UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
Commission File Number 1-9750
Sotheby’s Holdings, Inc.
(Exact name of registrant as specified in its charter)
| Michigan (State or other jurisdiction of incorporation or organization) |
38-2478409 (I.R.S. Employer Identification No.) |
| 38500 Woodward Avenue, Suite 100 Bloomfield Hills, Michigan (Address of principal executive offices) |
48303 (Zip Code) |
Registrant’s telephone number, including area code: (248) 646-2400
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes x No o.
As of July 30, 2004, there were outstanding 45,352,487 shares of Class A Limited Voting Common Stock, par value $0.10 per share, and 17,848,354 shares of Class B Common Stock, par value $0.10 per share, of the Registrant. Each share of Class B Common Stock is freely convertible into one share of Class A Limited Voting Common Stock.
TABLE OF CONTENTS
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FINANCIAL INFORMATION |
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Financial Statements: |
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Consolidated Income Statements for the Three and Six Months Ended June 30, 2004 and 2003 |
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Consolidated Balance Sheets at June 30, 2004, December 31, 2003 and June 30, 2003 |
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Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| PART II: |
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OTHER INFORMATION |
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SOTHEBY’S
HOLDINGS, INC. Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, Revenues: Auction and related revenues $ 166,337 $ 107,580 $ 225,439 $ 145,713 License fee revenue — — 45,000 — Other revenues 3,190 2,838 5,520 5,897 Total revenues 169,527 110,418 275,959 151,610 Expenses: Direct costs of services 19,276 14,938 26,470 21,665 Salaries and related costs 49,842 36,042 89,081 69,575 General and administrative expenses 24,046 22,336 49,571 44,027 Depreciation and amortization expense 5,604 6,257 11,510 12,518 Retention costs — 2,865 285 6,344 Net restructuring charges 27 (450 ) 146 5,341 Special charges 772 593 1,284 1,376 Total expenses 99,567 82,581 178,347 160,846 Operating income (loss) 69,960 27,837 97,612 (9,236 ) Interest income 532 1,055 1,102 1,628 Interest expense (8,395 ) (7,884 ) (16,805 ) (15,021 ) Other (expense) income (270 ) (35 ) 419 401 Income (loss) from continuing operations before taxes 61,827 20,973 82,328 (22,228 ) Income tax expense (benefit) 21,021 7,776 27,991 (7,776 ) Income (loss) from continuing operations 40,806 13,197 54,337 (14,452 ) Discontinued operations (Note 3): Income from discontinued operations before taxes 2,623 1,844 39,273 1,889 Income tax expense 952 845 14,413 861 Income from discontinued operations 1,671 999 24,860 1,028 Net income (loss) $ 42,477 $ 14,196 $ 79,197 ($13,424 ) Basic earnings (loss) per share: Earnings (loss) from continuing operations $ 0.66 $ 0.21 $ 0.88 ($0.24 ) Earnings from discontinued operations 0.03 0.02 0.41 0.02 Basic earnings (loss) per share $ 0.69 $ 0.23 $ 1.29 ($0.22 ) Diluted earnings (loss) per share: Earnings (loss) from continuing operations $ 0.65 $ 0.21 $ 0.87 ($0.24 ) Earnings from discontinued operations 0.03 0.02 0.40 0.02 Diluted earnings (loss) per share $ 0.68 $ 0.23 $ 1.27 ($0.22 ) Weighted average shares outstanding (in millions): Basic 61.7 61.6 61.6 61.5 Diluted 62.3 61.6 62.2 61.5 See accompanying Notes to Consolidated Financial Statements 3 SOTHEBY’S
HOLDINGS, INC. June 30, December 31, June 30, A S
S E T S Current Assets: Cash and cash equivalents $ 147,233 $ 62,498 $ 47,541 Restricted cash 6,423 8,179 10,771 Accounts receivable, net of allowance for doubtful accounts of $5,286, $6,052 and $6,469 486,113 231,968 330,118 Notes receivable and consignor advances, net of allowance for credit losses of $1,448, $1,600 and $1,144 69,919 82,253 57,477 Inventory, net 14,659 14,848 12,111 Deferred income taxes 6,050 5,117 11,537 Prepaid expenses and other current assets 67,334 45,904 42,405 Assets held for sale (Note 3) — 29,244 18,901 Total Current Assets 797,731 480,011 530,861 Non-Current Assets: Notes receivable 20,363 26,689 24,058 Properties, less accumulated depreciation and amortization of $106,294, $98,310, and $85,440 239,093 248,261 252,760 Goodwill 13,504 13,565 13,373 Investments 28,221 28,678 29,678 Deferred income taxes 69,154 101,684 92,357 Other assets 3,620 2,582 2,963 Total Assets $ 1,171,686 $ 901,470 $ 946,050 L
I A B I L I T I E S A N D S H A R E H O L D E R S ’ E
Q U I T Y Current Liabilities: Due to consignors $ 457,670 $ 255,198 $ 311,539 Credit facility borrowings — 20,000 20,000 Accounts payable and accrued liabilities 98,985 82,145 77,805 Deferred revenues 4,709 4,787 5,071 Accrued income taxes 13,250 4,441 4,181 York Property capital lease obligation 119 113 107 Deferred gain on sale of York Property 1,129 1,129 1,129 Settlement liabilities 13,531 5,281 16,795 Liabilities held for sale (Note 3) — 14,794 9,030 Total Current Liabilities 589,393 387,888 445,657 Long-Term Liabilities: Long-term debt, net of unamortized discount of $422, $461 and $498 99,578 99,539 99,502 Settlement liabilities 61,641 75,498 61,642 York Property capital lease obligation 172,108 172,169 172,227 Deferred gain on sale of York Property 19,938 20,502 21,087 Other liabilities 18,320 18,466 17,085 Total Liabilities 960,978 774,062 817,200 Shareholders’ Equity: Common Stock, $0.10 par value 6,310 6,173 6,154 Authorized shares—125,000,000 of Class A and 75,000,000 of Class B, Issued and outstanding shares—45,287,616, 45,052,339 and 45,014,513 of Class A, and 17,853,548, 16,681,150 and 16,549,650 of Class B at June 30, 2004, December 31, 2003 and June 30, 2003, respectively Additional paid-in capital 222,287 204,567 202,521 Retained earnings (accumulated deficit) 657 (78,540 ) (71,309 ) Deferred compensation expense (13,948 ) (1,507 ) — Accumulated other comprehensive loss (4,598 ) (3,285 ) (8,516 ) Total Shareholders’ Equity 210,708 127,408 128,850 Total Liabilities and Shareholders’ Equity $ 1,171,686 $ 901,470 $ 946,050 See accompanying Notes to Consolidated Financial Statements 4 SOTHEBY'S
HOLDINGS, INC. Six Months Ended June 30, 2004 2003 Operating Activities: Income (loss) from continuing operations $ 54,337 ($14,452 ) Adjustments to reconcile income (loss) from continuing operations to net cash used by operating activities: Depreciation and amortization expense 11,510 12,518 Deferred income taxes 27,991 (7,776 ) Tax benefit of stock option exercises 224 — Restricted stock compensation expense 2,369 — Asset provisions 1,797 (976 ) Asset write-offs 27 589 Other 2,606 1,334 Changes in assets and liabilities: Increase in accounts receivable (253,565 ) (48,585 ) Decrease in inventory 2,166 1,314 Increase in prepaid expenses and other current assets (20,908 ) (2,452 ) Increase in other long-term assets (564 ) (594 ) Decrease in short-term and long-term settlement liabilities (8,457 ) (49,733 ) Increase in due to consignors 202,650 36,460 Decrease in accrued income taxes (2,075 ) (503 ) Increase
(decrease) in accounts payable, accrued liabilities and other liabilities 15,982 (22,626 ) Operating Cash Flow from discontinued operations (Note 3) (3,916 ) (2,689 ) Net cash provided (used) by operating activities 32,174 (98,171 ) Investing Activities: Funding of notes receivable and consignor advances (89,702 ) (38,840 ) Collections of notes receivable and consignor advances 104,497 53,489 Capital expenditures (5,001 ) (3,241 ) Proceeds
from sale of domestic real estate brokerage business (Note 3) 53,863 — Proceeds from York Property sale-leaseback — 167,054 Decrease in investments 877 688 Decrease (increase) in restricted cash 1,261 (1,994 ) Investing Cash Flow from discontinued operations (Note 3) 1,011 1,051 Net cash provided by investing activities 66,806 178,207 Financing Activities: Proceeds from credit facility borrowings 65,000 107,000 Repayments of credit facility borrowings (85,000 ) (187,000 ) Decrease in York Property capital lease obligation (55 ) (1,532 ) Proceeds from exercise of stock options 2,676 — Net cash used by financing activities (17,379 ) (81,532 ) Impact of consolidating variable interest entity 487 — Effect of exchange rate changes on cash and cash equivalents (258 ) 1,240 Increase (decrease) in cash and cash equivalents 81,830 (256 ) Cash and cash equivalents at beginning of period 65,403 48,718 Cash and cash equivalents at end of period $ 147,233 $ 48,462 Cash and cash equivalents at end of period: Continuing
Operations $ 147,233 $ 47,541 Discontinued Operations — 921 $ 147,233 $ 48,462 See accompanying Notes to Consolidated Financial Statements 5 SOTHEBY’S
HOLDINGS, INC. 1. Basis of Presentation The Consolidated Financial Statements included herein have been prepared by Sotheby’s Holdings, Inc. (together with its subsidiaries, the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto on Form 10-K for the year ended December 31, 2003. In the fourth quarter of 2003, the Company committed to a plan to sell its domestic real estate brokerage business, Sotheby’s International Realty, Inc. (“SIR”). On February 17, 2004, the Company consummated the sale of SIR. Accordingly, the assets and liabilities of SIR are classified as held for sale in the December 31, 2003 and June 30, 2003 Consolidated Balance Sheets, and its operating results are reported as discontinued operations in the Consolidated Income Statements for the three and six months ended June 30, 2004 and 2003 (see Note 3). The Company has concluded that an entity with whom its Finance segment has outstanding loans and to whom the Company provides management consulting services meets the definition of a variable interest entity under Financial Accounting Standards Board Interpretation No. 46, as revised. As primary beneficiary of the variable interest entity, the Company was required to consolidate the entity as part of the Auction segment beginning on March 31, 2004 (see Note 16). In the opinion of the management of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial statements included herein, have been made. 6 2. Seasonality of Business The worldwide art auction market has two principal selling seasons, spring and fall. Consequently, first and third quarter results of the Auction segment typically reflect lower Aggregate Auction Sales (as defined below) and lower operating results than the second and fourth quarters due to the fixed nature of many of the Company’s operating expenses. Aggregate Auction Sales represents the hammer price of property sold at auction by the Company plus buyer’s premium. The table below demonstrates that approximately 80% of the Company’s Aggregate Auction Sales are derived from the second and fourth quarters of the year. Percentage of Annual 2003 2002 2001 January – March 12 % 11 % 13 % April – June 34 % 38 % 45 % July – September 7 % 12 % 7 % October
