 14, 2007. As a result of Mr. Noortmans death, the Company recorded an impairment loss in the first quarter of 2007 of $7.7 million related
to NMPs customer relationships ($6 million) and trade name ($0.8 million), as well as Mr. Noortmans non-compete agreement ($0.9 million). The impairment of Mr. Noortmans non-compete agreement resulted in the write-off of its entire remaining carrying value. The fair values of NMPs intangible
assets utilized in determining the amount of these impairment losses were based on appraisals.
The Company performs its annual impairment test for indefinite lived intangible assets as of October 31. Based on the results of the October 31, 2008 annual impairment test, the Company determined that the NMP trade name was further impaired and recorded an additional impairment loss of $2.1
million in the fourth quarter of 2008. This impairment loss is principally due to a reduction in managements future cash flow estimates for NMP.
As discussed in Note G, in March 2007, the Company acquired an auction house in Paris, France for a purchase price of $1.7 million (net of $3 million in cash acquired). In conjunction with the purchase price allocation for this acquisition, the Company recognized an intangible asset of approximately
$2.2 million related to customer relationships in the first quarter of 2008.
For the years ended December 31, 2008, 2007 and 2006, amortization expense related to Intangible Assets was approximately $2.2 million, $1.5 million and $1.7 million, respectively. Estimated amortization expense for the remaining useful lives of the customer relationships are as follows:
|
|
|
2009 |
|
|
|
1,752 |
|
2010 |
|
|
|
942 |
|
2011 |
|
|
|
363 |
|
2012 |
|
|
|
90 |
|
|
|
|
Total |
|
|
$ |
|
3,147 |
|
|
|
|
The estimated weighted average remaining useful life of the Companys customer relationships is approximately 2.1 years.
Note IDebt
Bank Credit FacilityThe Company has a senior secured credit agreement with an international syndicate of lenders arranged by Bank of America Securities N.A. (BofA) (the BofA Credit Agreement) that expires on September 7, 2010.
As of December 31, 2008, there were no outstanding borrowings under the BofA Credit Agreement and the amount of unused borrowing capacity was $300 million. For the years ended
72
December 31, 2008 and 2006, the weighted average interest rate charged on outstanding borrowings under the BofA Credit Agreement was approximately 5.0% and 7.0%, respectively. For the year ended December 31, 2007, the Company had no borrowings under the BofA Credit Agreement.
The borrowing capacity available under the BofA Credit Agreement is limited to a borrowing base, which is generally equal to 100% of eligible loans (i.e., notes receivable and consignor advances) made by the Company in the U.S. and the U.K. plus 15% of the Companys net tangible assets, as
defined by the BofA Credit Agreement. Borrowings under the BofA Credit Agreement are secured by substantially all of the non-real estate assets of the Companys subsidiaries in the U.S. and the U.K. Additionally, the BofA Credit Agreement contains financial covenants which limit capital
expenditures and dividend payments and which require the Company to maintain certain quarterly interest and leverage ratios. The BofA Credit Agreement also has certain non-financial covenants and restrictions. Management believes that the Company is in compliance with these covenants.
On February 4, 2009, as a result of the acceleration by RFR of the closing date of the Companys purchase of the York Property (see Notes F and L) and the significant auction guarantee losses that the Company incurred in the second half of 2008, the BofA Credit Agreement was amended to
provide for the following:
|
|
|
|
|
An increase in the maximum consolidated leverage ratio (as defined in the BofA Credit Agreement) from 3.5 to 4.25 for the twelve months ended March 31, 2009, 4.75 for the twelve months ended June 30, 2009, 5.0 for the twelve months ended September 30, 2009 and 3.75 for the twelve months
ended December 31, 2009. In the first quarter of 2010, the maximum leverage ratio reverts to 3.5 for the remaining term of the BofA Credit Agreement. |
|
|
|
|
|
A one-time adjustment to the calculation of the consolidated leverage ratio to exclude $52 million of auction guarantee losses incurred in the second half of 2008. |
|
|
|
|
|
An increase of $15 million (from $10 million to $25 million) in the amount of cash payments related to certain non-recurring expenses that may be excluded from the calculation of Consolidated EBITDA, as defined by the BofA Credit Agreement. |
|
|
|
|
|
An increase of $20 million (from $20 million to $40 million) in the available capacity for cash payments to repurchase long-term debt. |
|
|
|
|
|
An increase in the interest rate charged on outstanding borrowings to LIBOR plus a margin between 3.25% and 4.5%, determined by reference to the Companys leverage ratio. Prior to this amendment, the interest rate charged on outstanding borrowings was LIBOR plus 1.75%. |
|
|
|
|
|
A reduction in the total borrowing capacity from $300 million to $250 million.
|
As a result of this amendment, the Company incurred fees of approximately $2 million, which will be amortized to interest expense over the remaining term of the BofA Credit Agreement.
Long-Term DebtAs of December 31, 2008 and 2007, long-term debt consisted of the following:
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
6.98% Notes (redeemed July 18, 2008) |
|
|
$ |
|
|
|
|
|
$ |
|
99,888 |
|
3.125% Convertible Notes, due June 2013 |
|
|
|
200,000 |
|
|
|
|
|
|
7.75% Senior Notes, due June 2015 |
|
|
|
129,267 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$ |
|
329,267 |
|
|
|
$ |
|
99,888 |
|
|
|
|
|
|
Convertible NotesOn June 17, 2008, the Company issued $200 million aggregate principal amount of 3.125% Convertible Senior Notes, due June 15, 2013 (the Convertible Notes). The net proceeds from the issuance of the Convertible Notes were approximately $194.3 million, after deducting
transaction costs. As of December 31, 2008, the Convertible Notes had a carrying value of $200 million and a fair value of $132 million based on a broker quoted price.
The Convertible Notes bear interest at a rate of 3.125% per year, payable semi-annually in cash on June 15 and December 15 of each year. The principal amount of the Convertible Notes is
73
payable in cash, shares of Sothebys common stock (Common Stock), or a combination thereof, at the option of the Company, based on an initial conversion rate of 29.4122 shares of Common Stock per $1,000 principal amount of Convertible Notes, which is equivalent to a conversion price of
approximately $34 per share (the Conversion Price). The maximum number of shares of Common Stock that may be issued upon conversion is approximately 5.8 million shares. The conversion rate for the Convertible Notes is subject to adjustment for certain events. The Convertible Notes may be
converted at any time beginning on March 15, 2013 and ending on the close of business on June 14, 2013. Prior to March 15, 2013, the Convertible Notes may only be converted: (1) during any fiscal quarter after the fiscal quarter ending September 30, 2008 (and only during such fiscal quarter), if the
closing price of the Common Stock exceeds 130% of the Conversion Price during a defined period at the end of the previous quarter, (2) if the trading price of Convertible Notes falls below a certain threshold over a defined period, or (3) upon the occurrence of certain specified corporate transactions
(as set forth in the Convertible Notes Indenture). As of December 31, 2008, none of these conversion criteria have been met.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Common Stock or a combination thereof at its election. It is the Companys current intent and policy to settle up to the principal amount of the Convertible Notes in cash.
The Company evaluated the embedded conversion option in the Convertible Notes in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and concluded that the embedded conversion option contained within the Convertible Notes should not
be accounted for separately because the conversion option is indexed to the Common Stock and is classified as shareholders equity.
The Convertible Notes have no impact on diluted shares outstanding until the average price of the Common Stock for a period exceeds the Conversion Price as it is the Companys current intent and policy to settle up to the principal amount of the Convertible Notes in cash.
Each of the Companys existing and future domestic subsidiaries have jointly, severally, fully and unconditionally guaranteed the Convertible Notes on a senior unsecured basis to the extent such subsidiaries guarantee borrowings under the BofA Credit Agreement.
(See Note B for information on a recently issued accounting standard that will impact the Companys accounting for the Convertible Notes.)
Senior NotesOn June 17, 2008, the Company issued $150 million aggregate principal amount of 7.75% Senior Notes (the Senior Notes), due June 15, 2015. The net proceeds from the issuance of the Senior Notes were approximately $145.9 million, after deducting the initial purchasers discounts and
fees. The Senior Notes were issued at a discount and have an effective interest rate of 8%. Interest on the Senior Notes is payable semi-annually in cash on June 15 and December 15 of each year.
On December 23, 2008, the Company repurchased an aggregate principal amount of $19 million of its Senior Notes for a purchase price of $10.5 million (representing 56% of the aggregate principal amount repurchased). This repurchase resulted in a non-cash benefit of $7.8 million, which was
recognized within Extinguishment of Debt (Net) in the Consolidated Income Statement for the year ended December 31, 2008. As of December 31, 2008, the Senior Notes had a carrying value of $129.3 million and a fair value of $69.4 million based on a broker quoted price.
On January 27, 2009, the Company repurchased an additional $2.8 million of its Senior Notes for a purchase price of $1.6 million (representing 59% of the aggregate principal amount repurchased). This repurchase resulted in a non-cash benefit of approximately $1 million, which will be reflected in
the Companys results in the first quarter of 2009.
At any time before June 15, 2015, the Senior Notes will only be redeemable at the price specified in the Senior Notes Indenture, plus accrued and unpaid interest. In addition, at any time prior to June 15, 2011, the Company may redeem up to 35% of the aggregate principal amount of the Senior
Notes with the net cash proceeds of certain equity offerings at the redemption price of 107.75% plus accrued and unpaid interest. Also, if the Company experiences a change of control,
74
the Company must offer to repurchase all of the Senior Notes then outstanding at 101% of the aggregate principal amount of the Senior Notes repurchased, plus accrued and unpaid interest.
The Senior Notes Indenture also contains covenants that limit, among other things, the Company and its subsidiaries ability to: grant liens on their assets; enter into certain sale and leaseback transactions; and merge, consolidate or transfer or dispose of substantially all of their assets. Management
believes that the Company is in compliance with these covenants.
Each of the Companys existing and future domestic subsidiaries have jointly, severally, fully and unconditionally guaranteed the Senior Notes on a senior unsecured basis to the extent such subsidiaries guarantee borrowings under the BofA Credit Agreement.
Registration Rights AgreementThe Company has entered into a registration rights agreement, dated as of June 17, 2008 (the Registration Rights Agreement) with representatives of the initial purchasers of the Senior Notes (the Representatives), pursuant to which the Company has agreed to
consummate an offer to exchange the Senior Notes for a new issue of debt securities registered under the Securities Act of 1933, as amended (the Securities Act), with terms substantially identical to those of the Senior Notes (except for the provisions relating to the transfer restrictions and payment of
additional interest) no later than 366 days after the date of the initial issuance of the notes. However, the Registration Rights Agreement provides that the Company will not be required to consummate the exchange offer if (i) the Senior Notes are freely tradable before the required date for the
consummation of such exchange offer, and (ii) on or before such date, the restrictive legend on the Senior Notes has been removed. If the Company fails to satisfy its registration obligations under the Registration Rights Agreement, it will be required to pay additional interest to the holders of the Senior
Notes under certain circumstances. Additional interest, if any, will accrue at a rate of 0.25% for the first 90 day period after the date of a registration default and thereafter it will be increased by an additional 0.25% for each subsequent 90 day period that elapses provided that the aggregate increase in
such annual interest rate may in no event exceed 1% per year over the stated interest rate of the Senior Notes.
Convertible Note Hedge and Warrant TransactionsOn June 11, 2008, in connection with the offering of the Convertible Notes, the Company entered into convertible note hedge transactions (the Convertible Note Hedges) that will allow the Company to purchase its Common Stock from affiliates of
BofA and Goldman, Sachs & Co. (collectively the Counterparties) at a strike price equal to the Conversion Price of the Convertible Notes. The Convertible Note Hedges will cover, subject to customary anti-dilution adjustments, approximately 5.8 million shares of Common Stock. The Convertible Note
Hedges are intended to offset potential dilution to Sothebys Common Stock upon potential future conversion of the Convertible Notes. The Convertible Note Hedges will expire upon the maturity of the Convertible Notes.
On June 11, 2008, the Company also entered into warrant transactions, whereby the Company sold to the Counterparties warrants (the Warrants) to acquire, subject to customary anti-dilution adjustments, approximately 5.8 million shares of Common Stock at $44.905 per share.
These contracts meet all of the applicable criteria for equity classification as outlined in EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, and, as a result, the $40.6 million cost of the Convertible Note Hedges ($22.5
million, net of taxes) and the $22.3 million in net proceeds received from the sale of the Warrants are recorded within Additional Paid-In Capital in Shareholders Equity. In addition, because both of these contracts are classified as shareholders equity and are indexed to Sothebys Common Stock, they
are not accounted for as derivatives under SFAS No. 133.
The Warrants have no impact on diluted shares outstanding until the average price of the Common Stock for a period exceeds the Warrants $44.905 exercise price. The Convertible Note Hedges are anti-dilutive and therefore have no impact on diluted shares outstanding.
Redemption of 6.98% NotesIn February 1999, the Company issued a tranche of 10-year long-term debt securities for an aggregate offering price of $100 million (the Notes). The Notes had an effective interest rate of 6.98% payable semi-annually in cash each February and August. On July 18, 2008,
the Company redeemed the Notes for $105.7 million, using a portion of the net proceeds
75
from the issuance of the Senior Notes and Convertible Notes. The $105.7 million paid upon redemption includes $102.5 million for the present value of the remaining principal and interest and $3.2 million for accrued and unpaid interest through the date of redemption. As a result, the Company
recognized a bond redemption cost of $2.5 million within Extinguishment of Debt (Net) in the Consolidated Income Statement for the year ended December 31, 2008.
Future Interest and Principal PaymentsAs of December 31, 2008, the aggregate future principal and interest payments due under the Convertible Notes and Senior Notes are as follows (in thousands of dollars):
|
|
|
2009 |
|
|
$ |
|
16,403 |
|
2010 |
|
|
|
16,403 |
|
2011 |
|
|
|
16,403 |
|
2012 |
|
|
|
16,403 |
|
2013 |
|
|
|
213,278 |
|
20142015 |
|
|
|
146,229 |
|
|
|
|
Total future principal and interest payments |
|
|
$ |
|
425,119 |
|
|
|
|
Interest ExpenseFor the years ended December 31, 2008, 2007 and 2006, interest expense consisted of the following:
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
|
(Thousands of dollars) |
Senior secured credit facility: |
|
|
|
|
|
|
Interest expense on outstanding borrowings |
|
|
$ |
|
1,740 |
|
|
|
$ |
|
|
|
|
|
$ |
|
1,787 |
|
Amortization of amendment and arrangement fees |
|
|
|
736 |
|
|
|
|
582 |
|
|
|
|
568 |
|
Commitment fees |
|
|
|
787 |
|
|
|
|
765 |
|
|
|
|
707 |
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
3,263 |
|
|
|
|
1,347 |
|
|
|
|
3,062 |
|
|
|
|
|
|
|
|
York Property capital lease obligation |
|
|
|
17,491 |
|
|
|
|
17,666 |
|
|
|
|
17,826 |
|
6.98% Notes (redeemed July 18, 2008) |
|
|
|
3,767 |
|
|
|
|
6,971 |
|
|
|
|
6,965 |
|
7.75% Senior Notes, due June 2015 |
|
|
|
6,381 |
|
|
|
|
|
|
|
|
|
|
|
3.125% Convertible Notes, due June 2013 |
|
|
|
3,368 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs |
|
|
|
989 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of discount related to antitrust matters (see Note Q) |
|
|
|
|
|
|
|
|
941 |
|
|
|
|
2,679 |
|
Other interest expense |
|
|
|
1,423 |
|
|
|
|
1,697 |
|
|
|
|
2,507 |
|
|
|
|
|
|
|
|
Total interest expense |
|
|
$ |
|
36,682 |
|
|
|
$ |
|
28,622 |
|
|
|
$ |
|
33,039 |
|
|
|
|
|
|
|
|
For the years ended December 31, 2008 and 2007, other interest expense principally relates to the amortization of the discount on the note payable to Arcimboldo (see Note O) and other miscellaneous interest expense. For the year ended December 31, 2006, other interest expense principally relates
to interest accrued on the obligations under the Sothebys, Inc. 2005 Benefit Equalization Plan and its predecessor, the Sothebys, Inc. 1988 Benefit Equalization Plan, which was an unfunded deferred compensation plan available to certain U.S. officers of the Company whose contributions to the
Sothebys, Inc. Retirement Savings Plan were limited by Internal Revenue Service regulations (see Note N).