– December 47 % 39 % 35 % 100 % 100 % 100 % 3. Discontinued Operations In the fourth quarter of 2003, the Company committed to a plan to sell SIR, its domestic real estate brokerage business. On February 17, 2004, the Company consummated the sale of SIR to a subsidiary of Cendant Corporation (“Cendant”). SIR was the principal component of the Company’s former Real Estate segment. In conjunction with the sale, the Company entered into an agreement with Cendant to license the Sotheby’s International Realty trademark and certain related trademarks for an initial 50-year term with a 50-year renewal option (the “License Agreement”). The License Agreement is applicable to Canada, Israel, Mexico, the United States (the “U.S.”) and certain Caribbean countries. The total consideration paid by Cendant at closing for SIR’s company-owned real estate brokerage business and affiliate network, as well as the License Agreement and the International Options (as defined below) was $100.7 million, consisting of $98.9 million in cash and the assumption of a $1.8 million note payable. Net cash proceeds from the sale, after deducting $4.7 million in transaction costs, were $94.2 million. In addition to the consideration received at closing, the License Agreement provides for an ongoing 7 license fee during its term based on the volume of commerce transacted under the licensed trademarks. The consideration received at closing was allocated among each of the following components based on a valuation of their respective fair values: (i) SIR’s company-owned real estate brokerage business and affiliate network, (ii) the License Agreement and (iii) the International Options. Based on this valuation, $55.1 million was allocated to SIR’s company-owned real estate brokerage business and affiliate network, $45 million was allocated to the License Agreement and $0.6 million was allocated to the International Options. As a result
of the sale of SIR’s company-owned real estate brokerage business
and affiliate network, the Company recognized a pre-tax gain of $32.3
million, consisting of the $55.1 million in allocated proceeds less SIR’s
closing book value and transaction related costs. The $32.3 million pre-tax
gain is recorded within income from discontinued operations before taxes
in the Company’s Consolidated Income Statements. As a result of this
gain, the Company utilized approximately $12.7 million of the net Deferred
Tax Asset related to its net operating loss carryforwards.
The $45 million of proceeds allocated to the License Agreement represents a one-time non-refundable upfront license fee received by the Company as consideration for entering into the License Agreement. The Company has no significant future performance obligations associated with the non-refundable upfront license fee. As a result, the Company recognized license fee revenue of $45 million in the first quarter of 2004, which is classified within the continuing operations section of the Consolidated Income Statements. This classification is consistent with how the Company will report ongoing license fees earned during the term of the License Agreement, as well as license fee revenue earned in the future from other potential
licensing opportunities. As a result of this one-time license fee, the Company utilized approximately $15 million of the net Deferred Tax Asset related to its net operating loss carryforwards during the first quarter of 2004. The Company incurred transaction costs of approximately $2.1 million related to the consummation of the License Agreement in the first quarter of 2004, which are recorded within General and Administrative Expenses in the Consolidated Income Statements. 8 The other non-U.S. offices of the Company’s real estate brokerage business, which are not significant to the Company’s overall operations, continue to operate as Sotheby’s International Realty under current management. Accordingly, the assets and liabilities of such offices are not classified as held for sale in the Consolidated Balance Sheets, and their operating results are not reported as discontinued operations in the Consolidated Income Statements. Cendant has options to acquire most of these offices and a license to use the related trademarks in other countries outside the U.S. during the five-year period following February 17, 2004 for a nominal amount (the “International Options”). The fair
value of these options is being marked to market on a quarterly basis with any changes in fair value recorded in the Consolidated Income Statements. For the three and six months ended June 30, 2004, there was no change in the fair value of the International Options. The following is a summary of the operating results of SIR for the three and six months ended June 30, 2004 and 2003: Three Months Ended Six Months Ended 2004 2003 2004 2003 (Thousands of dollars) Revenues $ 3,857 $ 8,616 $ 13,969 $ 15,044 Expenses: Direct costs of services — 1,227 635 2,424 Salaries and related costs — 2,605 4,347 5,137 General and administrative expenses 466 2,377 1,945 4,504 Depreciation and amortization expense — 537 — 1,076 Total expenses 466 6,746 6,927 13,141 Operating income 3,391 1,870 7,042 1,903 Gain on sale of SIR (768 ) — 32,293 — Other expense — (26 ) (62 ) (14 ) Income from discontinued operations before taxes 2,623 1,844 39,273 1,889 Income tax expense 952 845 14,413 861 Income from discontinued operations $ 1,671 $ 999 $ 24,860 $ 1,028 9 According to
the terms of the Stock Purchase Agreement related to the transaction,
the Company is due to receive amounts collected by Cendant for the closing
of real estate transactions subsequent to February 17, 2004 that were
under contract prior to that date. For the three and six months ended
June 30, 2004, revenues from discontinued operations included $3.9 million
and $8.3 million, respectively, of such amounts.
The following is a summary of the assets and liabilities of SIR as of December 31, 2003 and June 30, 2003: December 31, June 30, (Thousands of dollars) Assets: Cash and cash equivalents $ 2,905 $ 921 Restricted cash 1,157 1,572 Accounts receivable, net 901 691 Properties, net 10,679 10,712 Goodwill 10,089 3,338 Other current assets 3,513 1,667 Assets held for sale $ 29,244 $ 18,901 Liabilities: Accounts payable and accrued liabilities $ 10,956 $ 6,980 Other current liabilities 3,838 2,050 Liabilities held for sale $ 14,794 $ 9,030 4. Segment Reporting The Company’s continuing operations are organized under two business segments – Auction and Finance. The domestic operations of the Company’s real estate brokerage business, which were sold on February 17, 2004, have been classified as discontinued operations and are no longer included in this presentation. Such operations were the principal component of the Real Estate segment. The non-U.S. offices of the Company’s remaining real estate brokerage activities are not a reportable operating segment because they are not significant to the Company’s overall operations and are included in “All Other.” (See Note 3 for further information on discontinued operations.) The table below
presents revenues for the Company’s operating segments, as well as
a reconciliation of segment revenues to total revenues from continuing
operations for the three and six months ended June 30, 2004 and 2003:
10 Three Months Ended Six Months Ended 2004 2003 2004 2003 (Thousands of dollars) Auction $ 166,337 $ 107,580 $ 225,439 $ 145,713 Finance 1,865 1,290 3,081 2,777 All Other 1,325 1,548 2,439 3,120 Total segment revenues 169,527 110,418 230,959 151,610 Unallocated amounts: License fee revenue (see Note 3) — — 45,000 — Total revenues from continuing operations $ 169,527 $ 110,418 $ 275,959 $ 151,610 The table below presents income (loss) before taxes for the Company’s operating segments, as well as a reconciliation of segment income (loss) before taxes to income (loss) from continuing operations before taxes for the three and six months ended June 30, 2004 and 2003: Three Months Ended Six Months Ended 2004 2003 2004 2003 (Thousands of dollars) Auction $ 64,066 $ 25,974 $ 44,100 ($5,364 ) Finance 269 (561 ) — (815 ) All Other (395 ) (485 ) (450 ) (932 ) Segment income (loss) before taxes 63,940 24,928 43,650 (7,111 ) Unallocated amounts: License fee revenue (see Note 3) — — 45,000 — License Agreement transaction costs (see Note 3)* (96 ) — (2,142 ) — Unallocated
expenses related to discontinued operations** — (363 ) — (865 ) Special charges (see Note 12) (772 ) (593 ) (1,284 ) (1,376 ) Amortization of discount - DOJ antitrust fine (see Note 12) (506 ) (584 ) (1,038 ) (1,191 ) Amortization of discount - Discount Certificates (see Note 12) (712 ) — (1,427 ) — Net restructuring charges (see Note 13) (27 ) 450 (146 ) (5,341 ) Retention costs — (2,865 ) (285 ) (6,344 ) Income (loss) from continuing operations before taxes $ 61,827 $ 20,973 $ 82,328 ($22,228 ) 11 * Represents transaction costs related to the consummation of the License Agreement, which are not allocated to the Company’s operating segments. This is consistent with how the related license fee revenue is presented for segment reporting purposes. ** Represents amounts
previously allocated to the Company’s discontinued domestic real
estate brokerage business (see Note 3), which represent expenses of the
Company’s ongoing operations.
The table below presents assets for the Company’s operating segments, as well as a reconciliation of segment assets to consolidated assets as of June 30, 2004, December 31, 2003 and June 30, 2003: June 30, December 31, June 30, (Thousands of dollars) Auction $ 1,016,282 $ 651,150 $ 731,660 Finance 77,736 107,678 84,595 All Other 2,464 1,574 2,257 Total segment assets 1,096,482 760,402 818,512 Unallocated amounts: Deferred tax assets 75,204 106,801 103,894 Assets held for sale (see Note 3) — 29,244 18,901 Unallocated
assets related to discontinued operations*** — 5,023 4,743 Consolidated Assets $ 1,171,686 $ 901,470 $ 946,050 ***
Represents amounts
previously allocated to the Company’s discontinued domestic real
estate brokerage business (see Note 3), which represent assets of the
Company’s ongoing operations.
5. Receivables Accounts Receivable - Accounts Receivable primarily relates to the Company’s Auction segment. Under the standard terms and conditions of the Company’s Auction Sales, the Company is not obligated to pay consignors for items that have not been paid for by the purchaser. If the purchaser defaults on payment, the Company has the right to cancel the sale and return the property to the owner, re-offer the property at auction or negotiate a private sale. At June 30, 2004, approximately $69.4 million, or 14%, of the net Accounts Receivable balance was due from one purchaser and is due to be collected in equal payments of $34.7 million in November 2004 and January 2005. 12 Notes Receivable
and Consignor Advances – The Company provides
certain collectors and dealers with financing generally secured by works
of art that the Company either has in its possession or permits the borrower
to possess. Although the Company’s general policy is to make secured
loans at loan to value ratios (principal loan amount divided by the low
auction estimate of the collateral) of 50% or lower, the Company will
lend at loan to value ratios higher than 50%. The Company generally makes
two types of secured loans: (1) advances secured by consigned property
to borrowers who are contractually committed, in the near term, to sell
the property at auction (a “consignor advance”); and (2) general
purpose term loans to collectors or dealers secured by property not presently
intended for sale. The consignor advance allows a consignor to receive
funds shortly after consignment for an auction that will occur several
weeks or months in the future, while preserving for the benefit of the
consignor the potential of the auction process. The general purpose secured
loans allow the Company to establish or enhance a mutually beneficial
relationship with dealers and collectors. The loans are generally made
with full recourse to the borrower. In certain instances, however, loans
are made with recourse limited to the works of art pledged as security
for the loan. To the extent that the Company is looking wholly or partially
to the collateral for repayment of its loans, repayment can be adversely
impacted by a decline in the art market in general or in the value of
the particular collateral. In addition, in situations where the borrower
becomes subject to bankruptcy or insolvency laws, the Company’s ability
to realize on its collateral may be limited or delayed by the application
of such laws. Under certain circumstances, the Company also makes unsecured
loans to collectors and dealers. Included in Notes Receivable and Consignor
Advances are unsecured loans totaling $5.4 million, $11.3 million and
$14.6 million at June 30, 2004, December 31, 2003 and June 30, 2003, respectively.
In certain situations, the Company also finances the purchase of works of art by certain art dealers through unsecured loans. The property purchased pursuant to such unsecured loans is sold by the dealer or at auction with any net profit or loss shared by the Company and the dealer. Interest income related to such unsecured loans is reflected in the results of the Finance segment, while the Company’s share of any profit or loss is reflected in the results of the Auction segment. The total of all such unsecured loans was $4.7 million, $7.8 million and $10.9 million at June 30, 2004, December 31, 2003 and June 30, 2003, respectively. These amounts are included in the total unsecured loan balances provided in the previous
paragraph. 13 At June 30, 2004, two consignor advances comprised approximately 14% and 12%, respectively, of the net Notes Receivable and Consignor Advances balance. The weighted average interest rates earned on Notes Receivable and Consignor Advances were 7.7% and 5.3% for the three months ended June 30, 2004 and 2003, respectively. The weighted average interest rates earned on Notes Receivable and Consignor Advances were 6.1% and 5.6% for the six months ended June 30, 2004 and 2003, respectively. The increases in the weighted average interest rate for the three and six months ended June 30, 2004 were principally due to $1 million in interest income recognized in the second quarter of 2004 as a result of the collection of a disputed client loan, for which there was no comparable event in the prior year. Changes in the Allowance for Credit Losses relating to Notes Receivable and Consignor Advances for the six months ended June 30, 2004 and 2003 were as follows: Six Months Ended 2004 2003 (Thousands of dollars) Allowance for credit losses at January 1 $ 1,600 $ 1,573 Change in loan loss provision (49 ) 103 Write-offs (103 ) (537 ) Foreign currency exchange rate changes — 5 Allowance for credit losses at June 30 $ 1,448 $ 1,144 Receivable from Cendant – As of June 30, 2004, Prepaid Expenses and Other Current Assets included a $3.6 million receivable due from Cendant related to the sale of the Company’s domestic real estate brokerage business to Cendant on February 17, 2004 (see Note 3). 14 6. Goodwill Goodwill related to the Company’s continuing operations is entirely attributable to the Auction segment. For the six months ended June 30, 2004 and 2003, changes in the carrying value of such Goodwill were as follows: 2004 2003 (Thousands of dollars) Balance as of January 1 $ 13,565 $ 13,215 Foreign currency exchange rate changes (61 ) 158 Balance as of June 30 $ 13,504 $ 13,373 7. Credit Arrangements Bank Credit
Facilities – On March 4, 2004, the Company
used existing cash balances to repay the remaining $20 million in borrowings
outstanding under the senior secured term facility of its former credit
agreement (the “Amended and Restated Credit Agreement”.)
Additionally, on March 4, 2004, the Company entered into a new senior secured credit agreement with General Electric Capital Corporation (the “GE Capital Credit Agreement”). The GE Capital Credit Agreement is available through March 4, 2007 and provides for borrowings of up to $200 million provided by an international syndicate of lenders. Borrowings under the GE Capital Credit Agreement are available for the funding of the Company’s ordinary working capital requirements and general corporate needs. The Company paid commitment and arrangement fees of $3.0 million related to the GE Capital Credit Agreement, which are being amortized to interest expense over the three-year term of the agreement. The Company’s obligations under the GE Capital Credit Agreement are secured by substantially all of the assets of the Company, as well as the assets of its subsidiaries in the U.S. and the United Kingdom (the “U.K.”). The GE Capital Credit Agreement also contains financial covenants requiring the Company to not exceed $10 million in annual capital expenditures and to have a quarterly fixed charge coverage ratio of not less than 1.0. The financial covenant relating to capital expenditures is first effective for the year ending December 31, 2004, while the financial covenant relating to 15 the fixed charge coverage ratio tests was first effective for the quarter ended June 30, 2004. The GE Capital Credit Agreement also has a covenant that prohibits the Company from making dividend payments. The Company is in compliance with its covenants. At the option of the Company, borrowings under the GE Capital Credit Agreement generally bear interest equal to: (i) 1.25% plus the higher of the Prime Rate or the Federal Funds Rate plus 0.5%, or (ii) LIBOR plus 2.75%. Beginning on March 31, 2005, the applicable interest rate charged for borrowings under the GE Capital Credit Agreement may be adjusted up or down depending on the Company’s performance under the quarterly fixed charge coverage ratio tests. As of June 30, 2004, the Company had no outstanding borrowings under the GE Capital Credit Agreement. As of December 31, 2003 and June 30, 2003, the Company had outstanding borrowings of $20 million under the Amended and Restated Credit Agreement. For the six months ended June 30, 2004, the weighted average interest rate charged on outstanding borrowings was approximately 6.2%. For the three and six months ended June 30, 2003, the weighted average interest rates charged on outstanding borrowings were approximately 5.1% and 5.4%, respectively. Senior Unsecured
Debt – In February 1999, the Company issued a tranche of long-term
debt securities (the “Notes”), pursuant to the Company’s
$200 million shelf registration with the Securities and Exchange Commission,
for an aggregate offering price of $100 million. The ten-year Notes have
an effective interest rate of 6.98% payable semi-annually in February
and August.