Interest PaidFor the years ended December 31, 2008, 2007 and 2006, interest paid totaled $35.9 million, $25.3 million and $28.1 million, respectively. Interest paid consists of cash payments related to the Companys credit facility borrowings (including interest and fees) and long-term debt securities, as
well as the portion of lease payments for the York Property capital lease obligation related to interest.
76
Note JIncome Taxes
For the years ended December 31, 2008, 2007 and 2006, the significant components of income tax expense from continuing operations consist of the following:
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
|
(Thousands of dollars) |
Income (loss) from continuing operation before taxes: |
|
|
|
|
|
|
Domestic |
|
|
$ |
|
(66,794 |
) |
|
|
|
$ |
|
66,923 |
|
|
|
$ |
|
32,456 |
|
Foreign |
|
|
|
115,271 |
|
|
|
|
216,096 |
|
|
|
|
133,327 |
|
|
|
|
|
|
|
|
Total |
|
|
$ |
|
48,477 |
|
|
|
$ |
|
283,019 |
|
|
|
$ |
|
165,783 |
|
|
|
|
|
|
|
|
Income tax expense (benefit)current: |
|
|
|
|
|
|
Domestic |
|
|
$ |
|
(8,342 |
) |
|
|
|
$ |
|
43,453 |
|
|
|
$ |
|
3,928 |
|
State and Local |
|
|
|
(1,325 |
) |
|
|
|
|
723 |
|
|
|
|
115 |
|
Foreign |
|
|
|
31,396 |
|
|
|
|
53,944 |
|
|
|
|
32,660 |
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
21,729 |
|
|
|
|
98,120 |
|
|
|
|
36,703 |
|
|
|
|
|
|
|
|
Income tax expense (benefit)deferred |
|
|
|
|
|
|
Domestic |
|
|
|
(602 |
) |
|
|
|
|
(2,315 |
) |
|
|
|
|
22,341 |
|
State and Local |
|
|
|
(1,358 |
) |
|
|
|
|
(23,624 |
) |
|
|
|
|
0 |
|
Foreign |
|
|
|
2,578 |
|
|
|
|
331 |
|
|
|
|
1,006 |
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
618 |
|
|
|
|
(25,608 |
) |
|
|
|
|
23,347 |
|
|
|
|
|
|
|
|
Total |
|
|
$ |
|
22,347 |
|
|
|
$ |
|
72,512 |
|
|
|
$ |
|
60,050 |
|
|
|
|
|
|
|
|
For the years ended December 31, 2008, 2007 and 2006, income tax expense related to the Companys equity earnings of investees was approximately $1.8 million, $1.7 million and $1 million, respectively.
As of December 31, 2008 and 2007, the components of Deferred Income Tax Assets and Liabilities consisted of the following:
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
Deferred Tax Assets: |
|
|
|
|
Asset provisions and accrued liabilities |
|
|
$ |
|
80,929 |
|
|
|
$ |
|
58,519 |
|
Capital lease obligation |
|
|
|
75,548 |
|
|
|
|
75,962 |
|
Tax loss and credit carryforwards |
|
|
|
2,621 |
|
|
|
|
7,013 |
|
Difference between book and tax basis of depreciable and amortizable assets |
|
|
|
|
|
|
|
|
5,120 |
|
|
|
|
|
|
Sub-total |
|
|
|
159,098 |
|
|
|
|
146,614 |
|
Valuation allowance |
|
|
|
(1,328 |
) |
|
|
|
|
(439 |
) |
|
|
|
|
|
|
Total deferred tax assets |
|
|
|
157,770 |
|
|
|
|
146,175 |
|
|
|
|
|
|
Deferred Tax Liabilities: |
|
|
|
|
Difference between book and tax basis of depreciable and amortizable assets |
|
|
|
55,337 |
|
|
|
|
54,861 |
|
Step up of acquired assets |
|
|
|
843 |
|
|
|
|
5,156 |
|
Pension obligations |
|
|
|
2,083 |
|
|
|
|
2,648 |
|
Basis difference in equity method investments |
|
|
|
6,100 |
|
|
|
|
7,256 |
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
|
64,363 |
|
|
|
|
69,921 |
|
|
|
|
|
|
Total |
|
|
$ |
|
93,407 |
|
|
|
$ |
|
76,254 |
|
|
|
|
|
|
The Company has deferred tax assets related to various foreign and state loss and tax credit carryforwards totaling $2.6 million that begin to expire in 2009.
As of December 31, 2008 and 2007, the Company has provided valuation allowances of $1.3 million and $0.4 million, respectively, for certain deferred tax assets primarily related to foreign tax credits, state and foreign losses. During 2008, the valuation allowance increased by $0.9 million,
77
primarily due to the Companys reassessment of its ability to utilize foreign tax credits and net operating losses against current and projected income. In 2007, the valuation allowance decreased from 2006 by $28.7 million, primarily due to a reassessment of the Companys ability to utilize net operating
losses against then current and projected income. The change in the valuation allowance in 2007 also resulted from managements evaluation of the utilization of state and foreign operating losses. In assessing the need for the valuation allowance management considers, among other things, its projection of
future taxable income and ongoing prudent and feasible tax planning strategies.
During 2008, the Company recorded a reduction in excess tax benefits associated with the exercise of stock options and the vesting of restricted stock of $0.1 million to Additional Paid-in Capital. In 2007 and 2006, the equivalent amounts recorded were excess tax benefits of $15.7 million and $14.9
million, respectively.
For the years ended December 31, 2008, 2007 and 2006, the effective rate from continuing operations varied from the statutory rate as follows:
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
Statutory federal income tax rate |
|
|
|
35.00 |
% |
|
|
|
|
35.00 |
% |
|
|
|
|
35.00 |
% |
|
State and local taxes, net of federal tax benefit |
|
|
|
(3.60 |
%) |
|
|
|
|
(5.27 |
%) |
|
|
|
|
0.03 |
% |
|
Foreign taxes at rates different from U.S. rates |
|
|
|
(23.02 |
%) |
|
|
|
|
(8.45 |
%) |
|
|
|
|
(8.85 |
%) |
|
Deemed income from foreign subsidiaries, net |
|
|
|
6.75 |
% |
|
|
|
|
4.82 |
% |
|
|
|
|
8.08 |
% |
|
Impairment losses |
|
|
|
5.91 |
% |
|
|
|
|
0.72 |
% |
|
|
|
|
0.00 |
% |
|
Tax reserves |
|
|
|
16.19 |
% |
|
|
|
|
0.95 |
% |
|
|
|
|
3.97 |
% |
|
Life insurance proceeds |
|
|
|
0.00 |
% |
|
|
|
|
(2.49 |
%) |
|
|
|
|
0.00 |
% |
|
Other |
|
|
|
8.87 |
% |
|
|
|
|
0.34 |
% |
|
|
|
|
(2.01 |
%) |
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
|
46.10 |
% |
|
|
|
|
25.62 |
% |
|
|
|
|
36.22 |
% |
|
|
|
|
|
|
|
|
Tax reserves related to various federal and international tax events recorded in 2008 increased the Companys effective tax rate. During 2008, the differential between foreign and U.S. tax rates increased the effective tax rate because of the change in the mix of earnings between the U.S. and foreign
subsidiaries. Income taxes have not been provided on a cumulative total of $226.6 million and $280.3 million of undistributed earnings of certain foreign subsidiaries that are intended to be indefinitely reinvested outside of the U.S. at December 31, 2008 and 2007, respectively. It is not practicable to
determine the income tax liability that might be incurred if these earnings were to be distributed.
Total net income tax payments related to the Companys continuing operations during 2008, 2007 and 2006 were $81.6 million, $38.5 million and $24.3 million, respectively.
Note KUncertain Tax Positions
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax position on the income tax return must be recognized at the
largest amount that is more likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if there is less than a 50% likelihood of its being sustained. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
The Company adopted FIN No. 48 on January 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $16.8 million. Included in this balance are $12.5 million of tax benefits that, if recognized, would have impacted the Companys effective tax rate. Also included in this
balance are $1.5 million of tax benefits that, if recognized, would have resulted in adjustments to other tax accounts, primarily deferred taxes.
78
As a result of the adoption of FIN No. 48, as of January 1, 2007, the Company recognized a $1.5 million increase in the liability for unrecognized tax benefits, which was accounted for as follows (in thousands of dollars):
|
|
|
Reduction in Retained Earnings (cumulative effect) |
|
|
$ |
|
1,459 |
|
Increase in Deferred Tax Assets |
|
|
$ |
|
18 |
|
Increase in liability for unrecognized tax benefits |
|
|
$ |
|
1,477 |
|
As of December 31, 2008 and 2007, the Companys liability for unrecognized tax benefits, excluding interest and penalties, was $43.6 million and $32.6 million, respectively. The December 31, 2008 and 2007 balances are reflected in the Consolidated Balance Sheets as follows:
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
Current Liabilities: |
|
|
|
|
Accrued income taxes |
|
|
$ |
|
|
|
|
|
$ |
|
13,311 |
|
Non-Current Liabilities: |
|
|
|
|
Deferred income taxes (contra assets) |
|
|
|
28,887 |
|
|
|
|
12,898 |
|
Accrued income taxes |
|
|
|
14,738 |
|
|
|
|
6,406 |
|
|
|
|
|
|
|
|
|
$ |
|
43,625 |
|
|
|
$ |
|
32,615 |
|
|
|
|
|
|
As of December 31, 2008 and 2007, the total amount of unrecognized tax benefits that, if recognized, would favorably affect the Companys effective tax rate are $33.6 million and $19.4 million, respectively. Also included in the December 31, 2008 and 2007 balances are $1.5 million and $10.3 million,
respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.
The table below presents a reconciliation of the beginning and ending amount of the Companys liability for unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2008 and 2007 (in thousands of dollars):
|
|
|
|
|
|
|
2008 |
|
2007 |
Balance at January 1 |
|
|
$ |
|
32,615 |
|
|
|
$ |
|
16,837 |
|
Increases in unrecognized tax benefits related to the current year |
|
|
|
12,731 |
|
|
|
|
6,427 |
|
Increases in unrecognized tax benefits related to prior years |
|
|
|
8,775 |
|
|
|
|
11,440 |
|
Decreases in unrecognized tax benefits related to prior years |
|
|
|
(8,935 |
) |
|
|
|
|
(2,089 |
) |
|
Decreases in unrecognized tax benefits related to settlements |
|
|
|
(1,486 |
) |
|
|
|
|
|
|
Decreases in unrecognized tax benefits due to lapse of the applicable statute of limitations |
|
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
|
$ |
|
43,625 |
|
|
|
$ |
|
32,615 |
|
|
|
|
|
|
The net increases in the liability for unrecognized tax benefits related to current and prior years is primarily attributable to increased reserves related to foreign earnings, transfer pricing and loss carryforwards, partially offset by the resolution of a New York City tax audit for tax years 1997 through
2001 and a change in the Companys tax accounting method related to inventory valuation that was adopted in 2008.
The Company recognizes interest expense and penalties related to unrecognized tax benefits as a component of income tax expense. In addition to the adjustment above, upon the adoption of FIN No. 48 in the first quarter of 2007, the Company increased its accrual for such interest to $1.2 million,
an increase of $0.5 million from December 31, 2006. For the year ended December 31, 2008, the Company decreased its accrual for interest and penalties by $1.5 million in its Consolidated Income Statements, after recognizing an increase of $1.5 million in 2007. As of December 31, 2008 and 2007, the
liability for tax related interest and penalties included in the Consolidated Balance Sheets was $1.2 million and $2.7 million, respectively. The net decrease for the twelve months ended December 31, 2008 is primarily due to the resolution of a New York City tax audit for tax years
79
1997 through 2001 and a change in the Companys tax accounting method related to inventory valuation that was adopted in 2008.
The Companys policy is to record interest expense related to sales, value added and other taxes as Interest Expense in the Consolidated Income Statements. Penalties related to such taxes are recorded as General and Administrative Expenses in the Consolidated Income Statements. Interest expense
and penalties related to income taxes are recorded as a component of Income Tax Expense (Benefit) in the Consolidated Income Statements.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Companys tax years that are open for audit for federal purposes and for major state, local and foreign jurisdictions are as follows:
Federal:
Major state and local jurisdictions:
|
|
|
|
|
New York State: 2004 to 2008 |
|
|
|
|
|
New York City: 2002 to 2008 |
|
|
|
|
|
California: 2002 to 2008
|
Major foreign jurisdictions:
|
|
|
|
|
Hong Kong: 1998 and 2002 to 2008 |
|
|
|
|
|
U.K.: 2005 to 2008
|
The
Company believes it is reasonably possible that a decrease of $4.6 million
in the balance of unrecognized tax benefit can occur within twelve months of
December 31, 2008 as a result of an expected settlement of an ongoing tax
audit.
Note
LLease Commitments
Capital LeaseAs discussed in Note F, on February 7, 2003, the Company sold the York Property and leased it back from the buyer, RFR, for an initial 20-year term, with options for the Company to extend the lease for two additional 10-year terms. The resulting lease was accounted for as a capital
lease.
The following is a schedule, by year, of the future minimum lease payments that were due under the York Property capital lease, together with the present value of the future minimum lease payments as of December 31, 2008 (in thousands of dollars):
|
|
|
2009 |
|
|
$ |
|
20,614 |
|
2010 |
|
|
|
20,637 |
|
2011 |
|
|
|
20,637 |
|
2012 |
|
|
|
22,056 |
|
2013 |
|
|
|
22,081 |
|
Thereafter |
|
|
|
225,072 |
|
|
|
|
Total future minimum lease payments |
|
|
|
331,097 |
|
Less: amount representing interest |
|
|
|
163,906 |
|
|
|
|
Present value of future minimum lease payments |
|
|
$ |
|
167,191 |
|
|
|
|
On February 6, 2009, the Company purchased the York Property from RFR for an aggregate purchase price of $370 million. The Company financed the purchase price through $135 million in cash payments and the assumption of an existing $235 million mortgage. The York Property mortgage
matures on July 1, 2035, with an optional pre-payment date of July 1, 2015, and bears an annual rate of interest of approximately 5.6%, which increases subsequent to July 1, 2015. It is the Companys current intention to pre-pay the mortgage on or about July 1, 2015.
Operating LeasesThe Company also conducts business on premises leased in various locations under long-term operating leases expiring at various dates through 2060. For the years ended December 31, 2008, 2007 and 2006, net rental expense under the Companys operating leases was $17.5 million,
$14.7 million and $13.7 million, respectively.
80
Future minimum lease payments due under noncancelable operating leases in effect at December 31, 2008 are as follows (in thousands of dollars):
|
|
|
2009 |
|
|
$ |
|
16,486 |
|
2010 |
|
|
|
13,364 |
|
2011 |
|
|
|
10,325 |
|
2012 |
|
|
|
6,406 |
|
2013 |
|
|
|
4,932 |
|
Thereafter |
|
|
|
46,998 |
|
|
|
|
Total future minimum lease payments |
|
|
$ |
|
98,511 |
|
|
|
|
The future minimum lease payments in the table above exclude future minimum sublease rental receipts of $5.7 million owed to the Company under non-cancelable subleases.
In addition to the operating lease payments in the table above, under the terms of certain leases, the Company is required to pay real estate taxes and utility costs and may be subject to escalations in the amount of future minimum lease payments based on certain contractual provisions.
Note MShareholders Equity, Dividends and Share-Based Payments
Common StockThe principal U.S. market for the Companys Common Stock is the New York Stock Exchange (the NYSE) (Symbol: BID). Each share of common stock is entitled to one vote.
Preferred StockIn addition to the Common Stock outstanding, the Company has the authority to issue 50 million shares of no par value preferred stock. No shares of preferred stock were issued and outstanding as of December 31, 2008, 2007 and 2006.
DividendsThe following table summarizes dividends per share and dividends declared and paid for the years ended December 31, 2008, 2007 and 2006 (in thousands of dollars, except per share data):
|
|
|
|
|
Year Ended |
|
Dividends Per Share |
|
Dividends Declared and Paid |
December 31, 2008 |
|
|
$ |
|
0.60 |
|
|
|
$ |
|
40,651 |
|
December 31, 2007 |
|
|
$ |
|
0.50 |
|
|
|
$ |
|
33,326 |
|
December 31, 2006 |
|
|
$ |
|
0.20 |
|
|
|
$ |
|
12,946 |
|
On
February 26, 2009, the Companys Board of Directors declared a quarterly
dividend on its common stock of $0.15 per share (approximately $10.2 million),
to be paid on March 16, 2009 to shareholders of record as of March 9, 2009.
Share-Based PaymentsOn January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment, using the modified prospective method. Under this method, the Company applied SFAS No. 123R to account for compensation expense for all share-based awards granted after the date of
adoption and for the unvested portion of previously granted awards that remained outstanding at the date of adoption.
For the years ended December 31, 2008, 2007 and 2006, the Company recorded stock compensation expense related to restricted stock and stock options of $30.4 million ($20.8 million after tax, or $0.32 per diluted share), $28.2 million ($19.6 million after tax, or $0.30 per diluted share) and $15.8
million ($10.7 million after tax, or $0.17 per diluted share), respectively.
For the years ended December 31, 2008, 2007 and 2006, net cash provided by operating activities decreased and net cash provided by financing activities increased by approximately $1.1 million, $15.7 million and $14.9 million, respectively, related to the classification of excess tax benefits from stock-
based payment arrangements.
Stock OptionsStock options issued pursuant to the Sothebys 1997 Stock Option Plan (the Stock Option Plan) are exercisable into authorized but unissued shares of Common Stock. Stock options generally expire ten years after the date of grant and generally vest and become exercisable ratably
after each of the first, second, third, fourth and fifth years following the date of grant. Stock
81
options vest immediately upon a change in control of the Company (as defined in the plan document for the Stock Option Plan, as amended).
In March 2006, the Compensation Committee of the Board of Directors (the Compensation Committee) approved an amendment to the Stock Option Plan whereby the maximum number of shares reserved for issuance under the plan was reduced by approximately 7 million shares, from 14.9
million shares to 7.9 million shares. This amendment is consistent with the evolution of the Companys equity compensation strategy towards a preference for restricted stock and restricted stock units as opposed to stock options and was made in conjunction with shareholder approval of a 4.5 million
increase in the number of shares of common stock authorized for issuance under the Sothebys Amended and Restated Restricted Stock Plan (the Restricted Stock Plan), which was approved on May 8, 2006. (See Restricted Stock below for a more detailed discussion of the Restricted Stock Plan and
the Restricted Stock Unit Plan.)
As of December 31, 2008, 0.5 million shares of Common Stock were available for the issuance of new stock option grants under the Stock Option Plan. No stock options have been granted by the Company since 2005.
The fair value of stock option grants, if any, is estimated using a Black-Scholes option valuation model, which utilizes assumptions for:
|
|
|
|
|
Expected life (estimated period of time outstanding): The expected life is estimated using historical exercise behavior taking into consideration the vesting period for each grant. |
|
|
|
|
|
Risk-free rate of return: The risk-free rate of return is based on the available yield for U.S. Treasury securities with a maturity that approximates the expected life of the stock option grant. |
|
|
|
|
|
Expected volatility: The expected volatility is based on historic volatility for a period approximately equal to the expected life of the stock option grant. |
|
|
|
|
|
Dividend yield: Dividend yield is the expected rate of dividends to be paid throughout the expected life of the stock option grant.
|
Changes in the number of stock options outstanding during the year ended December 31, 2008 were as follows (shares and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
Options |
|
Weighted Average Exercise Price |
|
Weighted Average Remaining Contractual Term |
Outstanding at January 1, 2008 |
|
|
|
962 |
|
|
|
$ |
|
16.64 |
|
|
|
Canceled |
|
|
|
(1 |
) |
|
|
|
$ |
|
21.36 |
|
|
|
Expired |
|
|
|
(1 |
) |
|
|
|
$ |
|
24.25 |
|
|
|
Exercised |
|
|
|
(25 |
) |
|
|
|
$ |
|
12.71 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
|
935 |
|
|
|
$ |
|
16.74 |
|
|
|
|
3.1 |
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008 |
|
|
|
935 |
|
|
|
$ |
|
16.74 |
|
|
|
|
3.1 |
|
|
|
|
|
|
|
|
As of December 31, 2008, all of the Companys stock options outstanding had exercise prices higher than the closing stock price of the Companys Common Stock on that day, and therefore had no intrinsic value.
The total intrinsic value for stock options exercised during 2008, 2007 and 2006 was $0.4 million, $33.8 million and $38.4 million, respectively.
Cash received from the exercise of stock options in 2008, 2007 and 2006 was $0.3 million, $18.6 million and $67 million, respectively. In 2008, 2007 and 2006, the tax benefit realized from stock option exercises totaled $0.1 million, $11 million and $12 million, respectively.
Restricted Stock and Restricted Stock UnitsIn February 2003, the Compensation Committee approved the adoption of the Restricted Stock Plan, effective May 1, 2003. The Restricted Stock Plan was approved by a vote of shareholders on April 29, 2003. The Restricted Stock Plan was amended on
November 7, 2005 to conform the plan to the Companys capital structure following a
82
recapitalization transaction that was completed on September 7, 2005. The Restricted Stock Plan was further amended, effective February 1, 2009, to become the Sothebys Restricted Stock Unit Plan (the Restricted Stock Unit Plan), whereby awards granted under the Restricted Stock Unit Plan may be
in the form of Restricted Stock Units (RSUs), rather than unvested shares of common stock (Restricted Stock).The award of RSUs in lieu of Restricted Stock shares offers certain tax advantages and flexibility to recipients.
The Restricted Stock Unit Plan provides for the issuance of Restricted Stock shares or RSUs, in lieu of restricted stock, to eligible employees. In making such awards, the Compensation Committee takes into account the nature of the services rendered by such employees, their present and potential
contributions to the Companys success, and such other factors as the Compensation Committee in its discretion deems relevant.
Restricted Stock shares granted pursuant to the Restricted Stock Plan and RSUs granted pursuant to the Restricted Stock Unit Plan generally vest ratably after each of the first, second, third and fourth years following the date of grant; however, Restricted Stock shares issued in connection with the
Sothebys Executive Bonus Plan (the EBP) through 2008 vest ratably over a three-year period and shares issued pursuant to certain employment arrangements vest over three and five-year periods, subject to the achievement of certain Company net income or share price targets, as well as continued
employment during the vesting periods. Prior to vesting, holders of Restricted Stock shares have voting rights and receive dividends if any, while holders of RSUs do not have voting rights and have the right to receive dividend equivalents. Restricted stock shares and RSUs may not be sold, assigned,
transferred, pledged or otherwise encumbered until they vest. As of December 31, 2008, 2.7 million shares remained available for future grants of Restricted Stock and RSUs.
On April 1, 2006, in conjunction with his employment arrangement and in an effort to encourage and reward the growth of shareholder value, the Company granted William F. Ruprecht, the Companys President and Chief Executive Officer, a one time award of 300,000 shares of Restricted Stock
that will only vest for Mr. Ruprecht at the end of the third and fifth years of his employment arrangement, and only if certain Company net income or share price targets are achieved as of December 31, 2008 and/or December 31, 2010. The three-year net income target was achieved on December 31,
2008. Accordingly, 180,000 of these Restricted Stock shares will vest on May 9, 2009. Management currently believes that the achievement of the five-year net income target is probable and that the remaining 120,000 Restricted Stock shares will vest on May 9, 2011.
Also in conjunction with his employment arrangement, beginning in 2007, Mr. Ruprecht is entitled to an annual Restricted Stock award, subject to agreed annual minimum ($1.4 million) and maximum ($2.2 million) levels, the value of which is determined at the discretion of the Compensation
Committee. Pursuant to this provision of his employment arrangement, Mr. Ruprecht received the following awards:
|
|
|
|
|
57,277 Restricted Stock shares granted on February 9, 2007 with a fair value of $2.2 million |
|
|
|
|
|
71,267 Restricted Stock shares granted on February 10, 2008 with a fair value of $2.2 million. |
|
|
|
|
|
168,868 RSUs granted on February 11, 2009 with a fair value of $1.4 million.
|
In conjunction with employment arrangements entered into with certain senior executives in the third quarter of 2006, the Company granted 427,531 shares of Restricted Stock that will only vest at the end of the third and/or fifth years of their employment arrangements, and only if certain objective
Company net income or share price targets are achieved as of June 30, 2009 and June 30, 2011. It is not expected that the net income targets will be achieved on the respective vesting dates.
The value of Restricted Stock shares issued pursuant to the Restricted Stock Plan and the RSUs issued pursuant to the Restricted Stock Unit Plan is generally determined based on the closing price of the Companys Common Stock on the business day immediately prior to the date of grant.
Subsequent to the date of grant, compensation expense is amortized to Salaries and Related Costs over the corresponding graded vesting period.
Stock compensation expense is also recognized for the value of future Restricted Stock grants that are contractually guaranteed according to the terms of certain employment arrangements. The guaranteed value of such future Restricted Stock grants is amortized over a period beginning on the
83
effective date of the respective employment arrangement and through the final legal vesting date of the grant.
On February 10, 2008, the Compensation Committee approved the issuance of the following Restricted Stock awards:
|
|
|
|
|
607,450 shares with a fair value of $18.8 million related to the initiation of the Companys new incentive compensation program. Such shares vest ratably after each of the first, second, third and fourth years of service following the date of grant. |
|
|
|
|
|
307,059 shares with a fair value of $9.5 million pursuant to the EBP. Such shares vest ratably after each of the first, second and third years following the date of grant. |
|
|
|
|
|
92,220 shares with a fair value of $2.8 million related to executive employment arrangements, including 71,267 shares with a fair value of $2.2 million issued to Mr. Ruprecht, as discussed above. Such shares vest ratably after each of the first, second, third and fourth years of service following the
date of grant.
|
On February 11, 2009, the Compensation Committee approved the issuance of the following Restricted Stock awards:
|
|
|
|
|
709,655 RSUs with a fair value of $5.9 million related to the Companys incentive compensation program. Such RSUs will vest ratably after each of the first, second, third and fourth years of service following the date of grant.
|
|
|
|
|
|
192,407 RSUs with a fair value of $1.6 million related executive employment arrangements, including 168,878 RSUs with a fair value of $1.4 million issued to Mr. Ruprecht, as discussed above. Such RSUs will vest ratably after each of the first, second, third and fourth years of service following
the date of grant. |
|
|
|
|
|
72,376 RSUs with a value of $0.6 million issued at the discretion of the Compensation Committee.
|
Changes in the number of outstanding Restricted Stock shares during the year ended December 31, 2008 were as follows (shares in thousands):
|
|
|
|
|
|
|
Restricted Shares |
|
Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2008 |
|
|
|
2,286 |
|
|
|
$ |
|
29.05 |
|
Granted |
|
|
|
1,007 |
|
|
|
$ |
|
30.87 |
|
Vested |
|
|
|
(707 |
) |
|
|
|
$ |
|
23.11 |
|
Canceled |
|
|
|
(49 |
) |
|
|
|
$ |
|
31.59 |
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
|
2,537 |
|
|
|
$ |
|
31.36 |
|
|
|
|
|
|
The total fair value of Restricted Stock shares that vested during 2008, 2007 and 2006 was $21.2 million, $23.4 million and $14.3 million, respectively, based on the closing stock price on the dates the shares vested.
As of December 31, 2008, unrecognized compensation expense related to the unvested portion of the Companys stock-based compensation was $26.5 million. This compensation expense is expected to be recognized over a weighted-average period of approximately 2.3 years. The Company does not
capitalize any compensation cost related to share-based compensation awards to employees.
Stock Compensation Plan for Non-Employee DirectorsEffective May 7, 2007, the Company amended the Sothebys Stock Compensation Plan for Non-Employee Directors. As of December 31, 2008, the Company had reserved 59,153 shares available in connection with this plan. For the years ended
December 31, 2008, 2007 and 2006, the number of shares issued to non-employee directors under this plan (including deferred stock units) was 24,761, 8,528 and 9,249, respectively.
Note NPension Arrangements
Retirement Savings PlanThe Company has a defined contribution plan for U.S. employees who have completed three consecutive months of employment (the Retirement Savings Plan).
84
Participants may elect to contribute between 2% and 20% of their eligible compensation, up to the maximum amount allowable under Internal Revenue Service (IRS) regulations, on a pre-tax basis. Employee savings are matched by a Company contribution of up to an additional 6% of each
participants eligible compensation. Additionally, the Company may contribute an annual discretionary amount to the Retirement Savings Plan, which varies as a percentage of each participants eligible compensation depending on the Companys profitability and subject to the maximum amount allowable
under IRS regulations. For the year ended December 31, 2008, the Company did not make a discretionary contribution to the Retirement Savings Plan due to the Companys significantly lower profitability in 2008. For the years ended December 31, 2007 and 2006, the Companys discretionary
contribution to the Retirement Savings Plan was 4% of each participants eligible compensation.
For the years ended December 31, 2008, 2007 and 2006, pension expense recorded within Salaries and Related Costs for the Retirement Savings Plan, net of forfeitures, was $2.6 million, $5.5 million and $4.6 million, respectively.
Deferred Compensation PlanThrough December 31, 2006, the Company had an unfunded deferred compensation plan, the Sothebys, Inc. 2005 Benefit Equalization Plan (the 2005 BEP), which was available to certain officers of the Company for whom contributions to the Retirement Savings Plan
were limited by IRS regulations. Such officers could enter into agreements pursuant to which their salaries would be reduced and the Company would maintain accounts on their behalf in the amount of the difference between the deferral election made in the participants salary reduction agreement and
the aggregate amount of contributions actually made by the participant under the Retirement Savings Plan. Employees could elect to defer up to 12% of their eligible compensation and employee deferrals were matched by a Company contribution of up to 6% of the participants eligible compensation.
Additionally, there was a discretionary annual Company contribution for those participants for whom discretionary contributions to the Retirement Savings Plan were limited by IRS regulations. Contributions to the 2005 BEP earned interest at a rate equal to 3.3% above the 10-year U.S. Treasury Bond
rate. For the year ended December 31, 2006, pension expense recorded within Salaries and Related Costs related to the 2005 BEP was $1.4 million.
On December 7, 2006, the Company adopted the Sothebys Deferred Compensation Plan (the DCP), effective January 1, 2007. The DCP replaced the 2005 BEP and its predecessor, the Sothebys, Inc. 1988 Benefit Equalization Plan (together, the BEP). The DCP incorporates best practice
features of contemporary non-qualified plans, including providing participants with a broad menu of investment crediting options which track a portfolio of various deemed investment funds. Employee deferrals and Company contributions to the DCP are informally funded into a rabbi trust which provides
benefit security by sheltering assets in the event of a change-in-control of the Company and certain other situations. DCP liabilities are financed through the trust using Company-owned variable life insurance, as well as other investments. The unfunded liability for the BEP, which totaled $24.2 million as
of December 31, 2006, was transferred into the DCP on January 1, 2007. The Company funded this amount into the rabbi trust on February 8, 2007 and has funded an additional $16.4 million into the trust subsequent to that date.
As of December 31, 2008 and 2007, the DCP liability totaled $31.5 million and $31.1 million, respectively, and the assets held in the rabbi trust totaled $33.2 million and $31.8 million, respectively. Changes in the DCP liability resulting from gains (which increase the DCP liability) and losses (which
decrease the DCP liability) in deemed participant investments are recognized currently in the Consolidated Income Statements within Salaries and Related Costs. For the year ended December 31, 2008, net losses in deemed participant investments totaled $6 million, thereby reducing Salaries and Related
Costs by this amount. For the year ended December 31, 2007, net gains in deemed participant investments totaled $1.9 million, thereby increasing Salaries and Related Costs by this amount.
As of December 31, 2008, the trust assets consist of $14.4 million of investments that are classified as trading securities and reflected at their fair value in the Consolidated Balance Sheets within Trust Assets Related to Deferred Compensation Liability, and $18.8 million in Company-owned variable
life insurance, which is reflected at its cash surrender value in the Consolidated
85
Balance Sheets within Trust Assets Related to Deferred Compensation Liability. Gains and losses resulting from changes in the fair value of the trading securities and the cash surrender value of the Company-owned variable life insurance are recognized currently in the Consolidated Income Statements
within Other (Expense) Income, which is presented below Operating Income. For the year ended December 31, 2008, the Consolidated Income Statement includes a net loss of $5.1 million within Other (Expense) Income resulting from decreases in the fair value of the trading securities and the cash
surrender value of the Company-owned variable life insurance. Included in this net loss is a $1.8 million life insurance benefit recognized as a result of the death of a DCP participant. For the year ended December 31, 2007, the Consolidated Income Statement includes a net gain of $1.9 million within
Other (Expense) Income resulting from increases in the fair value of the trading securities and the cash surrender value of the Company-owned variable life insurance.