The Notes have covenants that impose limitations on the Company from placing liens on certain property and entering into certain sale-leaseback transactions. The Company is in compliance with these covenants. An event of default related to the GE Capital Credit Agreement does not, in and of itself, constitute an event of default under the Indenture pursuant to which the Notes were issued. 16 If and to the extent required under the Indenture pursuant to which the Notes were issued and subject to certain exceptions contained in the Indenture, the security documents executed in connection with the GE Capital Credit Agreement provide that the obligations under the Notes shall be secured equally and ratably with that portion of the obligations under the GE Capital Credit Agreement that exceed the permitted exceptions contained in the Indenture. Interest Expense – For the three and six months ended June 30, 2004 and 2003, interest expense consisted of the following: Three Months Ended Six Months Ended 2004 2003 2004 2003 (Thousands of dollars) Credit Facility Borrowings: Interest expense on outstanding borrowings $ — $ 266 $ 298 $ 1,248 Amortization of credit facility fees 625 497 966 1,277 Sub-total 625 763 1,264 2,525 Interest expense on York Property capital lease obligation 4,478 4,481 8,957 7,159 Interest expense on long-term debt 1,738 1,737 3,476 3,474 Amortization of discount - DOJ antitrust fine (see Note 12) 506 584 1,038 1,191 Amortization of discount - Discount Certificates (see Note 12) 712 — 1,427 — Other interest expense 336 319 643 672 Total $ 8,395 $ 7,884 $ 16,805 $ 15,021 Other interest expense principally relates to interest accrued on the unfunded obligation under the Company’s Benefit Equalization Plan. 17 8. Defined Benefit Pension Plan The Company makes contributions to a defined benefit pension plan covering substantially all U.K. employees (the “U.K. Plan”). For the three and six months ended June 30, 2004 and 2003, the components of net periodic pension cost were as follows: Three Months Ended Six Months Ended 2004 2003 2004 2003 (Thousands of dollars) Service cost $ 1,662 $ 1,487 $ 3,334 $ 2,920 Interest cost 2,786 2,346 5,588 4,608 Expected return on plan assets (4,104 ) (3,621 ) (8,232 ) (7,114 ) Amortization of prior service cost 66 60 133 118 Amortization of actuarial loss 261 — 524 — Amortization of transitional asset — (3 ) — (5 ) Sub-total 671 269 1,347 527 Special termination benefits — 37 13 282 Net periodic pension cost $ 671 $ 306 $ 1,360 $ 809 The special termination benefits are reflected in the Consolidated Income Statements principally within Net Restructuring Charges. Total contributions to the U.K. Plan in 2004 are expected to be approximately $2.8 million. For the six months ended June 30, 2004, total contributions to the U.K. Plan were approximately $1.4 million. Effective April 1, 2004, the U.K. Plan was closed to new employees. From that date, a defined contribution plan was made available to new employees. 9. Derivative Instruments The Company utilizes forward exchange contracts to manage exposures related to foreign currency risks, which primarily arise from short-term foreign currency denominated intercompany balances. Generally, such intercompany balances are centrally funded and settled through the Company’s global treasury function. The Company’s objective for holding such derivative instruments is to minimize foreign currency risks using the most effective methods to eliminate or reduce the impacts of these exposures. 18 The forward exchange contracts entered into by the Company are used as economic cash flow hedges of the Company’s exposure to short-term foreign currency denominated intercompany balances. Such forward exchange contracts are typically short-term with settlement dates no more than one month from their inception. These contracts are not designated as hedging instruments under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and are recorded in the Company’s Consolidated Balance Sheets at fair value, which is based on referenced market rates. Changes in the fair value of the Company’s forward exchange
contracts are recognized currently in earnings and are generally offset by the revaluation of the underlying intercompany balances in accordance with SFAS No. 52, “Foreign Currency Translation.” As of June 30,
2004 and 2003, the assets relating to the Company’s forward exchange
contracts were approximately $28,000 and $38,000, respectively. As of
December 31, 2003, the Consolidated Balance Sheets included an asset of
approximately $0.3 million relating to the Company’s forward exchange
contracts. These assets are recorded within Prepaid Expenses and Other
Current Assets and reflect the fair value of the outstanding forward exchange
contracts. 10. Commitments and Contingencies Employment Agreements – During the second half of 2003 the Company entered into employment agreements with a number of employees, which expire in June 2006. Such agreements provide, among other benefits, for minimum salary levels, as well as incentive bonuses which are payable only if specified Company and individual goals are attained. The aggregate commitment for future salaries for the entire three-year period, excluding incentive bonuses, is approximately $10.1 million, of which approximately $3.7 million had been paid through July 30, 2004. Lending Commitments – In certain situations, the 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 (see Note 5). Unfunded commitments to extend additional credit were approximately $10.5 million at June 30, 2004. 19 Legal Actions – The Company becomes involved, from time to time, in various claims and lawsuits incidental to the ordinary course of its business. In the opinion of management, any such claims and lawsuits are not currently expected to have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity. (See Notes 11 and 12 for other commitments and contingencies.) 11. Auction Guarantees On certain occasions, the Company will guarantee to the consignor a minimum price in connection with the sale of property at auction. The Company must perform under its guarantee only in the event that the property sells for less than the minimum price and, therefore, the Company must pay the difference between the sale price at auction and the amount of the guarantee. If the property does not sell, the amount of the guarantee must be paid, but the Company has the right to recover such amount through the future sale of the property. Generally, the Company is entitled to a share of the excess proceeds if the property under guarantee sells above a minimum price. In addition, the Company is obligated under the terms of certain
guarantees to loan a portion of the guaranteed amount prior to the auction. In the first quarter of 2003, the Company adopted the recognition and measurement provisions of Financial Accounting Standards Board Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” for guarantees issued or modified after December 31, 2002. As of June 30,
2004, the Company had outstanding auction guarantees totaling approximately
$6.5 million, the property relating to which had a mid-estimate sales
price of approximately $8.0 million. The property under such guarantees
is being offered at auction in November 2004. As of June 30, 2004 and
December 31, 2003, the carrying amount of the liability related to the
Company’s auction guarantees was approximately $0.1 million and $0.5
million, respectively. As of June 30, 2003, the carrying amount of the
liability for the Company’s auction guarantees was approximately
$25,000. The liability related to the Company’s auction guarantees
is reflected in the Consolidated Balance Sheets within Accounts Payable
and Accrued Liabilities. 20 As of August 2, 2004, the Company had outstanding auction guarantees totaling approximately $19.4 million, the property relating to which had a mid-estimate sales price of approximately $21.9 million. The property under such guarantees will be offered at auction in November 2004 and June 2005. As of August 2, 2004, $3.0 million of the guaranteed amount had been advanced by the Company. 12. Special Charges and Settlement Liabilities Special Charges
– For the three and six months ended June 30, 2004 and 2003, the
Company recorded the following Special Charges related to the investigation
by the Antitrust Division of the United States Department of Justice (the
“DOJ”), other governmental investigations and the related civil
antitrust litigation:
Three Months Ended Six Months Ended 2004 2003 2004 2003 (Thousands of dollars) Legal and other professional fees $ 330 $ 44 $ 480 $ 552 Settlement administration costs 256 549 419 574 Loss on redemption of Discount Certificates 186 — 385 — Settlement of U.S. Antitrust opt out claim — — — 250 Total $ 772 $ 593 $ 1,284 $ 1,376 For the three and six months ended June 30, 2004, the legal and other professional fees noted above are principally the result of the Canadian Competition Bureau’s continuing investigation regarding anti-competitive practices relating to commissions charged by the Company and Christie’s International, PLC (“Christie’s”) for auction services. In the opinion of management, this investigation is not currently expected to have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity. On April 10, 2003, the Company and Christie’s entered into a settlement agreement with one of the parties that opted out of the class action settlement in civil antitrust litigation brought against the Company and Christie’s relating to commissions charged for auctions in the U.S. (the “U.S. Antitrust Litigation”). In the first quarter of 2003, the Company recorded $0.25 million in Special Charges as a result of the completion of the settlement of this claim. 21 Settlement Liabilities – In accordance with the U.S. Antitrust Litigation settlement agreement, the Company issued to the class of plaintiffs vendor’s commission discount certificates (“Discount Certificates”) with a face value of $62.5 million. The Court determined that the $62.5 million face value of the Discount Certificates had a fair market value of not less than $50 million, which equals the amount that was recorded in the Consolidated Income Statements as Special Charges in the third quarter of 2000. The Discount Certificates are fully redeemable in connection with any auction conducted by the Company or Christie’s in the U.S. or the U.K. and may be used to satisfy
consignment charges involving vendor’s commission, risk of loss and/or catalogue illustration. The Discount Certificates will expire on May 14, 2008 and cannot be redeemed subsequent to that date; however, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. The $12.5 million discount on the face value of the Discount Certificates is being amortized to interest expense over the four-year period prior to May 15, 2007, the first date at which the Discount Certificates are redeemable for cash. As of June 30, 2004, the outstanding face value of unused Discount Certificates that the Company could be required to redeem was $59.3 million and the carrying value of such Discount Certificates was $50.5 million. 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. As a result, in the third quarter of 2000, the Company recorded Special Charges of $34.1 million, which represents the present value of the fine payable. The $10.9 million discount on the amount due is being amortized to interest expense over the five-year period during which the fine is being paid. As of June 30, 2004, the Company had funded $18 million of the fine and the remaining $27 million of the fine is payable as follows: $12 million due on February 6, 2005 and $15 million due on February 6, 2006. As of June 30, 2004, the carrying
value of the fine payable to the DOJ was $24.6 million. 22 As of June 30, 2004, December 31, 2003 and June 30, 2003, Settlement Liabilities consisted of the following: June 30, December 31, June 30, (Thousands of dollars) Current: Discount Certificates (net) $ 3,200 $ 1,330 $ 13,000 DOJ antitrust fine (net) 10,331 3,951 3,795 Sub-total 13,531 5,281 16,795 Long-term: Discount Certificates (net) 47,330 49,845 37,000 DOJ antitrust fine (net) 14,311 25,653 24,642 Sub-total 61,641 75,498 61,642 Total $ 75,172 $ 80,779 $ 78,437 The current portion of the liability for the Discount Certificates is based on management’s estimate of redemptions expected during the twelve-month period after the current balance sheet date. Amounts charged to Settlement Liabilities during the six months ended June 30, 2004 were as follows: Discount DOJ Total (Thousands of dollars) Liability at January 1, 2004 $ 51,175 $ 29,604 $ 80,779 Cash payment to DOJ — (6,000 ) (6,000 ) Redemption of Discount Certificates (2,457 ) — (2,457 ) Amortization of discount 1,427 1,038 2,465 Loss on redemption of Discount Certificates 385 — 385 Liability at June 30, 2004 $ 50,530 $ 24,642 $ 75,172 13. Restructuring
Liability
During the fourth quarter of 2002, management approved plans to further restructure the Auction segment, as well as to carry out additional headcount reductions in certain corporate departments (the “2002 Restructuring Plan”). The goal of the 2002 Restructuring Plan was to improve profitability through further cost savings and other strategic actions. The 2002 Restructuring Plan has been fully implemented and the remaining liability, which is recorded within Accounts Payable and Accrued Liabilities, is expected to be funded by the end of 2004. Amounts charged to the restructuring liability through June 30, 2004 were as follows: 23 Employee Lease and Asset Other Total (Thousands of dollars) Restructuring charges $ 4,007 $ 124 $ — $ 50 $ 4,181 Cash payments (46 ) — — — (46 ) Foreign currency exchange rate changes 8 — — — 8 Liability at December 31, 2002 3,969 124 — 50 4,143 Restructuring charges 5,219 500 495 319 6,533 Asset write-offs — — (495 ) — (495 ) Cash payments (6,502 ) (621 ) — (343 ) (7,466 ) Adjustments to liability (1,471 ) (3 ) — (25 ) (1,499 ) Foreign currency exchange rate changes 311 — — — 311 Liability at December 31, 2003 1,526 — — 1 1,527 Restructuring charges 38 47 — 61 146 Cash payments (1,401 ) (47 ) — (62 ) (1,510 ) Foreign currency exchange rate changes (32 ) — — — (32 ) Liability at June 30, 2004 $ 131 $ — $ — $ — $ 131 14. Comprehensive Income (Loss) The Company’s comprehensive income (loss) includes the net income (loss) for the period, as well as other comprehensive income (loss), which consists of the change in the foreign currency translation adjustment account during the period. For the three and six months ended June 30, 2004 and 2003, comprehensive income (loss) is as follows: Three Months Ended Six Months Ended 2004 2003 2004 2003 (Thousands of dollars) Net income (loss) $ 42,477 $ 14,196 $ 79,197 ($13,424 ) Other comprehensive (loss) income (669 ) 1,149 (1,313 ) 1,791 Comprehensive income (loss) $ 41,808 $ 15,345 $ 77,884 ($11,633 ) 24 15. Stock-Based Compensation Stock Option
Plans – The Company
accounts for the 1987 Stock Option Plan and 1997 Stock Option Plan in
accordance with the provisions of Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees.”