Defined Benefit Plan (U.K.)The Company sponsors a defined benefit pension plan covering most U.K. employees. Effective April 1, 2004, the U.K. Pension Plan was closed to new employees. From that date, a defined contribution plan was made available to new employees in the U.K.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132 (R). Effective December 31, 2006, the Company adopted the balance sheet recognition provisions
of SFAS No. 158, as well as the related disclosure requirements, and recognized the funded status of the U.K. Pension Plan in its Consolidated Balance Sheet as of December 31, 2006. SFAS No. 158 also requires the measurement of defined benefit pension plan assets and obligations as of the date of the
employers fiscal year-end balance sheet. Effective January 1, 2008, the Company adopted the measurement date provision of SFAS No. 158 and revalued the plan assets and benefit obligations related to the U.K Pension Plan as of January 1, 2008. Prior to the adoption of the measurement date provision
of SFAS No. 158, the Company used a September 30 measurement date for the U.K. Pension Plan. The actuarial assumptions used for the revaluation of plan assets and benefit obligations related to the U.K. Pension Plan as of January 1, 2008 were consistent with those used for the September 30, 2007
valuation.
To account for the financial statement effect of the difference in measurement dates, SFAS No. 158 requires that the net pension cost for the period between the measurement date that was used for the immediately preceding fiscal year end (September 30, 2007 for the Company) and the beginning
of the fiscal year that the measurement date provisions are first applied (January 1, 2008 for the Company), be recognized, net of taxes, as an adjustment of the opening balance of Retained Earnings. Accordingly, as a result of the adoption of the measurement date provision of SFAS No. 158 for the
U.K. Pension Plan, net pension cost of $0.2 million ($0.1 million, net of taxes) was recorded in the first quarter of 2008 as an adjustment to the January 1, 2008 balance of Retained Earnings.
SFAS No. 158 also requires that other changes in the fair value of plan assets and benefit obligations (for example, actuarial and asset gains and losses) for the period between the measurement date that was used for the immediately preceding fiscal year end (September 30, 2007 for the Company)
and the beginning of the fiscal year that the measurement date provision of SFAS No. 158 is first applied (January 1, 2008 for the Company) be recognized, net of taxes, as an adjustment of the opening balance of Accumulated Other Comprehensive Income (Loss). Accordingly, as a result of the adoption
of the measurement date provision of SFAS No. 158 for the U.K. Pension Plan, a $0.3 million gain ($0.2 million, net of taxes) was recorded in the first quarter of 2008 as an adjustment to the January 1, 2008 balance of Accumulated Other Comprehensive Income.
In February 2008, the Company agreed with the Trustees of the U.K. Pension Plan to cease advance funding of future discretionary benefit increases to retirees. As a result, an updated actuarial valuation was prepared as of February 29, 2008 reflecting this change. On an annual basis, the Company,
in consultation with the Trustees, determines an appropriate level of funding of discretionary benefit increases to retirees for that particular year depending on specific objective criteria related to the financial status of the Company and the U.K. Pension Plan. In addition to this
86
change, a number of the other actuarial assumptions for the U.K. Pension Plan were updated to reflect the then current market conditions.
Benefit Obligation
The table below details the change in the benefit obligation, the change in the fair value of plan assets, the funded status and the amounts recognized in the Consolidated Balance Sheets as of December 31, 2008 and 2007 related to the U.K. Pension Plan:
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
Reconciliation of benefit obligation |
|
|
|
|
Benefit obligation at beginning of year |
|
|
$ |
|
310,410 |
|
|
|
$ |
|
344,004 |
|
Service cost for the transition period * |
|
|
|
1,465 |
|
|
|
|
|
|
Interest cost for the transition period * |
|
|
|
4,080 |
|
|
|
|
|
|
Employee contributions for the transition period * |
|
|
|
224 |
|
|
|
|
|
|
Actuarial gain for the transition period * |
|
|
|
(1,502 |
) |
|
|
|
|
|
|
Benefit payments for the transition period * |
|
|
|
(1,079 |
) |
|
|
|
|
|
|
Service cost |
|
|
|
4,723 |
|
|
|
|
8,456 |
|
Interest cost |
|
|
|
15,044 |
|
|
|
|
16,749 |
|
Contributions by plan participants |
|
|
|
825 |
|
|
|
|
1,006 |
|
Actuarial gain |
|
|
|
(61,169 |
) |
|
|
|
|
(61,646 |
) |
|
Benefits paid |
|
|
|
(4,620 |
) |
|
|
|
|
(4,520 |
) |
|
Special termination benefits |
|
|
|
|
|
|
|
|
248 |
|
Foreign currency exchange rate changes |
|
|
|
(76,211 |
) |
|
|
|
|
6,113 |
|
|
|
|
|
|
Benefit obligation at end of year |
|
|
|
192,190 |
|
|
|
|
310,410 |
|
|
|
|
|
|
Reconciliation of plan assets |
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
|
324,420 |
|
|
|
|
291,174 |
|
Employee contributions for the transition period * |
|
|
|
224 |
|
|
|
|
|
|
Benefit payments for the transition period * |
|
|
|
(1,079 |
) |
|
|
|
|
|
|
Actual return on assets in the transition period * |
|
|
|
4,137 |
|
|
|
|
|
|
Actual return on plan assets |
|
|
|
(45,975 |
) |
|
|
|
|
28,543 |
|
Employer contributions |
|
|
|
5,845 |
|
|
|
|
3,256 |
|
Contributions by plan participants |
|
|
|
825 |
|
|
|
|
1,006 |
|
Benefits paid |
|
|
|
(4,620 |
) |
|
|
|
|
(4,520 |
) |
|
Foreign currency exchange rate changes |
|
|
|
(80,366 |
) |
|
|
|
|
4,961 |
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
|
203,411 |
|
|
|
|
324,420 |
|
|
|
|
|
|
Funded Status |
|
|
|
|
Net pension asset recognized |
|
|
$ |
|
11,221 |
|
|
|
$ |
|
14,010 |
|
|
|
|
|
|
|
* |
|
|
|
Represents amounts recorded in conjunction with the adoption of the measurement date provision of SFAS No. 158, as discussed above.
|
87
Components of Net Pension Cost
For the years ended December 31, 2008, 2007 and 2006, the components of net pension (benefit) cost related to the U.K. Pension Plan were:
|
|
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
|
(Thousands of dollars) |
Service cost |
|
|
$ |
|
4,723 |
|
|
|
$ |
|
8,456 |
|
|
|
$ |
|
6,720 |
|
Interest cost |
|
|
|
15,044 |
|
|
|
|
16,749 |
|
|
|
|
12,866 |
|
Expected return on plan assets |
|
|
|
(23,899 |
) |
|
|
|
|
(20,093 |
) |
|
|
|
|
(16,587 |
) |
|
Amortization of prior service cost |
|
|
|
15 |
|
|
|
|
90 |
|
|
|
|
269 |
|
Amortization of net loss |
|
|
|
72 |
|
|
|
|
6,155 |
|
|
|
|
3,417 |
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
(4,045 |
) |
|
|
|
|
11,357 |
|
|
|
|
6,685 |
|
Special termination benefits |
|
|
|
|
|
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension (benefit) cost |
|
|
$ |
|
(4,045 |
) |
|
|
|
$ |
|
11,605 |
|
|
|
$ |
|
6,685 |
|
|
|
|
|
|
|
|
Amounts Recognized in Comprehensive (Loss) Income
The table below details the amounts recognized in Comprehensive (Loss) Income, net of taxes, related to the U.K. Pension Plan for the years ended December 31, 2008 and 2007:
|
|
|
|
|
Year Ended December 31 |
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
Net (loss) gain for period * |
|
|
$ |
|
(6,341 |
) |
|
|
|
$ |
|
50,469 |
|
Amortization of prior service cost |
|
|
|
11 |
|
|
|
|
63 |
|
Amortization of net loss |
|
|
|
52 |
|
|
|
|
4,309 |
|
|
|
|
|
|
Total |
|
|
$ |
|
(6,278 |
) |
|
|
|
$ |
|
54,841 |
|
|
|
|
|
|
|
* |
|
|
|
Net (loss) gain is the change in the value of the benefit obligation and/or plan assets resulting from experience different from that assumed or from a change in actuarial assumptions.
|
Amounts Included in Accumulated Other Comprehensive (Loss) Income
The table below details the amounts included in Accumulated Other Comprehensive (Loss) Income, net of taxes, related to the U.K. Pension Plan that have not yet been recognized as components of net pension cost as of December 31, 2008 and 2007:
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
|
(Thousands of dollars) |
Net loss |
|
|
$ |
|
13,183 |
|
|
|
$ |
|
10,168 |
|
Prior service cost |
|
|
|
16 |
|
|
|
|
31 |
|
|
|
|
|
|
Total |
|
|
$ |
|
13,199 |
|
|
|
$ |
|
10,199 |
|
|
|
|
|
|
The net loss and prior service cost are being recognized over the expected remaining service lives of the active employees in the U.K. Pension Plan. As of December 31, 2008, this was estimated to be approximately 14.4 years. For the year ended December 31, 2009, prior service cost of
approximately $8,000, net of taxes, is expected to be recognized as a component of the net pension benefit for the year. Accordingly, Accumulated Other Comprehensive (Loss) Income will be reduced by this amount.
Assumptions
The following assumptions were used in determining the benefit obligation and net pension (benefit) cost related to the U.K. Pension Plan:
|
|
|
|
|
Benefit Obligation |
|
2008 |
|
2007 |
Weighted average discount rate |
|
|
|
6.00 |
% |
|
|
|
|
5.70 |
% |
|
Weighted average rate of compensation increase |
|
|
|
4.80 |
% |
|
|
|
|
5.20 |
% |
|
88
|
|
|
|
|
|
|
Net Pension (Benefit) Cost |
|
2008 |
|
2007 |
|
2006 |
Weighted average discount rate |
|
|
|
6.30 |
% |
|
|
|
|
4.80 |
% |
|
|
|
|
4.90 |
% |
|
Weighted average rate of compensation increase |
|
|
|
5.30 |
% |
|
|
|
|
4.75 |
% |
|
|
|
|
4.50 |
% |
|
Weighted average expected long-term rate of return on plan assets |
|
|
|
8.30 |
% |
|
|
|
|
7.50 |
% |
|
|
|
|
7.25 |
% |
|
The expected long-term rate of return on plan assets is based on expected future appreciation, as well as dividend and interest yields currently available on equity and bond markets as of the measurement date and weighted according to the composition of invested assets as of that date.
Plan Assets
As of December 31, 2008 and September 30, 2007, the weighted average asset allocations for the U.K. Pension Plan, by category, were as follows:
|
|
|
|
|
|
|
December 31, 2008 |
|
September 30, 2007 |
Equity securities |
|
|
|
64 |
% |
|
|
|
|
67 |
% |
|
Debt securities |
|
|
|
33 |
% |
|
|
|
|
29 |
% |
|
Real estate |
|
|
|
2 |
% |
|
|
|
|
3 |
% |
|
Other |
|
|
|
1 |
% |
|
|
|
|
1 |
% |
|
The investment policy for the U.K. Pension Plan is established by its trustees (the Trustees) in consultation with the management of the Company. The Trustees investment objective is to maximize the return on assets while controlling the level of risk so as to ensure that sufficient assets are
available to pay participants benefits as and when they arise. The Trustees have agreed that a diversified portfolio of assets with a relatively high concentration of equity securities is appropriate. In order to avoid an undue concentration of risk, a diverse spread of assets is held. The diversification is both
within and across asset categories. In setting specific asset allocation targets, the Trustees take expert advice as required from professional investment advisors. Additionally, the Trustees require that the majority of the assets be realizable at short notice. The Trustees current investment strategy includes
target allocation percentages of approximately 68% for growth assets and approximately 32% for debt securities and other assets. These target allocation percentages are spread across different categories within each asset class and permit actual allocation percentages to fall within a reasonable range of
these targets.
The investment managers for the U.K. Pension Plan have full discretion in making investment decisions, subject to broad guidelines established by the Trustees. It is the Trustees policy not to invest in shares of the Company or any of its subsidiaries. The performance of the investment managers is
benchmarked against suitable indices.
Estimated Future Benefit Payments
Estimated future benefit payments related to the U.K. Pension Plan, which reflect expected future service, as appropriate, are as follows (in thousands of dollars):
|
|
|
Year |
|
Benefit Payments |
2009 |
|
|
$ |
|
5,415 |
|
2010 |
|
|
$ |
|
5,931 |
|
2011 |
|
|
$ |
|
6,252 |
|
2012 |
|
|
$ |
|
6,732 |
|
2013 |
|
|
$ |
|
5,828 |
|
2014-2018 |
|
|
$ |
|
43,876 |
|
Contributions
In 2008, the Company contributed $5.8 million to the U.K. Pension Plan and expects to contribute approximately $3.2 million to the plan in 2009.
Defined Benefit Plan (Germany)The Company sponsors a defined benefit pension plan for its employees in Germany (the German Pension Plan). The Company uses a December 31 measurement date for the German Pension Plan. In the fourth quarter of 2006, the Company adopted the
recognition provisions of SFAS No. 158 for the German Pension Plan and, as a result, recognized a net gain of $0.2 million, net of taxes, in Other Comprehensive Income. In 2007, a net
89
gain of $0.4 million, net of taxes, was recognized in Other Comprehensive Income related to the German Pension Plan. These are the only amounts related to the German Pension Plan included in Accumulated Other Comprehensive (Loss) Income as of December 31, 2008 and 2007.
As of December 31, 2008 and 2007, the pension liability related to the German Pension Plan recorded in the Consolidated Balance Sheets was approximately $2.3 million. For each of the years ended December 31, 2008, 2007 and 2006, net pension cost for the German Pension Plan was $0.2 million.
Future benefit payments related to the German Pension Plan are expected to be approximately $60,000 annually for the years 2009 to 2013 and approximately $0.6 million in the aggregate during the five years thereafter.
Note OCommitments and Contingencies
Employment ArrangementsAs of December 31, 2008, the Company had employment arrangements with seven employees, which expire at various points between June 2009 and June 2011. Such arrangements provide, among other benefits, for minimum salary levels and for incentive bonuses under the
Companys incentive compensation programs which are payable only if specified Company and individual goals are attained. Additionally, certain of these arrangements provide annual equity grants, and severance payments and continuation of benefits upon termination of employment under certain
circumstances. The aggregate remaining commitment for salaries related to these employment arrangements, excluding any participation in the Companys incentive compensation programs and equity grants, was approximately $10.5 million as of December 31, 2008.
Lending CommitmentsThe Company enters into legally binding arrangements to lend, primarily on a collateralized basis and subject to certain limitations and conditions, to potential consignors and other individuals who have collections of fine art or other objects. Unfunded commitments to extend
additional credit were $1.6 million at December 31, 2008, of which $1 million was committed to an employee of the Company.
Legal ActionsThe Company is involved from time to time in claims, proceedings and litigation, including the matters described below:
Sothebys Inc. v. Halsey Minor is an action commenced by a subsidiary of the Company in September 2008 in the U.S. District Court for the Southern District of New York, seeking to collect approximately $18 million for three paintings that Mr. Minor purchased in auctions conducted by Sothebys
in the spring of 2008. Mr. Minor filed a counterclaim in that action alleging that Sothebys had failed to disclose that the consignor of one of those paintings had an outstanding loan from Sothebys and asserting that the sale should, therefore, be rescinded or the price of the painting reduced. In October
2008 Mr. Minor commenced a separate action in the U.S. District Court for the Northern District of California seeking recovery for alleged losses on behalf of a purported class of purchasers of properties that were subject to alleged undisclosed loans from Sothebys. The action also asserted breaches of
fiduciary duties arising from alleged art consulting advice provided to Mr. Minor by a Sothebys employee. Sothebys filed a motion in the New York action to enjoin the California action as duplicative of claims that have been or could be asserted in the New York action. In January 2009 the judge in
the New York action granted that motion. Sothebys also filed a motion in the California action seeking dismissal of that action on grounds similar to those asserted in its motion in the New York action. In January 2009 the judge in the California action granted that motion. Mr. Minors time to appeal
those decisions has expired. While it is not possible to predict the outcome of litigation, management believes that there are meritorious defenses to the claims asserted in the counterclaim to the New York action and in the California action and that they will not have a material adverse effect on the
Companys consolidated results of operations, financial condition and/or cash flows. These actions are being vigorously defended.