Accordingly, compensation cost related to stock option grants to employees
has been recognized only to the extent that the fair market value of the
stock exceeds the exercise price of the stock option at the date of the
grant. The following table illustrates the effect on net income (loss)
and earnings (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation,” to
stock-based employee compensation:
Three Months Ended Six Months Ended 2004 2003 2004 2003 (Thousands of dollars, except per share data) Net income (loss), as reported $ 42,477 $ 14,196 $ 79,197 ($13,424 ) Add: Stock-based employee compensation expense included in reported net income (loss), net of tax effects 1,428 — 1,572 — Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (2,059 ) (1,981 ) (3,207 ) (4,053 ) Pro forma net income (loss) $ 41,846 $ 12,215 $ 77,562 ($17,477 ) Earnings (loss) per share: Basic earnings (loss) per share, as reported $ 0.69 $ 0.23 $ 1.29 ($0.22 ) Basic earnings (loss) per share, pro forma $ 0.68 $ 0.20 $ 1.26 ($0.28 ) Diluted earnings (loss) per share, as reported $ 0.68 $ 0.23 $ 1.27 ($0.22 ) Diluted earnings (loss) per share, pro-forma $ 0.67 $ 0.20 $ 1.25 ($0.28 ) 25 Option Exchange
Program – In February 2003, the Compensation
Committee of the Board of Directors approved an exchange offer of cash
or restricted stock under the 2003 Restricted Stock Plan for stock options
to eligible employees that held certain stock options under the Company’s
1997 Stock Option Plan (the “Exchange Offer”) and the Exchange
Offer was tendered during the first half of 2004.
The total amount of options that were cancelled as a result of the Exchange Offer was approximately 5.6 million and the number of shares of restricted stock that were issued was approximately 1.1 million shares. These shares were issued upon acceptance of the Exchange Offer at the closing market price of the Company’s Class A Common Stock on the date of issuance and are being expensed over a four-year vesting period. The total amount of the compensation expense related to the restricted stock issuance, assuming that all restricted shares vest, will be approximately $14.1 million, of which $1.9 million was recognized in the second quarter of 2004. The cash payment made in conjunction with the Exchange Offer was
approximately $2.2 million and was expensed in full upon acceptance on March 31, 2004. 16. Variable Interest Entity In December 2003, the Financial Accounting Standards Board (the “FASB”) issued a revision to FIN No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which was originally issued in January 2003. FIN 46, as revised, provides guidance on the consolidation of certain entities when control exists through other than voting (or similar) interests and was effective immediately with respect to entities created after January 31, 2003. For certain special purpose entities created prior to February 1, 2003, FIN 46, as revised, became effective for financial statements issued after December 15, 2003. FIN 46, as revised, is effective for all other entities created prior to February 1, 2003
beginning with financial statements for reporting periods ending after March 15, 2004. FIN 46, as revised, requires consolidation by the majority holder of expected losses, expected residual returns, or both of the activities of a variable interest entity (“VIE”). The Company has concluded that an entity with whom its Finance segment has outstanding loans of approximately $3.5 million and to whom the Company provides management consulting services meets the definition of a VIE under FIN 46, as revised. As primary beneficiary of the VIE, the Company was required to consolidate the entity as part of the Auction segment beginning on March 31, 2004. 26 The entity is an art gallery which is engaged in business as a broker/dealer in works of art. The Company provides management consulting services to the entity in exchange for a management fee, which is equal to 50% of the entity’s net income (excluding the management fee and certain other specified revenues and expenses). Included in the Company’s consolidated assets as of June 30, 2004 is inventory with a carrying value of approximately $3.8 million. Such inventory consists entirely of artwork and is the collateral for the $3.5 million in outstanding loans discussed above, which are eliminated in the consolidation. The Company has no equity investment in the entity. The Company accounts for its interest in the entity on a quarter lag applied on a consistent basis. As of March 31, 2004, the entity had total assets of $5.6 million, total liabilities of $4.9 million and capital of $0.7 million. 27 RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 Note 4 (“Segment Reporting”) of Notes to Consolidated Financial Statements should be read in conjunction with this discussion. Seasonality The worldwide art auction market has two principal selling seasons, spring and fall. Accordingly, first and third quarter results of the Auction segment typically reflect lower Aggregate Auction Sales (as defined below) and lower operating results than the second and fourth quarters due to the fixed nature of many of the Company’s operating expenses. (See Note 2 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”). Use of Non-GAAP Financial Measures GAAP refers to generally accepted accounting principles in the United States of America. Included in Management’s Discussion and Analysis of Results of Operations are financial measures presented in accordance with GAAP and also on a non-GAAP basis. When material, the Company excludes the impact of changes in foreign currency exchange rates when comparing current year results to the prior year. Consequently, such period-to-period comparisons are provided on a constant dollar basis by eliminating the impact of changes in foreign currency exchange rates since the prior year. Management believes the use of this non-GAAP financial measure provides a more meaningful discussion and analysis of material fluctuations in the Company’s operating results. Additionally, management utilizes this non-GAAP financial measure in analyzing its operating results. Overview In the first half of 2003, global economic uncertainties partially attributable to the impending war with Iraq had an adverse impact on the key property gathering period for the spring auction season and negatively impacted the Company’s results of operations, as discretionary sellers postponed selling plans and buyers took a more cautious approach to their collecting. Beginning in the autumn of 2003, however, as public confidence improved along with the quality and quantity of consignments around the world, the international art market recovered and the Company experienced significantly better results in 28 the fourth quarter
of 2003 and the first half of 2004 when compared to the same periods in the
prior years. Management currently expects the recovery in the international
art market to continue. Management currently
expects the recovery in the international art market to continue and is encouraged
by the level of consignments thus far for the fall auction season, which include
a number of outstanding single-owner sales. However, it is unlikely that Auction
segment results for the second half of 2004 will be at the level achieved in
the first half of the year. Aggregate Auction Sales for the second half of the
year are traditionally lower than the first half due to the timing of certain
sales in the Company's sales calendar. Additionally, we do not expect another
private sale such as the landmark private sale of the Forbes Collection of Faberge
in February 2004, or a replication of the May 2004 single-owner sale of property
of the Greentree Foundation, both as discussed in more detail below. (See statement
on Forward Looking Statements.) The Company’s pre-tax results from continuing operations for the three and six months ended June 30, 2004 and 2003 are summarized below (in thousands of dollars): Three Months Ended June 30, 2004 2003 $ Change % Change Revenues: Auction and related revenues $ 166,337 $ 107,580 $ 58,757 55 % License fee revenue — — — N/A Other revenues 3,190 2,838 352 12 % Total revenues 169,527 110,418 59,109 54 % Expenses 99,567 82,581 16,986 21 % Operating income 69,960 27,837 42,123 * Net interest expense and other (8,133 ) (6,864 ) 1,269 18 % Income from continuing operations before taxes $ 61,827 $ 20,973 $ 40,854 * Six Months Ended June 30, 2004 2003 $ Change % Change Revenues: Auction and related revenues $ 225,439 $ 145,713 $ 79,726 55 % License fee revenue 45,000 — 45,000 * Other revenues 5,520 5,897 (377 ) -6 % Total revenues 275,959 151,610 124,349 82 % Expenses 178,347 160,846 17,501 11 % Operating income (loss) 97,612 (9,236 ) 106,848 * Net interest expense and other (15,284 ) (12,992 ) 2,292 18 % Income (loss) from continuing operations before taxes $ 82,328 ($22,228 ) $ 104,556 * *
Represents a
change in excess of 100%.
The improvement in the Company’s results for the three and six months ended June 30, 2004 when compared to the prior year was due to increased profitability in the Auction segment principally resulting from a significant increase in auction sales during the spring auction season, as well as a higher level of private treaty revenues. Also favorably influencing the comparison of first half results to the prior year is a 29 $45 million one-time
license fee earned in the first quarter of 2004 in conjunction with the sale
of the Company’s domestic real estate brokerage business (see Note 3 of
Notes to Consolidated Financial Statements under Part I, Item 1, “Financial
Statements”). The overall improvement in the Company’s results for
the periods was partially offset by increased incentive bonus costs. For the six months
ended June 30, 2004, the Company’s pre-tax income from discontinued operations
was $39.3 million; a significant improvement when compared to the same period
in 2003 when the Company’s discontinued operations had pre-tax income of
approximately $1.9 million. This improvement was largely due to a pre-tax gain
of $32.3 million recognized on the sale of the Company’s discontinued domestic
real estate brokerage business. (See Note 3 of Notes to Consolidated Financial
Statements under Part I, Item 1, “Financial Statements.”) Please refer to the discussion below for a more detailed discussion of the significant factors impacting the Company’s results for the three and six months ended June 30, 2004. Sale of Sotheby’s International Realty, Inc. In the fourth quarter of 2003, the Company committed to a plan to sell its domestic real estate brokerage business, Sotheby’s International Realty, Inc. (“SIR”). On February 17, 2004, the Company consummated the sale of SIR to a subsidiary of Cendant Corporation (“Cendant”). SIR was the principal component of the Company’s former Real Estate segment. In conjunction with the sale, the Company entered into an agreement with Cendant to license the Sotheby’s International Realty trademark and certain related trademarks for an initial 50-year term with a 50-year renewal option (the “License Agreement”). The License Agreement is applicable to Canada, Israel, Mexico, the United States (the “U.S.”) and certain Caribbean countries. The total consideration paid by Cendant at closing for SIR’s company-owned real estate brokerage business and affiliate network, as well as the License Agreement and the International Options (as defined below) was $100.7 million, consisting of $98.9 million in cash and the assumption of a $1.8 million note payable. Net cash proceeds from the sale, after deducting $4.7 million in transaction costs, were $94.2 million. In addition to the consideration received at closing, the License Agreement provides for an ongoing license fee during its term 30 based on the volume of commerce transacted under the licensed trademarks. (See “Liquidity and Capital Resources” below for a discussion of the Company’s expected use of the proceeds received at closing.) The consideration received at closing was allocated among each of the following components based on a valuation of their respective fair values: (i) SIR’s company-owned real estate brokerage business and affiliate network, (ii) the License Agreement and (iii) the International Options. Based on this valuation, $55.1 million was allocated to SIR’s company-owned real estate brokerage business and affiliate network, $45 million was allocated to the License Agreement and $0.6 million was allocated to the International Options. As a result of the
sale of SIR’s company-owned real estate brokerage business and affiliate
network, the Company recognized a pre-tax gain of $32.3 million, consisting
of the $55.1 million in allocated proceeds less SIR’s closing book value
and transaction related costs. The $32.3 million pre-tax gain is recorded within
income from discontinued operations before taxes in the Company’s Consolidated
Income Statements. As a result of this gain, the Company utilized approximately
$12.7 million of the net deferred tax asset related to its net operating loss
carryforwards. The $45 million of proceeds allocated to the License Agreement represents a one-time non-refundable upfront license fee received by the Company as consideration for entering into the License Agreement. The Company has no significant future performance obligations associated with the non-refundable upfront license fee. As a result, the Company recognized license fee revenue of $45 million in the first quarter of 2004, which is classified within the continuing operations section of the Consolidated Income Statements. This classification is consistent with how the Company will report ongoing license fees earned during the term of the License Agreement, as well as license fee revenue earned in the future from other potential licensing opportunities. As a result of this one-time license fee, the Company utilized approximately $15 million of the net deferred tax asset related to its net operating loss
carryforwards during the first quarter of 2004. The Company incurred transaction costs of approximately $2.1 million related to the consummation of the License Agreement in the first quarter of 2004, which are recorded within general and administrative expenses in the Consolidated Income Statements. 31 The other non-U.S. offices of the Company’s real estate brokerage business, which are not significant to the Company’s overall operations, continue to operate as Sotheby’s International Realty under current management. Accordingly, the assets and liabilities of such offices are not classified as held for sale in the Consolidated Balance Sheets, and their operating results are not reported as discontinued operations in the Consolidated Income Statements. Cendant has options to acquire most of these offices and a license to use the related trademarks in other countries outside the U.S. during the five-year period following February 17, 2004 for a nominal amount (the “International Options”). The fair value of these options is being marked to market on a quarterly basis with any changes in fair value recorded in the Consolidated Income Statements. For the three and six months ended June 30, 2004, there
was no change in the fair value of the International Options. (See Note 3 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) 32 Revenues For the three and six months ended June 30, 2004 and 2003, revenues from continuing operations consisted of the following (in thousands of dollars): Three Months Ended June 30, 2004 2003 $ Change % Change Auction and related revenues: Auction commission revenues $ 149,097 $ 96,723 $ 52,374 54 % Auction expense recoveries 6,978 5,279 1,699 32 % Private treaty revenues 3,054 1,523 1,531 * Principal activities 2,834 658 2,176 * Catalogue subscription revenues 2,622 2,310 312 14 % Other 1,752 1,087 665 61 % Total auction and related revenues 166,337 107,580 58,757 55 % License fee revenue — — — N/A Other revenues: Finance segment revenues 1,865 1,290 575 45 % Other 1,325 1,548 (223 ) -14 % Total other revenues 3,190 2,838 352 12 % Total revenues $ 169,527 $ 110,418 $ 59,109 54 % Key performance indicators: Aggregate Auction Sales ** $ 1,120,083 $ 580,084 $ 539,999 93 % Net Auction Sales *** $ 972,867 $ 499,560 $ 473,307 95 % Auction commission margin **** 15.3 % 19.4 % N/A -21 % Average loan portfolio $ 75,252 $ 88,943 ($13,691 ) -15 % Six
Months Ended June 30, 2004 2003 $
Change %
Change Auction
and related revenues: Auction
commission revenues $ 187,682 $ 129,004 $ 58,678 45 % Auction
expense recoveries 8,581 7,079 1,502 21 % Private
treaty revenues 16,316 2,759 13,557 * Principal
activities 5,069 449 4,620 * Catalogue
subscription revenues 4,765 4,160 605 15 % Other 3,026 2,262 764 34 % Total
auction and related revenues 225,439 145,713 79,726 55 % License
fee revenue 45,000 — 45,000 * Other
revenues: Finance
segment revenues 3,081 2,777 304 11 % Other 2,439 3,120 (681 ) -22 % Total
other revenues 5,520 5,897 (377 ) -6 % Total
revenues $ 275,959 $ 151,610 $ 124,349 82 % Key
performance indicators: Aggregate
Auction Sales ** $ 1,353,280 $ 781,006 $ 572,274 73 % Net
Auction Sales *** $ 1,173,673 $ 672,815 $ 500,858 74 % Auction
commission margin **** 16.0 % 19.2 % N/A -17 % Average
loan portfolio $ 85,149 $ 91,893 ($6,744 ) -7 % 33 Legend: * Represents a change in excess of 100%. ** Represents the hammer price of property sold at auction plus buyer’s premium. *** Represents the hammer price of property sold at auction. **** Represents total auction commission revenues as a percentage of Net Auction Sales. Auction and Related Revenues Auction and related revenues increased $58.8 million, or 55%, to $166.3 million and $79.7 million, or 55%, to $225.4 million for the three and six months ended June 30, 2004, respectively, when compared to the same periods in the prior year. For the three and six months ended June 30, 2004, the favorable impact of foreign currency translations on auction and related revenues was $7.2 million and $10.8 million, respectively. Excluding the impact of favorable foreign currency translations, auction and related revenues increased $51.6 million, or 48%, to $159.1 million and $68.9 million, or 47%, to $214.6 million for the three and six months ended June 30, 2004, respectively. The increased level of auction and related revenues during the periods was principally due to higher auction commission revenues and, to a lesser extent, increased private treaty revenues and principal activities, as explained in more detail below. Auction Commission Revenues – Auction commission revenues increased $52.4 million, or 54%, to $149.1 million and $58.7 million, or 45%, to $187.7 million for the three and six months ended June 30, 2004, respectively, when compared to the same periods in the prior year. For the three and six months ended June 30, 2004, the favorable impact of foreign currency translations on auction commission revenues was $6.4 million and $9.6 million, respectively. Excluding the impact of favorable foreign currency translations, auction commission revenues increased $46 million, or 48%, to $142.7 million and $49.1 million, or 38%, to $178.1 million for the three and six months ended June 30, 2004, respectively. The higher level of auction commission revenues during the periods was largely attributable to a significant increase in auction sales; partially offset by a decrease in auction commission margin. See “Aggregate Auction Sales” and “Auction Commission Margin” below for a detailed discussion of these key performance indicators. 34 Private Treaty Revenues – For the three and six months ended June 30, 2004, private treaty revenues increased $1.5 million and $13.6 million, respectively, when compared to the same periods in the prior year. The higher level of private treaty activity for these periods reflects the traditionally variable nature of such sales, as well as management’s expanded efforts in this area. Most significantly, results for the first half of 2004 include the landmark private sale of the Forbes Collection of Faberge in February 2004. Also favorably influencing the comparison of private treaty revenues to the prior year is the May 2004 sale of a collection of Old Master Drawings to the Louvre, as well as the private sale of Raphael’s “Madonna of the Pinks” to the National Gallery in London and the private sales from a collection of masterpiece sculpture that was on exhibit at the exclusive Isleworth Club in Florida, both of which occurred in the first quarter of 2004. Principal Activities – For the three and six months ended June 30, 2004, principal activities increased $2.2 million and $4.6 million, respectively, when compared to the same periods in the prior year. These increases were due, in part, to a $1.8 million gain recognized in May 2004 on the sale of a painting purchased by the Company for investment purposes, for which there was no comparable event in the prior year, as well as an increased level of guarantees issued for the spring auction season and a higher degree of success for such guarantees when compared to the prior year. Also favorably impacting the comparison of first half results to the prior year is a $2.2 million gain recognized in January 2004 on the sale of property purchased by an art dealer through an unsecured loan from the Company, for which there was no comparable event in the prior year. In certain situations, property