Italian Antitrust MatterIn October 2008, the Italian Antitrust Authority commenced an investigation of Italian auction houses and an Italian auction house trade association seeking evidence of practices that reduce competition, particularly in respect of the sale of modest value works of art. The
Companys subsidiary, Sothebys Italia S.r.l., has been contacted by the Italian Antitrust Authority and is cooperating fully with the investigation. While it is not possible to predict
90
the outcome of this investigation, management does not believe that it will have a material adverse effect on the Companys consolidated results of operations, financial condition and/or cash flows.
The Company becomes involved in other various claims and lawsuits incidental to the ordinary course of its business. Management does not believe that the outcome of any of these pending claims or proceedings will have a material adverse effect on the Companys consolidated results of operations,
financial condition and/or cash flows.
Noortman Master PaintingsOn June 7, 2006, the Company entered into a sale and purchase agreement (the Purchase Agreement) with Arcimboldo S.A. (Arcimboldo) pursuant to which the Company acquired all of the issued and outstanding shares of capital stock of NMP. Pursuant to the
Purchase Agreement, the Company paid initial consideration (the Initial Consideration) in the form of 1,946,849 shares of Sothebys Common Stock. If NMP fails to achieve a minimum level of financial performance during the five years following the closing of the transaction, up to 20% of the Initial
Consideration will be transferred back to the Company.
In addition to the Initial Consideration, an additional 486,712 shares of Sothebys Common Stock (the Additional Consideration) was issued and placed in escrow, to be released only if NMP achieves certain targeted performance and service criteria specified in the Purchase Agreement during the
five years following the closing of the transaction. Based on the closing price of Sothebys Common Stock on the New York Stock Exchange of $7.76 per share on February 18, 2009, the Additional Consideration had a fair value of approximately $3.8 million. The Additional Consideration is being held in
escrow pursuant to an escrow agreement dated June 7, 2006, among the parties to the Purchase Agreement and LaSalle Bank N.A.
Additionally, the Company acquired NMP subject to a 12.5 million ($16.1 million) long-term non-interest bearing note payable to Arcimboldo over a period of three years. As of the date of acquisition, the present value of the note payable to Arcimboldo was approximately 11.3 million ($14.6
million). The 1.2 million ($1.5 million) discount on the note payable is being amortized to Interest Expense over the notes three-year term. The remaining payment of 4.2 million (approximately $5.8 million) under the note payable is due on June 7, 2009. As of December 31, 2008, the carrying value of
the note payable was $5.7 million, representing the remaining payment of $5.8 million less the remaining unamortized discount of $0.1 million. The remaining carrying value of the note payable to Arcimboldo is recorded in the December 31, 2008 Consolidated Balance Sheet within Accounts Payable and
Accrued Liabilities.
(See Notes I, K, L and P for other commitments. See Notes P for other contingencies.)
Note PAuction Guarantees
From time to time in the ordinary course of its business, the Company will guarantee to consignors a minimum price in connection with the sale of property at auction (an auction guarantee). In the event that the property sells for less than the minimum guaranteed price, the Company must
perform under the auction guarantee by funding the difference between the sale price at auction and the amount of the auction guarantee. If the property does not sell, the amount of the guarantee must be paid, but the Company has the right to recover such amount through the future sale of the
property. In some cases, the sale proceeds ultimately realized by the Company exceed the amount of any losses previously recognized on the auction guarantee. Additionally, the Company is generally entitled to a share of excess proceeds if the property under the auction guarantee sells above a minimum
price. In addition, the Company is obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. In certain situations, the Company reduces its financial exposure under auction guarantees through auction commission sharing arrangements with
partners. The Companys counterparties to these risk sharing arrangements are typically major international art dealers or major art collectors. The Company could be exposed to credit-related losses in the event of nonperformance by these counterparties.
Under the terms of one auction guarantee where the Company incurred and recorded losses in the second and third quarters of 2008, the Company has the right to receive future auction
91
consignments beginning in 2009 to recoup up to $5 million of the losses incurred. The Company has not recorded any benefit with respect to this gain contingency but will do so if and when the gain contingency is realized.
As
of December 31, 2008, the Company had outstanding auction guarantees totaling
$12.5 million, with the related property having pre-sale low and high estimates
(1) of $13.1 million and $19.2 million, respectively. The Companys
financial exposure under these auction guarantees is reduced by $6.5 million
as a result of a risk sharing arrangement with an unaffiliated partner. The
property related to such auction guarantees is being offered at auctions
in the first half of 2009. As of December 31, 2008, $1.4 million of the guaranteed
amount had been advanced by the Company and was recorded within Notes Receivable
and Consignor Advances in the Consolidated Balance Sheet (see Note D). As
of December 31, 2008 and 2007, the carrying amount of the liability representing
the estimated fair value of the Companys obligation to perform under
its auction guarantees was approximately $0.2 million and $4.3 million, respectively,
and was reflected in the Consolidated Balance Sheets within Accounts Payable
and Accrued Liabilities. In the fourth quarter of 2008, the Company recognized
auction guarantee losses of approximately $0.6 million related to sales occurring
in February 2009 for auction guarantees that were entered into
on or before December 31, 2008.
|
(1) |
|
|
|
Pre-sale estimates are not always accurate predictions of auction sale results or the fair value of the guaranteed property.
|
Note QAntitrust Related Matters
In April 1997, the U.S. Department of Justice (the DOJ) began an investigation of certain art dealers and major auction houses, including the Company and its principal competitor, Christies International, PLC (Christies). In October 2000, the Company pled guilty to a violation of U.S. antitrust
laws in connection with a conspiracy to fix auction commission rates charged to sellers in the U.S. and elsewhere. In February 2001, the U.S. District Court for the Southern District of New York imposed on the Company a fine of $45 million payable to the DOJ without interest over a period of five
years. In the third quarter of 2000, the Company recorded a charge of $34.1 million, representing the present value of the fine payable to the DOJ. The $10.9 million discount on the fine payable was amortized to interest expense over the five-year period during which the fine was paid. The final
payment of $15 million owed under the fine was paid by the Company on February 6, 2006, and the liability to the DOJ was extinguished.
In conjunction with the settlement of certain civil litigation related to the investigation by the DOJ, in May 2003, the Company and Christies issued to the class of plaintiffs vendors commission discount certificates (Discount Certificates) with a face value of $125 million, of which the Company
was responsible for funding the redemption of $62.5 million. The court determined that the $62.5 million face value had a fair market value of not less than $50 million, which is the amount of expense that was recognized by the Company as a Special Charge in the third quarter of 2000. The $12.5 million
discount on the face value of the Discount Certificates was amortized to interest expense over the four-year period between the date of issuance and May 15, 2007, the date after which any unused Discount Certificates were redeemable for cash.
The Discount Certificates were fully redeemable in connection with any auction conducted by the Company or Christies in the U.S. or in the U. K. and were able to be used to satisfy consignment charges involving vendors commission, risk of loss and/or catalogue illustration.
The Discount Certificates expired on May 14, 2008 and, therefore, can no longer be redeemed. As a result of the expiration of the Discount Certificates, the Company reversed the remaining related liability and recognized an income statement benefit of $18.4 million in the second quarter of 2008.
During the period January 1, 2006 to December 31, 2008, amounts charged to and cash payments made against Settlement Liabilities with respect to the Discount Certificates and the DOJ antitrust fine were as follows:
92
|
|
|
|
|
|
|
|
|
Discount Certificates (net) |
|
DOJ Antitrust Fine (net) |
|
Total |
|
|
(Thousands of dollars) |
Settlement Liabilities at January 1, 2006 |
|
|
$ |
|
46,994 |
|
|
|
$ |
|
14,899 |
|
|
|
$ |
|
61,893 |
|
Cash payment to DOJ |
|
|
|
|
|
|
|
|
(15,000 |
) |
|
|
|
|
(15,000 |
) |
|
Redemption of Discount Certificates |
|
|
|
(4,009 |
) |
|
|
|
|
|
|
|
|
|
(4,009 |
) |
|
Amortization of discount |
|
|
|
2,578 |
|
|
|
|
101 |
|
|
|
|
2,679 |
|
Loss on redemption of Discount Certificates |
|
|
|
202 |
|
|
|
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
|
Settlement Liabilities as of December 31, 2006 |
|
|
|
45,765 |
|
|
|
|
|
|
|
|
|
45,765 |
|
Redemption of Discount Certificates |
|
|
|
(24,065 |
) |
|
|
|
|
|
|
|
|
|
(24,065 |
) |
|
Amortization of discount |
|
|
|
941 |
|
|
|
|
|
|
|
|
|
941 |
|
Loss on redemption of Discount Certificates |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
Settlement Liabilities as of December 31, 2007 |
|
|
|
22,651 |
|
|
|
|
|
|
|
|
|
22,651 |
|
Redemption of Discount Certificates |
|
|
|
(4,266 |
) |
|
|
|
|
|
|
|
|
|
(4,266 |
) |
|
Expiration of Discount Certificates |
|
|
|
(18,385 |
) |
|
|
|
|
|
|
|
|
|
(18,385 |
) |
|
|
|
|
|
|
|
|
Settlement Liabilities as of December 31, 2008 |
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
In March 2003, the Company and Christies agreed to each pay $20 million to settle litigation that alleged violations of U.S. antitrust laws and international law impacting purchasers and sellers in auctions conducted outside the U.S. (the International Antitrust Litigation), and thereafter, the
Company deposited $20 million into an escrow account for the benefit of the members of the class of plaintiffs. The settlement agreement for the International Antitrust Litigation provided that if, as of June 7, 2006, there were any remaining settlement funds following the payment of all submitted claims,
the Company and Christies would be reimbursed for third-party administration costs incurred in distributing the settlement funds. In June 2006, it was determined that sufficient settlement funds remained following the payment of all submitted claims to reimburse the Company and Christies for third-
party administration costs incurred in distributing the settlement funds. As a result, in 2006, the Company recognized a $2.4 million benefit to General and Administrative Expenses, reflecting the recovery of such third-party administration costs incurred through December 31, 2006. The Company received
this reimbursement in January 2007.
In August 2006, a Canadian court approved the final settlement of the Canadian Competition Bureaus investigation regarding anticompetitive practices relating to vendors commissions charged by the Company and Christies for auction services during the period 1993 to 2000. Under the civil
settlement, the Company and its Canadian subsidiary entered into a civil Consent Prohibition Order requiring them to: (i) comply with Canadian antitrust laws and continue antitrust compliance training for five years, (ii) post a copy of the Order on the Companys website for 120 days and notify
Canadian consignors about the Order and (iii) pay $0.7 million in reimbursement of the costs of the investigation. In 2006, the Company recognized a $0.7 million charge related to the settlement of this matter within General and Administrative Expenses.
Note RVariable Interest Entity
Prior to May 12, 2008, an art dealer with whom the Companys Finance segment had outstanding loans of approximately $2.6 million and to whom the Company provided management consulting services met the definition of a variable interest entity (VIE) under FIN No. 46, Consolidation of
Variable Interest Entities, as revised, and was consolidated as part of the Dealer segment. The $2.6 million loan was repaid on May 12, 2008. Upon the settlement of this loan, the Companys existing arrangements with this entity terminated. As a result, the entity no longer meets the definition of a VIE
under FIN No. 46 and is no longer consolidated as part of the Companys Dealer segment.
93
Note SFair Value Measurements
As of January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which, among other requirements, requires enhanced disclosures about financial assets and liabilities that are measured and reported at fair value. Additionally, SFAS No. 157 provides a single definition of fair
value and establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value.
In February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No. 157, which defers the effective date of SFAS No. 157 as it applies to non-financial assets and liabilities from January 1, 2008 to January 1, 2009. Management is evaluating the impact of adopting SFAS No. 157
as it relates to the Companys non-financial assets and liabilities.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, which further illustrates key considerations in determining the fair value of a financial asset in an inactive market. FSP 157-3 became effective on October
10, 2008 and is applicable to all periods for which financial statements have not yet been issued. Management has adopted FSP 157-3 and applied its guidance, as applicable.
Assets and liabilities measured and reported at fair value are classified and disclosed according to one of the following categories:
|
|
|
|
|
Level 1Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Level 1 inputs generally provide the most reliable evidence of fair value. |
|
|
|
|
|
Level 2Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value may be determined through the use of models or other valuation methodologies. |
|
|
|
|
|
Level 3Pricing inputs are unobservable for the asset or liability and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation.
|
Certain of the Companys financial assets and liabilities are reported at fair value. The table below provides fair value measurement information for such assets and liabilities as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value |
|
Fair Value Measurements Using: |
|
Quoted Prices in Active Markets (Level 1) |
|
Significant Other Observable Inputs (Level 2) |
|
Significant Unobservable Inputs (Level 3) |
Assets: |
|
|
|
|
|
|
|
|
Foreign currency option contract |
|
|
$ |
|
199 |
|
|
|
$ |
|
|
|
|
|
$ |
|
199 |
|
|
|
$ |
|
|
|
Trust assets related to the deferred compensation liability* |
|
|
$ |
|
31,298 |
|
|
|
$ |
|
2,735 |
|
|
|
$ |
|
28,563 |
|
|
|
$ |
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts |
|
|
$ |
|
2,580 |
|
|
|
$ |
|
|
|
|
|
$ |
|
2,580 |
|
|
|
$ |
|
|
|
|
* |
|
|
|
The Trust assets related to the deferred compensation liability in the table above do not include the cash surrender value of insurance contracts within Company-owned life insurance policies ($1.9 million as of December 31, 2008), as these contracts are not considered to be financial instruments for the
purposes of this disclosure.
|
Level 1 Fair Value Measurements
Trust assets related to the deferred compensation liability (the Trust)The fair values of certain mutual funds investments held by the Trust are based on quoted market prices.
Level 2 Fair Value Measurements
Foreign currency forward exchange contractsThe fair value of foreign currency forward exchange contracts is based on referenced market rates.
94
Foreign currency option contractThe fair value of the Companys foreign currency option contract is based upon a standard option pricing model.
Trust assets related to the deferred compensation liabilityTrust assets include investments in certain mutual funds that invest in highly liquid, short-term investments that are valued at amortized cost, which approximates fair value. Trust assets also include investments held within Company-owned
variable life insurance policies, the fair value of which is based upon the prices of comparable publicly traded mutual funds. Trust assets also include insurance contracts within Company-owned life insurance policies, the fair value of which is stated in the underlying contract.
Note TRestructuring Plan and Related Charges
Due to the downturn in the international art market that began in September 2008, as well as the current uncertain and challenging economic environment, in the fourth quarter of 2008 management began a strategic review of its operations with the goal of materially recalibrating the Companys cost
base through a restructuring plan impacting its operations globally (the Restructuring Plan).
On December 1, 2008, the Executive Committee of the Companys Board of Directors approved the first phase of the Restructuring Plan that is resulting in headcount reductions impacting the Companys Auction segment in North America, as well as certain corporate departments. This decision
resulted in employee-related restructuring charges for severance and related benefits of $4.3 million in the fourth quarter of 2008. As of December 31, 2008, no payments were made against the $4.3 million accrued restructuring liability.
On February 26, 2009, the Companys Board of Directors approved the second phase of the Restructuring Plan impacting Sothebys Auction segment in the U.K. and Continental Europe. This phase of the Restructuring Plan will result in headcount reductions and, subject to the completion of the
required legal processes, a reduction in the Companys selling activities in Amsterdam and the vacating of certain premises in connection with a reorganization of the Companys European sourcing network. This decision will result in employee-related restructuring charges of approximately $6 million in
the first quarter of 2009, as well as approximately $3 million of lease exit and facilities-related costs that will be recognized in 2009.