purchased pursuant to such unsecured loans is sold by the dealer or at auction with any net profit or loss shared by the Company and the dealer. The level of principal activities in a period is largely attributable to the economic environment, the supply of quality property available for investment and resale and the demand by buyer’s for such property, as well as the level of auction guarantees issued by the Company. Aggregate Auction Sales – Aggregate Auction Sales increased $540 million, or 93%, to $1,120.1 million and $572.3 million, or 73%, to $1,353.3 million for the three and six months ended June 30, 2004, respectively, when compared to the same periods in the prior year. For the three and six months ended June 30, 2004, the favorable impact of foreign currency translations on Aggregate Auction Sales was $38.2 million and $58.5 million, respectively. Excluding the impact of 35 favorable foreign currency translations, Aggregate Auction Sales increased $501.8 million, or 87%, to $1,081.9 million and $513.8 million, or 66%, to $1,294.8 million for the three and six months ended June 30, 2004, respectively. The overall increase in Aggregate Auction Sales for the three and six months ended June 30, 2004, was principally the result of an improving economy and art market. Specifically, results for the periods include approximately $213.1 million in Aggregate Auction Sales attributable to the single-owner sale of property of the Greentree Foundation, which included the record breaking sale of Picasso’s “Garçon à la Pipe” for $104.2 million and for which there was no comparable sale in the prior year. Results for the period also significantly benefited from a $90.2 million, or 72%, increase in Aggregate Auction Sales from the various-owner spring Impressionist and Contemporary sales in New York. In 2003, such sales produced dramatically lower results when compared to prior years due in part to economic uncertainties related to the build up to the war in Iraq. The comparison to the prior year was also
favorably impacted by a $53.7 million, or 56%, improvement in the June Impressionist and Contemporary sales in London, as well as significantly better second quarter results generated by the Company’s salesrooms in Hong Kong, Geneva, Italy and Amsterdam. Auction Commission
Margin – For the three and six months ended June
30, 2004, the Company experienced decreases of 21% and 17%, respectively, in
auction commission margin when compared to the same periods in the prior year.
These decreases were principally due to the fact that a significant portion
of the increase in auction sales was at the high-end of the Company’s business
where auction commission margins are traditionally lower. Specifically, several
of the Impressionist and Contemporary collections offered during the spring
season carried lower auction commission margins than comparable sales in the
recent past. This is primarily due to the competitive environment, as well as
the Company’s decision to reduce its auction guarantee risk through sharing
arrangements with partners, whereby the Company reduces its financial exposure
under the auction guarantee in exchange for sharing in the auction commissions
with the partner. Both of these factors significantly contributed to a $19.3
million increase in auction commissions owed by the Company as a result of sharing
arrangements with unaffiliated third parties. 36 License Fee Revenue In the first quarter of 2004, the Company recognized income of $45 million related to a one-time license fee received as consideration for entering into an agreement with Cendant to license the Sotheby’s International Realty trademark and certain related trademarks. (See “Sale of Sotheby’s International Realty, Inc.” above and Note 3 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) Other Revenues For the three months ended June 30, 2004, other revenues increased $0.4 million, or 12%, when compared to the same period in the prior year. This increase was principally due to a $0.6 million, or 45%, increase in Finance segment revenues, as discussed in more detail below; partially offset by a reduction in art education revenues resulting from the sale of the Company’s United Kingdom (“U.K.”) art education business in the third quarter of 2003. For the six months ended June 30, 2004, other revenues decreased $0.4 million, or 6%, when compared to the same period in the prior year. This decrease was principally due to a reduction in art education revenues, as explained above, partially offset by a $0.3 million, or 11%, increase in Finance segment revenues, as discussed in more detail below. Finance Segment Revenues – The overall increase in Finance segment revenues for the periods was principally due to $1 million in interest income recognized in the second quarter of 2004 as a result of the collection of a disputed client loan, for which there was no comparable event in the prior year; partially offset by a decrease in the average loan portfolio balance. See “Average Loan Portfolio” below for a detailed discussion of this key performance indicator. Average Loan Portfolio
– The Finance segment’s average loan portfolio balance decreased $13.7
million, or 15%, and $6.7 million, or 7%, for the three and six months ended
June 30, 2004, respectively, when compared to the same periods in the prior
year. These decreases were due in part to the limited availability of capital
to fund new loans prior to the Company entering into its new senior secured
credit agreement with General Electric Capital Corporation on March 4, 2004.
As discussed in more detail below under “Liquidity and Capital Resources,”
the Company’s present intention is to expand the Finance segment’s
loan portfolio. 37 (See statement on
Forward Looking Statements.) Expenses For the three and six months ended June 30, 2004 and 2003, expenses from continuing operations consisted of the following (in thousands of dollars): Three Months Ended June 30, 2004 2003 $ Change % Change Direct costs of services $ 19,276 $ 14,938 $ 4,338 29 % Salaries and related costs 49,842 36,042 13,800 38 % General and administrative expenses 24,046 22,336 1,710 8 % Depreciation and amortization expense 5,604 6,257 (653 ) -10 % Retention costs — 2,865 (2,865 ) -100 % Net restructuring charges 27 (450 ) 477 * Special charges 772 593 179 30 % Total expenses $ 99,567 $ 82,581 $ 16,986 21 % Six Months Ended June 30, 2004 2003 $ Change % Change Direct costs of services $ 26,470 $ 21,665 $ 4,805 22 % Salaries and related costs 89,081 69,575 19,506 28 % General and administrative expenses 49,571 44,027 5,544 13 % Depreciation and amortization expense 11,510 12,518 (1,008 ) -8 % Retention costs 285 6,344 (6,059 ) -96 % Net restructuring charges 146 5,341 (5,195 ) -97 % Special charges 1,284 1,376 (92 ) -7 % Total expenses $ 178,347 $ 160,846 $ 17,501 11 % * Represents a change in excess of 100%. Direct Costs of Services Direct costs of services (consisting largely of corporate marketing and sale marketing expenses, as well as catalogue production and distribution costs) increased $4.3 million, or 29%, to $19.3 million and $4.8 million, or 22%, to $26.5 million for the three and six months ended June 30, 2004, respectively, when compared to the same periods in the prior year. For the three and six months ended June 30, 2004, the unfavorable impact of foreign currency translations on direct costs was $0.8 million and $1.4 million, respectively. Excluding the impact of unfavorable foreign currency translations, direct costs increased $3.5 million, or 23%, to $18.5 million and $3.4 million, or 16%, to $25.1 million for the three and six months ended June 30, 2004, respectively. 38 The increased level of direct costs is consistent with the higher level of Aggregate Auction Sales and private treaty activity during the three and six months ended June 30, 2004. In particular, direct costs for the second quarter of 2004 include approximately $1.2 million in catalogue production, advertising and promotional costs related to the single-owner sale of property from the Greentree Foundation, for which there was no comparable sale in the prior year. The overall increase in direct costs for the first half of the year was partially offset by approximately $0.9 million in cost reductions achieved as a result of the elimination of direct costs associated with the Company’s former e-commerce and U.K. art education activities. Salaries and Related Costs For the three and six months ended June 30, 2004 and 2003, salaries and related costs consisted of the following: Three Months Ended June 30, 2004 2003 $ Change % Change Full-time salaries $ 24,247 $ 24,553 ($306 ) -1 % Employee benefits 4,173 3,656 517 14 % Payroll taxes 3,395 2,681 714 27 % Option Exchange 1,944 — 1,944 * Incentive bonus costs 12,697 1,889 10,808 * Other 3,386 3,263 123 4 % Total salaries and related costs $ 49,842 $ 36,042 $ 13,800 38 % Six Months Ended June 30, 2004 2003 $ Change % Change Full-time salaries $ 49,338 $ 49,083 $ 255 1 % Employee benefits 8,791 7,518 1,273 17 % Payroll taxes 6,362 5,362 1,000 19 % Option Exchange 4,094 — 4,094 * Incentive bonus costs 14,122 2,144 11,978 * Other 6,374 5,468 906 17 % Total salaries and related costs $ 89,081 $ 69,575 $ 19,506 28 % * Represents a change in excess of 100%. Salaries and related costs increased $13.8 million, or 38%, to $49.8 million, and $19.5 million, or 28%, to $89.1 million for the three and six months ended June 30, 2004, respectively, when compared to the same periods in the prior year. The unfavorable impact of foreign currency translations on salaries and related costs was approximately $1.9 million and $4.5 million for the three and six months ended June 30, 2004, respectively. Excluding the impact of unfavorable foreign currency 39 translations, salaries and related costs increased $11.9 million, or 33%, to $47.9 million and $15.0 million, or 22%, to $84.6 million. These increases were principally