Total cash expenditures related to the Restructuring Plan are expected to be approximately $11 million, of which approximately $3 million will be paid in the first quarter of 2009. A substantial portion of the remaining cash expenditures related to the Restructuring Plan are expected to be made
throughout the remainder of 2009.
Note UQuarterly Results (Unaudited)
The worldwide art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. Accordingly, the Companys auction business is seasonal, with peak revenues and operating income generally occurring in those quarters. Consequently, first and
third quarter results have historically reflected lower Net Auction Sales (the hammer (sale) price of property sold at auction) when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of the Companys operating expenses.
95
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
(Thousands of dollars, except per share data) |
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
Net Auction Sales (a) |
|
|
$ |
|
675,684 |
|
|
|
$ |
|
1,861,039 |
|
|
|
$ |
|
637,135 |
|
|
|
$ |
|
1,015,877 |
|
Income Statement Data |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Auction and related revenues |
|
|
$ |
|
107,938 |
|
|
|
$ |
|
290,393 |
|
|
|
$ |
|
62,289 |
|
|
|
$ |
|
156,005 |
|
Finance revenues |
|
|
|
3,512 |
|
|
|
|
3,650 |
|
|
|
|
3,687 |
|
|
|
$ |
|
3,334 |
|
Dealer revenues |
|
|
|
16,685 |
|
|
|
|
24,791 |
|
|
|
|
8,396 |
|
|
|
$ |
|
5,724 |
|
License fee revenues |
|
|
|
591 |
|
|
|
|
918 |
|
|
|
|
1,174 |
|
|
|
$ |
|
755 |
|
Other revenues |
|
|
|
535 |
|
|
|
|
409 |
|
|
|
|
427 |
|
|
|
$ |
|
346 |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
$ |
|
129,261 |
|
|
|
$ |
|
320,161 |
|
|
|
$ |
|
75,973 |
|
|
|
$ |
|
166,164 |
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
$ |
|
(12,395 |
) |
|
|
|
$ |
|
95,334 |
|
|
|
$ |
|
(46,218 |
) |
|
|
|
$ |
|
(8,452 |
) |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
$ |
|
(12,395 |
) |
|
|
|
$ |
|
95,334 |
|
|
|
$ |
|
(46,218 |
) |
|
|
|
$ |
|
(8,452 |
) |
|
|
|
|
|
|
|
|
|
|
Per Share Amounts: |
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
|
|
|
|
|
|
Basic |
|
|
$ |
|
(0.19 |
) |
|
|
|
$ |
|
1.47 |
|
|
|
$ |
|
(0.71 |
) |
|
|
|
$ |
|
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
$ |
|
(0.19 |
) |
|
|
|
$ |
|
1.46 |
|
|
|
$ |
|
(0.71 |
) |
|
|
|
$ |
|
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
|
|
|
|
|
|
Basic |
|
|
$ |
|
(0.19 |
) |
|
|
|
$ |
|
1.47 |
|
|
|
$ |
|
(0.71 |
) |
|
|
|
$ |
|
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
$ |
|
(0.19 |
) |
|
|
|
$ |
|
1.46 |
|
|
|
$ |
|
(0.71 |
) |
|
|
|
$ |
|
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
Shares Outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
|
64,395 |
|
|
|
|
64,663 |
|
|
|
|
64,719 |
|
|
|
|
64,740 |
|
Diluted |
|
|
|
64,395 |
|
|
|
|
65,390 |
|
|
|
|
64,719 |
|
|
|
|
64,740 |
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
Net Auction Sales (a) |
|
|
$ |
|
665,915 |
|
|
|
$ |
|
1,808,028 |
|
|
|
$ |
|
276,418 |
|
|
|
$ |
|
1,875,553 |
|
Income Statement Data |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Auction and related revenues |
|
|
$ |
|
129,817 |
|
|
|
$ |
|
313,479 |
|
|
|
$ |
|
66,359 |
|
|
|
$ |
|
323,473 |
|
Finance revenues |
|
|
|
4,780 |
|
|
|
|
4,219 |
|
|
|
|
4,029 |
|
|
|
|
3,997 |
|
Dealer revenues |
|
|
|
11,847 |
|
|
|
|
20,495 |
|
|
|
|
13,442 |
|
|
|
|
16,982 |
|
License fee revenues |
|
|
|
580 |
|
|
|
|
822 |
|
|
|
|
920 |
|
|
|
|
638 |
|
Other revenues |
|
|
|
375 |
|
|
|
|
492 |
|
|
|
|
308 |
|
|
|
|
668 |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
$ |
|
147,399 |
|
|
|
$ |
|
339,507 |
|
|
|
$ |
|
85,058 |
|
|
|
$ |
|
345,758 |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
$ |
|
24,334 |
|
|
|
$ |
|
107,348 |
|
|
|
$ |
|
(20,948 |
) |
|
|
|
$ |
|
102,405 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
$ |
|
24,334 |
|
|
|
$ |
|
107,348 |
|
|
|
$ |
|
(20,948 |
) |
|
|
|
$ |
|
102,405 |
|
|
|
|
|
|
|
|
|
|
Per Share Amounts: |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
Basic |
|
|
$ |
|
0.39 |
|
|
|
$ |
|
1.68 |
|
|
|
$ |
|
(0.33 |
) |
|
|
|
$ |
|
1.59 |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
$ |
|
0.37 |
|
|
|
$ |
|
1.64 |
|
|
|
$ |
|
(0.33 |
) |
|
|
|
$ |
|
1.55 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
Basic |
|
|
$ |
|
0.39 |
|
|
|
$ |
|
1.68 |
|
|
|
$ |
|
(0.33 |
) |
|
|
|
$ |
|
1.59 |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
$ |
|
0.37 |
|
|
|
$ |
|
1.64 |
|
|
|
$ |
|
(0.33 |
) |
|
|
|
$ |
|
1.55 |
|
|
|
|
|
|
|
|
|
|
Shares Outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
|
63,152 |
|
|
|
|
63,750 |
|
|
|
|
63,974 |
|
|
|
|
64,255 |
|
Diluted |
|
|
|
65,078 |
|
|
|
|
65,561 |
|
|
|
|
63,974 |
|
|
|
|
66,024 |
|
Legend:
|
|
|
|
|
|
|
|
|
(a) Net Auction Sales represents the hammer (sale) price of property sold at auction.
96
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A: CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of December 31, 2008, the Company has carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and
procedures. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) were effective as of December 31, 2008.
Managements Report on Internal Control over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management evaluates the effectiveness of the Companys internal control over financial reporting using the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework. Management, under the supervision and with the participation of the Companys Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of
the Companys internal control over financial reporting as of December 31, 2008 and concluded that it is effective.
The Companys independent registered public accounting firm, Deloitte & Touche LLP, has audited the effectiveness of the Companys internal control over financial reporting as of December 31, 2008 and has expressed an unqualified opinion in their report which is included herein.
Changes in Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting that occurred during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
97
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
SOTHEBYS
New York, New York
We have audited the internal control over financial reporting of Sothebys and subsidiaries (the Company) as of December 31, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and consolidated financial statement schedule as of and for the year ended December 31, 2008 of the Company and our report dated
February 26, 2009 expressed an unqualified opinion on those financial statements and financial statement schedule and includes an explanatory paragraph referring to the Companys adoption of the measurement date provision of Statement of Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of Financial Accounting Standards Board Statement No. 87, 88, 106 and 132 (R), effective January 1, 2008.
/s/ DELOITTE &
TOUCHE LLP
Deloitte & Touche LLP |
New York, New York
February 26, 2009
98
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item is incorporated herein by reference to the Companys definitive proxy statement for the annual meeting of shareholders to be held in 2009 (the Proxy Statement) under the captions Proposal 1Election of Directors, Corporate Governance and Section 16(a)
Beneficial Ownership Reporting Compliance.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the material appearing in the Proxy Statement under the captions Compensation of Executive Officers and Compensation of Directors. Notwithstanding anything to the contrary herein, Report of the Audit Committee
and the Report of Compensation Committee in the Proxy Statement are not incorporated by reference herein.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the table and related text and footnotes appearing in the Proxy Statement under the caption Security Ownership of Certain Beneficial Owners and Management.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated herein by reference to the material appearing in the Proxy Statement under the captions Certain Relationships and Related Transactions and Corporate Governance.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to the material appearing in the Proxy Statement under the caption Proposal 2Ratification of the Appointment of Registered Public Accounting Firm.
99
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
|
|
|
|
|
15(a)(1) |
|
|
|
|
|
|
The following consolidated financial statements and the related notes thereto of Sothebys and subsidiaries are contained in Item 8, Financial Statements and Supplementary Data: Consolidated Income StatementsYears ended December 31, 2008, 2007 and 2006; Consolidated Balance
SheetsDecember 31, 2008 and 2007; Consolidated Statements of Cash FlowsYears ended December 31, 2008, 2007 and 2006; Consolidated Statements of Changes in Shareholders EquityYears ended December 31, 2008, 2007 and 2006. |
15(a)(2) |
|
|
|
|
|
|
The following is the consolidated financial statement schedule of Sothebys Holdings, Inc. and subsidiaries required by Item 15(d): Schedule IIValuation and Qualifying Accounts for the years ended December 31, 2008, 2007 and 2006. |
15(a)(3) |
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
Agreement and Plan of Merger between Sothebys Holdings, Inc., a Michigan corporation and Sothebys Delaware, Inc., a Delaware corporation, dated March 31, 2006, incorporated by reference to the Companys First Quarter Form 10-Q for 2006. |
|
|
2.2 |
|
|
|
|
|
|
|
Agreement for the Sale and Purchase of All the Issued and Outstanding Shares in Noortman Master Paintings B.V., dated June 7, 2006, incorporated by reference to Exhibit 2.1 to the Companys Second Quarter Form 10-Q for 2006. |
|
|
3.1 |
|
|
|
|
|
|
|
Certificate of Incorporation of Sothebys, as amended as of June 30, 2006, incorporated by reference to Exhibit 3.1 to the Companys current report on Form 8-K, filed on July 7, 2006 with the Securities and Exchange Commission. |
|
|
3.2 |
|
|
|
|
|
|
|
By-Laws of Sothebys adopted as of March 31, 2006, incorporated by reference to Exhibit 3.2 to the Companys current report on Form 8-K, filed on July 7, 2006 with the Securities and Exchange Commission. |
|
|
4.1 |
|
|
|
|
|
|
|
See Exhibits 3.1 and 3.2. |
|
|
4.2 |
|
|
|
|
|
|
|
Specimen Common Stock Certificate of Sothebys, incorporated by reference to Exhibit 4.1 to Post-Effective Amendment No. 1 to the Companys Registration Statement on Form 8-A filed on November 21, 2006. |
|
|
4.3 |
|
|
|
|
|
|
|
Indenture, dated as of June 17, 2008, for the 3.125% Convertible Senior Notes due 2013 between Sothebys, as Issuer, and the Initial Subsidiary Guarantors Party Hereto, and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 10.1 to the Companys Second
Quarter Form 10-Q for 2008. |
|
|
4.4 |
|
|
|
|
|
|
|
Indenture, dated as of June 17, 2008, 7.75% Senior Notes due 2015 between Sothebys, as Issuer, and the Initial Subsidiary Guarantors Party Hereto, and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 10.2 to the Companys Second Quarter Form 10-Q. for
2008. |
|
|
4.5 |
|
|
|
|
|
|
|
Registration Rights Agreement dated June 17, 2008, between Sothebys and Banc of America Securities LLC, Goldman, Sachs & Co., Comerica Securities, Inc. and HSBC Securities (USA) Inc, incorporated by reference to Exhibit 10.3 to the Companys Second Quarter Form 10-Q for 2008. |
|
|
10.1* |
|
|
|
|
|
|
|
Sothebys Deferred Compensation Plan, dated December 21, 2006 and effective January 1, 2007, incorporated by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006. |
|
|
10.2* |
|
|
|
|
|
|
|
Sothebys Holdings, Inc. 1997 Stock Option Plan Composite Plan Document, effective January 1, 2000, incorporated by reference to Exhibit 10(k) to the Companys Annual Report on Form 10-K for the year ended December 31, 2000. |
100
|
|
|
|
|
|
|
10.3* |
|
|
|
|
|
|
|
Seventh Amendment to the Sothebys Holdings, Inc. 1997 Stock Option Plan dated November 7, 2005, effective September 8, 2005, incorporated by reference to Exhibit 10.4 to the Companys Annual Report on Form 10-K for the year ended December 31, 2005. |
|
|
10.4* |
|
|
|
|
|
|
|
Eighth Amendment to the Sothebys 1997 Stock Option Plan Composite Plan Document, dated and effective May 8, 2006, incorporated by reference to Exhibit 10.2 to the Companys current report on Form 8-K dated May 12, 2006. |
|
|
10.5 |
|
|
|
|
|
|
|
Agreement of Partnership of Acquavella Modern Art, dated May 29, 1990, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10(b) to the Companys current report on Form 8-K, filed on June 7, 1990, SEC File No. 1-9750, on file at
the Washington, D.C. office of the Securities and Exchange Commission. |
|
|
10.6 |
|
|
|
|
|
|
|
First Amendment to Agreement of Partnership, dated December 31, 2000, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10(m) to the Companys Annual Report on Form 10-K for the year ended
December 31, 2000. |
|
|
10.7 |
|
|
|
|
|
|
|
Second Amendment to Agreement of Partnership, dated December 15, 2001, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10(k) to the Companys Annual Report on Form 10-K for the year ended
December 31, 2001. |
|
|
10.8 |
|
|
|
|
|
|
|
Third Amendment to Agreement of Partnership, dated February 10, 2003, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10(h) to the Companys Annual Report on Form 10-K for the year ended
December 31, 2002. |
|
|
10.9 |
|
|
|
|
|
|
|
Fourth Amendment to Agreement of Partnership, dated January 13, 2004, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10(i) to the Companys Annual Report on Form 10-K for the year ended
December 31, 2003. |
|
|
10.10 |
|
|
|
|
|
|
|
Fifth Amendment to Agreement of Partnership, dated December 8, 2004, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10.9 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2004. |
|
|
10.11 |
|
|
|
|
|
|
|
Sixth Amendment to Agreement of Partnership, dated March 1, 2006, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc. incorporated by reference to Exhibit 10.11 to the Companys Annual Report on Form 10-K for the year ended December
31, 2005. |
|
|
10.12 |
|
|
|
|
|
|
|
Seventh Amendment to the Agreement of Partnership, dated January 12, 2007, of Acquavella Modern Art, between Sothebys Nevada, Inc and Acquavella Contemporary Art., Inc., incorporated by reference to Exhibit 10.4 to the Companys First Quarter Form 10-Q for 2007. |
|
|
10.13 |
|
|
|
|
|
|
|
Eighth Amendment to the Agreement of Partnership, dated January 23, 2008, of Acquavella Modern Art, between Sothebys Nevada, Inc and Acquavella Contemporary Art., Inc., incorporated by reference to Exhibit 10.2 to the Companys First Quarter Form 10-Q for 2008. |
|
|
10.14* |
|
|
|
|
|
|
|
Sothebys 1998 Stock Compensation Plan for Non-Employee Directors, as amended and restated on April 9, 2007, effective May 7, 2007 (the Directors Plan), incorporated by reference to Exhibit 10.2 to the Companys current report on Form 8-K, filed on May 11, 2007 with the Securities
and Exchange Commission. |
101
|
|
|
|
|
|
|
10.15* |
|
|
|
|
|
|
|
First Amendment to the Directors Plan, dated November 6, 2007 incorporated by reference to Exhibit 10.14 to the Companys Annual Report on Form 10-K for the year ended December 31, 2007 (the 2007 Form 10-K). |
|
|
10.16 |
|
|
|
|
|
|
|
Amended and Restated Credit Agreement dated as of November 14, 2005, among Sothebys Inc., as the Company, Sothebys Holdings, Inc., as Holdings, Certain U.K. Subsidiaries of Holdings, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, LaSalle Bank
N.A., as Syndication Agent and the Other Lenders Party Hereto, Banc of America Securities, LLC and LaSalle Bank N.A., as Joint Lead Arrangers and Joint Book Managers, incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2005. |
|
|
10.17 |
|
|
|
|
|
|
|
Amendment No. 2 to the Amended and Restated Credit Agreement among Sothebys Holdings, Inc., Sothebys, Inc., Oatshare Limited, Sothebys, and Bank of America, N.A. dated May 18, 2006, incorporated by reference to Exhibit 10.1 to the Companys current report on Form 8-K, filed on
May 23, 2006 with the Securities and Exchange Commission. |
|
|
10.18 |
|
|
|
|
|
|
|
Amendment No. 3 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A., dated January 2, 2007, incorporated by reference to Exhibit 10.3
to the Companys First Quarter Form 10-Q for 2007. |
|
|
10.19 |
|
|
|
|
|
|
|
Amendment No. 4 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A., dated July 25, 2007, incorporated by reference to Exhibit 10.1 to
the Companys Third Quarter Form 10-Q for 2007. |
|
|
10.20 |
|
|
|
|
|
|
|
Consent and Amendment No. 5 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A., dated December 17, 2007 incorporated by reference
to Exhibit 10.19 to the 2007 Form 10-K. |
|
|
10.21 |
|
|
|
|
|
|
|
Amendment No. 6 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A. dated January 22, 2008, incorporated by reference to Exhibit 10.1
to the Companys First Quarter Form 10-Q for 2008. |
|
|
10.22 |
|
|
|
|
|
|
|
Amendment No. 7 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A. dated April 24, 2008, incorporated by reference to Exhibit 10.1 to
the Companys Third Quarter Form 10-Q for 2008. |
|
|
10.23 |
|
|
|
|
|
|
|
Amendment No. 8 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A. dated June 6, 2008, incorporated by reference to Exhibit 10.2 to
the Companys Third Quarter Form 10-Q for 2008. |
|
|
10.24 |
|
|
|
|
|
|
|
Amendment No. 9 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A. dated February 4, 2009. |
|
|
10.25 |
|
|
|
|
|
|
|
Purchase and Sale Agreement between SIBS, LLC, as Seller and RFR Holding Corp., as Purchaser; Dated: As of December 16, 2002; Property: 1334 York Avenue, New York, New York 10021, incorporated by reference to Exhibit 10(a) to the Companys First Quarter Form 10-Q for 2003. |
|
|
10.26 |
|
|
|
|
|
|
|
Lease between 1334 York Avenue L.P., Landlord, and Sothebys, Inc., Tenant, February 7, 2003; Premises: 1334 York Avenue, New York, New York, incorporated by reference to Exhibit 10(b) to the Companys First Quarter Form 10-Q for 2003. |
102
|
|
|
|
|
|
|
10.27 |
|
|
|
|
|
|
|
Guaranty of Lease, made by Sothebys in favor of 1334 York Avenue L.P., dated as of June 30, 2006 incorporated by reference to Exhibit 10.29 to the Companys current report on Form 8-K, filed on July 7, 2006 with the Securities and Exchange Commission. |
|
|
10.28* |
|
|
|
|
|
|
|
Letter Agreement between Sothebys Holdings, Inc. and William F. Ruprecht, with related Terms of Employment, dated March 31, 2006, incorporated by reference to Exhibit 10.23 to the 2007 Form 10-K. |
|
|
10.29* |
|
|
|
|
|
|
|
Severance Agreement between Sothebys and William S. Sheridan, dated August 3, 2006, incorporated by reference to Exhibit 10.1 to the Companys Third Quarter Form 10-Q for 2006. |
|
|
10.30* |
|
|
|
|
|
|
|
Service Agreement between Sothebys and Robin Woodhead, with related Terms of Employment, dated August 15, 2006, incorporated by reference to Exhibit 10.2 to the Companys Third Quarter Form 10-Q for 2006. |
|
|
10.31* |
|
|
|
|
|
|
|
Severance Agreement between Sothebys and Bruno Vinciguerra, dated January 25, 2007, effective January 22, 2007, incorporated by reference to Exhibit 10.1 to the Companys First Quarter Form 10-Q for 2007. |
|
|
10.32* |
|
|
|
|
|
|
|
Severance Agreement between Sothebys and Gilbert Klemann, dated October 9, 2007, effective February 1, 2008, incorporated by reference to Exhibit 10.28 to the 2007 Form 10- K. |
|
|
10.33* |
|
|
|
|
|
|
|
Amendment to October 9, 2007 Severance Agreement between Sothebys and Gilbert Klemann, dated September 9, 2008, effective September 25, 2008, incorporated by reference to Exhibit 10.2 to the Companys Third Quarter Form 10-Q for 2008. |
|
|
10.34* |
|
|
|
|
|
|
|
Sothebys Holdings, Inc. Amended and Restated Restricted Stock Plan, incorporated by reference to Exhibit 10.1 to the Companys Registration Statement on Form S-8 filed on May 9, 2006. |
|
|
10.35* |
|
|
|
|
|
|
|
First Amendment to Sothebys Amended and Restated Restricted Stock Plan, dated July 28, 2006, incorporated by reference to Exhibit 10.1 to the Companys Second Quarter Form 10-Q for 2007. |
|
|
10.36* |
|
|
|
|
|
|
|
Form of Sothebys Amended and Restated Restricted Stock Plan Restricted Stock Agreement, incorporated by reference to Exhibit 10.2 to the Companys Second Quarter Form 10-Q for 2007. |
|
|
10.37* |
|
|
|
|
|
|
|
Form of Sothebys Amended and Restated Restricted Stock Plan Restricted Stock Entitlement Agreement, incorporated by reference to Exhibit 10.3 to the Companys Second Quarter Form 10-Q for 2007. |
|
|
10.38* |
|
|
|
|
|
|
|
Second Amendment to Sothebys Amended and Restated Restricted Stock Plan, dated September 7, 2007, incorporated by reference to Exhibit 10.2 to the Companys Third Quarter Form 10-Q for 2007. |
|
|
10.39 |
|
|
|
|
|
|
|
Stock Purchase Agreement, dated as of February 17, 2004, by and among NRT Incorporated as the Purchaser, Sothebys Holdings, Inc., as the Seller, and Cendant Corporation as the Purchaser Guarantor, incorporated by reference to Exhibit 99.1 to the Companys current report on Form 8-K,
filed on March 2, 2004 with the Securities and Exchange Commission. |
|
|
10.40 |
|
|
|
|
|
|
|
Trademark License Agreement, dated as of February 17, 2004, among SPTC, Inc., as Licensor, Sothebys Holdings, Inc. as Guarantor, Monticello Licensee Corporation, as Licensee, and Cendant Corporation, as Guarantor, incorporated by reference to Exhibit 99.2 to the Companys current
report on Form 8-K, filed on March 2, 2004 with the Securities and Exchange Commission. |
103
|
|
|
|
|
|
|
10.41 |
|
|
|
|
|
|
|
Amendment No. 1 to Trademark License Agreement, dated as of May 2, 2005, among SPTC Delaware, LLC (as an assignee of SPTC, Inc) and Sothebys Holdings, Inc. and Cendant Corporation and Sothebys International Realty Licensee Corporation (formerly known as Monticello Licensee
Corporation), incorporated by reference to Exhibit 10.1 to the Companys Second Quarter Form 10-Q for 2005. |
|
|
10.42 |
|
|
|
|
|
|
|
Amendment No. 2 to Trademark License Agreement, dated as of May 2, 2005, among SPTC Delaware, LLC (as an assignee of SPTC, Inc) and Sothebys Holdings, Inc. and Cendant Corporation and Sothebys International Realty Licensee Corporation (formerly known as Monticello Licensee
Corporation), incorporated by reference to Exhibit 10.2 to the Companys Second Quarter Form 10-Q for 2005. |
|
|
10.43* |
|
|
|
|
|
|
|
Sothebys Executive Bonus Plan (as amended and restated effective as of January 1, 2007), dated April 9, 2007, incorporated by reference to Exhibit 10.1 to the Companys current report on Form 8-K, filed on May 11, 2007 with the Securities and Exchange Commission. |
|
|
10.44 |
|
|
|
|
|
|
|
Transaction Agreement by and among Sothebys Holdings, Inc., and A. Alfred Taubman and Other Parties to the Agreement, dated as of September 7, 2005, incorporated by reference to Exhibit 10.1 to the Companys Third Quarter Form 10-Q for 2005. |
|
|
10.45 |
|
|
|
|
|
|
|
Convertible Bond Hedge Transaction (Transaction Reference Number: NY-35263), dated June 11, 2008, between Sothebys and Bank of America, N.A, incorporated by reference to Exhibit 10.4 to the Companys Second Quarter Form 10-Q for 2008. |
|
|
10.46 |
|
|
|
|
|
|
|
Convertible Bond Hedge Transaction (Transaction Reference Number: SDB1627455583), dated June 11, 2008, between Sothebys and Goldman, Sachs & Co, incorporated by reference to Exhibit 10.5 to the Companys Second Quarter Form 10-Q for 2008. |
|
|
10.47 |
|
|
|
|
|
|
|
Issuer Warrant Transaction (Transaction Reference Number: NY-35264), dated June 11, 2008, between Sothebys and Bank of America, N.A, incorporated by reference to Exhibit 10.6 to the Companys Second Quarter Form 10-Q for 2008. |
|
|
10.48 |
|
|
|
|
|
|
|
Issuer Warrant Transaction (Transaction Reference Number: SDB1627455582), dated June 11, 2008 between Sothebys and Goldman, Sachs & Co, incorporated by reference to Exhibit 10.7 to the Companys Second Quarter Form 10-Q for 2008. |
|
|
21 |
|
|
|
|
|
|
|
Subsidiaries of the Registrant |
|
|
23 |
|
|
|
|
|
|
|
Consent of Deloitte & Touche LLP |
|
|
24 |
|
|
|
|
|
|
|
Powers of Attorney |
|
|
31.1 |
|
|
|
|
|
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31.2 |
|
|
|
|
|
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
32.1 |
|
|
|
|
|
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
32.2 |
|
|
|
|
|
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(15)(b) |
|
|
|
|
|
|
On October 14, 2008, the Company filed a current report on Form 8-K under Item 2.03, Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant. |
|
|
|
|
|
|
|
On October 23, 2008, the Company filed a current report on Form 8-K under Item 2.04, Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off Balance Sheet Arrangement. |
|
|
|
|
|
|
|
On November 12, 2008, the Company filed a current report on Form 8-K under Item 2.02, Results of Operations and Financial Condition and Item 9.01, Financial Statements and Exhibits. |
|
|
|
|
|
|
|
On November 14, 2008, the Company filed a current report on Form 8-K under Item 2.04, Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off Balance Sheet Arrangement and Item 8.01, Other Events. |
104
|
|
|
|
|
|
|
|
|
|
|
|
On November 25, 2008, the Company filed a current report on Form 8-K under Item 2.04, Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off Balance Sheet Arrangement. |
|
|
|
|
|
|
|
On December 4, 2008, the Company filed a current report on Form 8-K under Item 2.05, Costs Associated with Exit or Disposal Activities. |
|
|
|
|
|
|
|
The list of exhibits filed with this report is set forth in response to Item 15(a)(3). The required exhibit index has been filed with the exhibits. |
|
|
|
|
|
|
|
The financial statement schedule of the Company listed in response to Item 15(a)(2) is filed pursuant to this Item 15(d). |
|
* |
|
|
|
A compensatory agreement or plan required to be filed pursuant to Item 15(c) of Form 10-K
|
105
SCHEDULE II
SOTHEBYS
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
Column A |
|
Column B |
|
Column C |
|
Column D |
|
Column E |
Description |
|
Balance at Beginning of Period |
|
Charged to Costs and Expenses |
|
Charged to Other Accounts |
|
Deductions |
|
Balance at End of Period |
|
|
(Thousands of dollars) |
Valuation reserve deducted in the balance sheet from the asset to which it applies: |
|
|
|
|
|
|
|
|
|
|
Receivables (a): |
|
|
|
|
|
|
|
|
|
|
2008 Allowance for doubtful accounts and credit losses |
|
|
$ |
|
7,280 |
|
|
|
$ |
|
8,740 |
|
|
|
$ |
|
|
|
|
|
$ |
|
4,901 |
|
|
|
$ |
|
11,119 |
|
2007 Allowance for doubtful accounts and credit losses |
|
|
$ |
|
7,089 |
|
|
|
$ |
|
3,528 |
|
|
|
$ |
|
(285 |
) |
|
|
|
$ |
|
3,052 |
|
|
|
$ |
|
7,280 |
|
2006 Allowance for doubtful accounts and credit losses |
|
|
$ |
|
6,137 |
|
|
|
$ |
|
3,192 |
|
|
|
$ |
|
|
|
|
|
$ |
|
2,240 |
|
|
|
$ |
|
7,089 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
2008 Valuation allowance |
|
|
$ |
|
439 |
|
|
|
$ |
|
991 |
|
|
|
|
|
|
|
|
$ |
|
102 |
|
|
|
$ |
|
1,328 |
|
2007 Valuation allowance |
|
|
$ |
|
29,147 |
|
|
|
$ |
|
|
|
|
|
$ |
|
(12,308 |
) |
|
|
|
$ |
|
16,400 |
(b) |
|
|
|
$ |
|
439 |
|
2006 Valuation allowance |
|
|
$ |
|
24,885 |
|
|
|
$ |
|
1,368 |
|
|
|
$ |
|
2,894 |
|
|
|
$ |
|
|
|
|
|
$ |
|
29,147 |
|
|
(a) |
|
|
|
Consists of Accounts Receivable and Notes Receivables and Consignor Advances. |
|
(b) |
|
|
|
Includes a benefit of approximately $16.4 million recognized in the Consolidated Income Statements for the year ended December 31, 2007.
|
106
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOTHEBYS
By: |
|
/s/ WILLIAM F. RUPRECHT
William F. Ruprecht President and Chief Executive Officer |
Date: February 26, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
|
Title |
|
Date |
|
/s/ MICHAEL I. SOVERN*
Michael I. Sovern |
|
Chairman of the Board |
|
February 26, 2009 |
/s/ DEVONSHIRE*
The
Duke of Devonshire |
|
Deputy Chairman of the Board |
|
February 26, 2009 |
/s/ WILLIAM F. RUPRECHT
William F. Ruprecht |
|
President, Chief Executive Officer and Director |
|
February 26, 2009 |
/s/ ROBIN G. WOODHEAD*
Robin G. Woodhead |
|
Executive Vice President and Director |
|
February 26, 2009 |
/s/ JOHN M. ANGELO*
John M. Angelo |
|
Director |
|
February 26, 2009 |
/s/ BLAKENHAM*
Michael Blakenham |
|
Director |
|
February 26, 2009 |
/s/ ALLEN
QUESTROM*
Allen Questrom |
|
Director |
|
February 26, 2009 |
/s/ DONALD M. STEWART*
Donald M. Stewart |
|
Director |
|
February 26, 2009 |
/s/ DIANA L. TAYLOR*
Diana L. Taylor |
|
Director |
|
February 26, 2009 |
/s/ ROBERT S. TAUBMAN*
Robert S. Taubman |
|
Director |
|
February 26, 2009 |
/s/ DENNIS M. WEIBLING*
Dennis M. Weibling |
|
Director |
|
February 26, 2009 |
/s/ WILLIAM S. SHERIDAN
William S. Sheridan |
|
Executive Vice President and Chief Financial Officer |
|
February 26, 2009 |
/s/ KEVIN M. DELANEY
Kevin M. Delaney |
|
Senior Vice President, Controller and Chief Accounting Officer |
|
February 26, 2009 |
/s/ WILLIAM S. SHERIDAN
*William S. Sheridan as Attorney-in-Fact |
|
|
|
February 26, 2009 |
107
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
2.1 |
|
|
|
|
|
|
|
Agreement and Plan of Merger between Sothebys Holdings, Inc., a Michigan corporation and Sothebys Delaware, Inc., a Delaware corporation, dated March 31, 2006, incorporated by reference to the Companys First Quarter Form 10-Q for 2006. |
|
|
2.2 |
|
|
|
|
|
|
|
Agreement for the Sale and Purchase of All the Issued and Outstanding Shares in Noortman Master Paintings B.V., dated June 7, 2006, incorporated by reference to Exhibit 2.1 to the Companys Second Quarter Form 10-Q for 2006. |
|
|
3.1 |
|
|
|
|
|
|
|
Certificate of Incorporation of Sothebys, as amended as of June 30, 2006, incorporated by reference to Exhibit 3.1 to the Companys current report on Form 8-K, filed on July 7, 2006 with the Securities and Exchange Commission. |
|
|
3.2 |
|
|
|
|
|
|
|
By-Laws of Sothebys adopted as of March 31, 2006, incorporated by reference to Exhibit 3.2 to the Companys current report on Form 8-K, filed on July 7, 2006 with the Securities and Exchange Commission. |
|
|
4.1 |
|
|
|
|
|
|
|
See Exhibits 3.1 and 3.2. |
|
|
4.2 |
|
|
|
|
|
|
|
Specimen Common Stock Certificate of Sothebys, incorporated by reference to Exhibit 4.1 to Post-Effective Amendment No. 1 to the Companys Registration Statement on Form 8-A filed on November 21, 2006. |
|
|
4.3 |
|
|
|
|
|
|
|
Indenture, dated as of June 17, 2008, for the 3.125% Convertible Senior Notes due 2013 between Sothebys, as Issuer, and the Initial Subsidiary Guarantors Party Hereto, and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 10.1 to the Companys Second
Quarter Form 10-Q for 2008. |
|
|
4.4 |
|
|
|
|
|
|
|
Indenture, dated as of June 17, 2008, 7.75% Senior Notes due 2015 between Sothebys, as Issuer, and the Initial Subsidiary Guarantors Party Hereto, and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 10.2 to the Companys Second Quarter Form 10-Q for
2008. |
|
|
4.5 |
|
|
|
|
|
|
|
Registration Rights Agreement dated June 17, 2008, between Sothebys and Banc of America Securities LLC, Goldman, Sachs & Co., Comerica Securities, Inc. and HSBC Securities (USA) Inc, incorporated by reference to Exhibit 10.3 to the Companys Second Quarter Form 10-Q for 2008. |
|
|
10.1* |
|
|
|
|
|
|
|
Sothebys Deferred Compensation Plan, dated December 21, 2006 and effective January 1, 2007, incorporated by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006. |
|
|
10.2* |
|
|
|
|
|
|
|
Sothebys Holdings, Inc. 1997 Stock Option Plan Composite Plan Document, effective January 1, 2000, incorporated by reference to Exhibit 10(k) to the Companys Annual Report on Form 10-K for the year ended December 31, 2000. |
|
|
10.3* |
|
|
|
|
|
|
|
Seventh Amendment to the Sothebys Holdings, Inc. 1997 Stock Option Plan dated November 7, 2005, effective September 8, 2005, incorporated by reference to Exhibit 10.4 to the Companys Annual Report on Form 10-K for the year ended December 31, 2005. |
|
|
10.4* |
|
|
|
|
|
|
|
Eighth Amendment to the Sothebys 1997 Stock Option Plan Composite Plan Document, dated and effective May 8, 2006, incorporated by reference to Exhibit 10.2 to the Companys current report on Form 8-K dated May 12, 2006. |
|
|
10.5 |
|
|
|
|
|
|
|
Agreement of Partnership of Acquavella Modern Art, dated May 29, 1990, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10(b) to the Companys current report on Form 8-K, filed on June 7, 1990, SEC File No. 1-9750, on file at
the Washington, D.C. office of the Securities and Exchange Commission. |
108
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
10.6 |
|
|
|
|
|
|
|
First Amendment to Agreement of Partnership, dated December 31, 2000, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10(m) to the Companys Annual Report on Form 10-K for the year ended
December 31, 2000. |
|
|
10.7 |
|
|
|
|
|
|
|
Second Amendment to Agreement of Partnership, dated December 15, 2001, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10(k) to the Companys Annual Report on Form 10-K for the year ended
December 31, 2001. |
|
|
10.8 |
|
|
|
|
|
|
|
Third Amendment to Agreement of Partnership, dated February 10, 2003, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10(h) to the Companys Annual Report on Form 10-K for the year ended
December 31, 2002. |
|
|
10.9 |
|
|
|
|
|
|
|
Fourth Amendment to Agreement of Partnership, dated January 13, 2004, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10(i) to the Companys Annual Report on Form 10-K for the year ended
December 31, 2003. |
|
|
10.10 |
|
|
|
|
|
|
|
Fifth Amendment to Agreement of Partnership, dated December 8, 2004, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated by reference to Exhibit 10.9 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2004. |
|
|
10.11 |
|
|
|
|
|
|
|
Sixth Amendment to Agreement of Partnership, dated March 1, 2006, of Acquavella Modern Art, between Sothebys Nevada, Inc. and Acquavella Contemporary Art, Inc. incorporated by reference to Exhibit 10.11 to the Companys Annual Report on Form 10-K for the year ended December
31, 2005. |
|
|
10.12 |
|
|
|
|
|
|
|
Seventh Amendment to the Agreement of Partnership, dated January 12, 2007, of Acquavella Modern Art, between Sothebys Nevada, Inc and Acquavella Contemporary Art., Inc., incorporated by reference to Exhibit 10.4 to the Companys First Quarter Form 10-Q for 2007. |
|
|
10.13 |
|
|
|
|
|
|
|
Eighth Amendment to the Agreement of Partnership, dated January 23, 2008, of Acquavella Modern Art, between Sothebys Nevada, Inc and Acquavella Contemporary Art., Inc., incorporated by reference to Exhibit 10.2 to the Companys First Quarter Form 10-Q for 2008. |
|
|
10.14* |
|
|
|
|
|
|
|
Sothebys 1998 Stock Compensation Plan for Non-Employee Directors, as amended and restated on April 9, 2007, effective May 7, 2007 (the Directors Plan), incorporated by reference to Exhibit 10.2 to the Companys current report on Form 8-K, filed on May 11, 2007 with the Securities
and Exchange Commission. |
|
|
10.15* |
|
|
|
|
|
|
|
First Amendment to the Directors Plan, dated November 6, 2007 incorporated by reference to Exhibit 10.14 to the Companys Annual Report on Form 10-K for the year ended December 31, 2007 (the 2007 Form 10-K). |
|
|
10.16 |
|
|
|
|
|
|
|
Amended and Restated Credit Agreement dated as of November 14, 2005, among Sothebys Inc., as the Company, Sothebys Holdings, Inc., as Holdings, Certain U.K. Subsidiaries of Holdings, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, LaSalle Bank
N.A., as Syndication Agent and the Other Lenders Party Hereto, Banc of America Securities, LLC and LaSalle Bank N.A., as Joint Lead Arrangers and Joint Book Managers, incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2005. |
|
|
10.17 |
|
|
|
|
|
|
|
Amendment No. 2 to the Amended and Restated Credit Agreement among Sothebys Holdings, Inc., Sothebys, Inc., Oatshare Limited, Sothebys, and Bank of America, N.A. dated May 18, 2006, incorporated by reference to Exhibit 10.1 to the Companys current report on Form 8-K, filed on
May 23, 2006 with the Securities and Exchange Commission. |
109
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
10.18 |
|
|
|
|
|
|
|
Amendment No. 3 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A., dated January 2, 2007, incorporated by reference to Exhibit 10.3
to the Companys First Quarter Form 10-Q for 2007. |
|
|
10.19 |
|
|
|
|
|
|
|
Amendment No. 4 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A., dated July 25, 2007, incorporated by reference to Exhibit 10.1 to
the Companys Third Quarter Form 10-Q for 2007. |
|
|
10.20 |
|
|
|
|
|
|
|
Consent and Amendment No. 5 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A., dated December 17, 2007 incorporated by reference
to Exhibit 10.19 to the 2007 Form 10-K. |
|
|
10.21 |
|
|
|
|
|
|
|
Amendment No. 6 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A. dated January 22, 2008, incorporated by reference to Exhibit 10.1
to the Companys First Quarter Form 10-Q for 2008. |
|
|
10.22 |
|
|
|
|
|
|
|
Amendment No. 7 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A. dated April 24, 2008, incorporated by reference to Exhibit 10.1 to
the Companys Third Quarter Form 10-Q for 2008. |
|
|
10.23 |
|
|
|
|
|
|
|
Amendment No. 8 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A. dated June 6, 2008, incorporated by reference to Exhibit 10.2 to
the Companys Third Quarter Form 10-Q for 2008. |
|
|
10.24 |
|
|
|
|
|
|
|
Amendment No. 9 to the Amended and Restated Credit Agreement among Sothebys (a Delaware corporation), Sothebys Inc., Oatshare and Sothebys (a company registered in England and Wales) and Bank of America, N.A. dated February 4, 2009. |
|
|
10.25 |
|
|
|
|
|
|
|
Purchase and Sale Agreement between SIBS, LLC, as Seller and RFR Holding Corp., as Purchaser; Dated: As of December 16, 2002; Property: 1334 York Avenue, New York, New York 10021, incorporated by reference to Exhibit 10(a) to the Companys First Quarter Form 10-Q for 2003. |
|
|
10.26 |
|
|
|
|
|
|
|
Lease between 1334 York Avenue L.P., Landlord, and Sothebys, Inc., Tenant, February 7, 2003; Premises: 1334 York Avenue, New York, New York, incorporated by reference to Exhibit 10(b) to the Companys First Quarter Form 10-Q for 2003. |
|
|
10.27 |
|
|
|
|
|
|
|
Guaranty of Lease, made by Sothebys in favor of 1334 York Avenue L.P., dated as of June 30, 2006 incorporated by reference to Exhibit 10.29 to the Companys current report on Form 8-K, filed on July 7, 2006 with the Securities and Exchange Commission. |
|
|
10.28* |
|
|
|
|
|
|
|
Letter Agreement between Sothebys Holdings, Inc. and William F. Ruprecht, with related Terms of Employment, dated March 31, 2006, incorporated by reference to Exhibit 10.23 to the 2007 Form 10-K. |
|
|
10.29* |
|
|
|
|
|
|
|
Severance Agreement between Sothebys and William S. Sheridan, dated August 3, 2006, incorporated by reference to Exhibit 10.1 to the Companys Third Quarter Form 10-Q for 2006. |
|
|
10.30* |
|
|
|
|
|
|
|
Service Agreement between Sothebys and Robin Woodhead, with related Terms of Employment, dated August 15, 2006, incorporated by reference to Exhibit 10.2 to the Companys Third Quarter Form 10-Q for 2006. |
|
|
10.31* |
|
|
|
|
|
|
|
Severance Agreement between Sothebys and Bruno Vinciguerra, dated January 25, 2007, effective January 22, 2007, incorporated by reference to Exhibit 10.1 to the Companys First Quarter Form 10-Q for 2007. |
110
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
10.32* |
|
|
|
|
|
|
|
Severance Agreement between Sothebys and Gilbert Klemann, dated October 9, 2007, effective February 1, 2008, incorporated by reference to Exhibit 10.28 to the 2007 Form 10-K. |
|
|
10.33* |
|
|
|
|
|
|
|
Amendment to October 9, 2007 Severance Agreement between Sothebys and Gilbert Klemann, dated September 9, 2008, effective September 25, 2008, incorporated by reference to Exhibit 10.2 to the Companys Third Quarter Form 10-Q for 2008. |
|
|
10.34* |
|
|
|
|
|
|
|
Sothebys Holdings, Inc. Amended and Restated Restricted Stock Plan, incorporated by reference to Exhibit 10.1 to the Companys Registration Statement on Form S-8 filed on May 9, 2006. |
|
|
10.35* |
|
|
|
|
|
|
|
First Amendment to Sothebys Amended and Restated Restricted Stock Plan, dated July 28, 2006, incorporated by reference to Exhibit 10.1 to the Companys Second Quarter Form 10-Q for 2007. |
|
|
10.36* |
|
|
|
|
|
|
|
Form of Sothebys Amended and Restated Restricted Stock Plan Restricted Stock Agreement, incorporated by reference to Exhibit 10.2 to the Companys Second Quarter Form 10-Q for 2007. |
|
|
10.37* |
|
|
|
|
|
|
|
Form of Sothebys Amended and Restated Restricted Stock Plan Restricted Stock Entitlement Agreement, incorporated by reference to Exhibit 10.3 to the Companys Second Quarter Form 10-Q for 2007. |
|
|
10.38* |
|
|
|
|
|
|
|
Second Amendment to Sothebys Amended and Restated Restricted Stock Plan, dated September 7, 2007, incorporated by reference to Exhibit 10.2 to the Companys Third Quarter Form 10-Q for 2007. |
|
|
10.39 |
|
|
|
|
|
|
|
Stock Purchase Agreement, dated as of February 17, 2004, by and among NRT Incorporated as the Purchaser, Sothebys Holdings, Inc., as the Seller, and Cendant Corporation as the Purchaser Guarantor, incorporated by reference to Exhibit 99.1 to the Companys current report on Form 8-K,
filed on March 2, 2004 with the Securities and Exchange Commission. |
|
|
10.40 |
|
|
|
|
|
|
|
Trademark License Agreement, dated as of February 17, 2004, among SPTC, Inc., as Licensor, Sothebys Holdings, Inc. as Guarantor, Monticello Licensee Corporation, as Licensee, and Cendant Corporation, as Guarantor, incorporated by reference to Exhibit 99.2 to the Companys current
report on Form 8-K, filed on March 2, 2004 with the Securities and Exchange Commission. |
|
|
10.41 |
|
|
|
|
|
|
|
Amendment No. 1 to Trademark License Agreement, dated as of May 2, 2005, among SPTC Delaware, LLC (as an assignee of SPTC, Inc) and Sothebys Holdings, Inc. and Cendant Corporation and Sothebys International Realty Licensee Corporation (formerly known as Monticello Licensee
Corporation), incorporated by reference to Exhibit 10.1 to the Companys Second Quarter Form 10-Q for 2005. |
|
|
10.42 |
|
|
|
|
|
|
|
Amendment No. 2 to Trademark License Agreement, dated as of May 2, 2005, among SPTC Delaware, LLC (as an assignee of SPTC, Inc) and Sothebys Holdings, Inc. and Cendant Corporation and Sothebys International Realty Licensee Corporation (formerly known as Monticello Licensee
Corporation), incorporated by reference to Exhibit 10.2 to the Companys Second Quarter Form 10-Q for 2005. |
|
|
10.43* |
|
|
|
|
|
|
|
Sothebys Executive Bonus Plan (as amended and restated effective as of January 1, 2007), dated April 9, 2007, incorporated by reference to Exhibit 10.1 to the Companys current report on Form 8-K, filed on May 11, 2007 with the Securities and Exchange Commission. |
|
|
10.44 |
|
|
|
|
|
|
|
Transaction Agreement by and among Sothebys Holdings, Inc., and A. Alfred Taubman and Other Parties to the Agreement, dated as of September 7, 2005, incorporated by reference to Exhibit 10.1 to the Companys Third Quarter Form 10-Q for 2005. |
|
|
10.45 |
|
|
|
|
|
|
|
Convertible Bond Hedge Transaction (Transaction Reference Number: NY-35263) dated June 11, 2008, between Sothebys and Bank of America, N.A, incorporated by reference to Exhibit 10.4 to the Companys Second Quarter Form 10-Q for 2008. |
111
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
10.46 |
|
|
|
|
|
|
|
Convertible Bond Hedge Transaction (Transaction Reference Number: SDB1627455583) dated June 11, 2008, between Sothebys and Goldman, Sachs & Co, incorporated by reference to Exhibit 10.5 to the Companys Second Quarter Form 10-Q for 2008. |
|
|
10.47 |
|
|
|
|
|
|
|
Issuer Warrant Transaction (Transaction Reference Number: NY-35264) dated June 11, 2008, between Sothebys and Bank of America, N.A, incorporated by reference to Exhibit 10.6 to the Companys Second Quarter Form 10-Q for 2008. |
|
|
10.48 |
|
|
|
|
|
|
|
Issuer Warrant Transaction (Transaction Reference Number: SDB1627455582) dated June 11, 2008 between Sothebys and Goldman, Sachs & Co, incorporated by reference to Exhibit 10.7 to the Companys Second Quarter Form 10-Q for 2008. |
|
|
21 |
|
|
|
|
|
|
|
Subsidiaries of the Registrant |
|
|
23 |
|
|
|
|
|
|
|
Consent of Deloitte & Touche LLP |
|
|
24 |
|
|
|
|
|
|
|
Powers of Attorney |
|
|
31.1 |
|
|
|
|
|
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31.2 |
|
|
|
|
|
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
32.1 |
|
|
|
|
|
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
32.2 |
|
|
|
|
|
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* A compensatory agreement or plan required to be filed pursuant to Item 15(c) of Form 10-K
112