due to significantly higher incentive bonus costs and, to a lesser extent, the Company’s option exchange program and increased costs for employee benefits and payroll taxes; partially offset by lower full-time salaries (excluding the impact of unfavorable foreign currency translations). See discussion below for a more detailed explanation of each factor contributing to the variances versus the prior year. Incentive Bonus Costs – For the three and six months ended June 30, 2004, incentive bonus costs increased $10.8 million and $12.0 million, respectively, when compared to the same periods in the prior year. The significant increase in incentive bonus costs is consistent with the Company’s substantial improvement in second quarter results, as well as performance-based compensation awarded principally in the first quarter of 2004 in connection with the high level of private treaty transactions during the period. Option Exchange Program - In February 2003, the Compensation Committee of the Board of Directors approved an exchange offer of cash or restricted stock under the 2003 Restricted Stock Plan for stock options to eligible employees that held certain stock options under the Company’s 1997 Stock Option Plan (the “Exchange Offer”) and the Exchange Offer was tendered during the first half of 2004. The total amount of options that were cancelled as a result of the Exchange Offer was approximately 5.6 million and the number of shares of restricted stock that were issued was approximately 1.1 million shares. These shares were issued upon acceptance of the Exchange Offer at the closing market price of the Company’s Class A Common Stock on the date of issuance and are being expensed over a four-year vesting period. The total amount of the compensation expense related to the restricted stock issuance, assuming that all restricted shares vest, will be approximately $14.1 million, of which $1.9 million was recognized in the second quarter of 2004. The cash payment made in conjunction with the Exchange Offer was approximately $2.2 million and was expensed in full upon acceptance on March 31, 2004. Employee Benefits – For the three and six months ended June 30, 2004, employee benefits increased $0.5 million, or 14%, and $1.3 million, or 17%, respectively, when compared to the same periods in the prior year. The higher level of employee benefits was due in part to increases of $0.4 million and $0.8 million in costs related to the Company’s defined benefit pension plan for U.K. employees for the three and six months 40 ended June 30, 2004, respectively, when compared to the same periods in the prior year (see Note 8 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”). Also unfavorably impacting the comparison to the prior year are $0.6 million in severance costs incurred in the first quarter of 2004 related to headcount reductions in Continental Europe. These increases were partially offset by an overall lower level of employee benefits as a result of headcount reductions subsequent to March 31, 2003. Full-Time Salaries – For the three months ended June 30, 2004, full-time salaries decreased $0.3 million, or 1%, to $24.2 million, when compared to the same period in the prior year. For the three months ended June 30, 2004, the unfavorable impact of foreign currency translations on full-time salaries was $1.1 million. Excluding the impact of unfavorable foreign currency translations, full-time salaries decreased $1.4 million, or 6%, to $23.1 million. For the six months ended June 30, 2004, full-time salaries increased $0.3 million to $49.3 million, when compared to the same period in the prior year. For the six months ended June 30, 2004, the unfavorable impact of foreign currency translations on full-time salaries was $2.8 million. Excluding the impact of unfavorable foreign currency translations, full-time salaries decreased $2.5 million, or 5%, to $46.5 million. The lower level of full-time salaries was principally due to savings achieved as a result of headcount reductions subsequent to March 31, 2003. General and Administrative Expenses General and administrative expenses increased $1.7 million, or 8%, to $24.0 million, and $5.5 million, or 13%, to $49.6 million for the three and six months ended June 30, 2004, respectively, when compared to the same periods in the prior year. The unfavorable impact of foreign currency translations on general and administrative expenses was approximately $1.2 million and $2.7 million for the three and six months ended June 30, 2004, respectively. Excluding the impact of unfavorable foreign currency translations, general and administrative expenses increased $0.5 million, or 2%, to $22.8 million and $2.8 million, or 6%, to $46.9 million for the three and six months ended June 30, 2004, respectively. 41 The overall increase
in general and administrative expenses was largely due to higher professional
fees primarily resulting from $2.1 million of transaction costs incurred in
the first quarter of 2004 related to the consummation of the License Agreement
(see “Sale of Sotheby’s International Realty, Inc.” above and
Note 3 of Notes to Consolidated Financial Statements under Part I, Item 1,
“Financial Statements”), as well as professional fees incurred during
the first half of 2004 related to the Company’s ongoing implementation
of Section 404 of the Sarbanes-Oxley Act. Also unfavorably impacting the comparison
to the prior periods were increases in non-recurring client goodwill gestures
and authenticity claims of $1.6 million and $1.5 million for the three and six
months ended June 30, 2004, respectively. Additionally, for the three and six
months ended June 30, 2004, the Company experienced a slight increase in travel
and entertainment costs principally as a result of a higher level of travel
in conjunction with the successful spring auction season. The overall increase in general and administrative expenses for the three and six months ended June 30, 2004 was partially offset by an insurance recovery of approximately $4 million related to the collateral underlying a loan for which the Company recorded a loan loss reserve of $9 million in the fourth quarter of 2000 and subsequently wrote off in the first quarter of 2001. Also favorably impacting the comparison of general and administrative expenses to the prior year are cost savings achieved as a result of the discontinuation of the Company’s former e-commerce and U.K. art education activities. Depreciation and Amortization Expense Depreciation and amortization expense decreased $0.7 million, or 10%, to $5.6 million and $1.0 million, or 8%, to $11.5 million for the three and six months ended June 30, 2004, respectively, when compared to the same periods in the prior year principally due to fixed assets that became fully depreciated subsequent to the first quarter of 2003. This decrease is consistent with the lower level of capital spending by the Company in recent years. 42 Retention Costs In 2001 and 2002, the Company implemented retention programs to certain key employees upon fulfillment of full-time employment through certain dates. All amounts related to the retention programs were amortized over the related contractual service periods. For the six months ended June 30, 2004, the Company recognized retention costs of $0.3 million. For the three and six months ended June 30, 2003, the Company recognized retention costs of $2.9 million and $6.3 million, respectively. The final cash payment of $0.4 million due under the retention programs was made in January 2004 and, as a result, the retention programs have concluded. Net Restructuring Charges During the fourth
quarter of 2002, management approved plans to further restructure the Auction
segment, as well as to carry out additional headcount reductions in certain
corporate departments (the “2002 Restructuring Plan”). The goal of
the 2002 Restructuring Plan was to improve profitability through further cost
savings and other strategic actions, as described below. Net annual cost savings
achieved as a result of the 2002 Restructuring Plan were approximately $17 million.
See below for a more detailed discussion of these cost savings. In December 2002, the Company committed to the termination of approximately 60 employees as a result of the 2002 Restructuring Plan and recorded restructuring charges of $4.2 million in the fourth quarter of 2002, principally consisting of $4.0 million in employee termination benefits, as well as $0.2 million in lease termination and other costs. These headcount reductions impacted the Auction segment primarily in North America, as well as certain corporate departments. Estimated annual savings achieved in salaries and related costs as a result of the headcount reductions and attrition were approximately $5 million. In February 2003, as part of the 2002 Restructuring Plan, the Company and eBay entered into an agreement pursuant to which separate online auctions on sothebys.com were discontinued on April 30, 2003. As a result, the Company recorded restructuring charges of approximately $2.0 million in the first quarter of 2003 consisting of approximately $1.0 million for employee termination benefits, $0.5 million for a minimum guaranteed fee owed to eBay for which the Company would receive no future economic benefit and approximately $0.5 million for impairment losses related to certain technology assets. These actions resulted in estimated net annual cost savings of approximately $8 million, which 43 have been achieved principally through lower salaries and related costs resulting from the termination of approximately 30 employees and through attrition. Additionally, savings have been achieved in direct costs of services and general and administrative expenses. During 2003, as part of the 2002 Restructuring Plan, management committed to approximately 40 additional headcount reductions in Europe in the Auction segment. As a result, the Company recorded restructuring charges of $3.7 million and $0.5 million in the first and fourth quarters of 2003, respectively, for employee termination benefits. Additionally, in the first quarter of 2004, the Company recorded restructuring charges of $0.1 million for employee termination benefits, lease termination costs and other incremental costs incurred in the first quarter of 2004 related to this phase of the 2002 Restructuring Plan. These actions resulted in estimated annual cost savings of approximately $4 million, which have been achieved principally through lower salaries and related costs. During the first quarter of 2003, as part of the 2002 Restructuring Plan, the Company entered into an agreement to outsource the operation of its mainframe computer systems. In conjunction with the decision to outsource such operations, management committed to the termination of six employees in the corporate Information Technology department and, as a result, the Company recorded restructuring charges of approximately $0.1 million in the first quarter of 2003 for employee termination benefits. These actions have resulted in estimated net annual cost savings of approximately $0.3 million. Such savings, have been achieved primarily through lower salaries and related costs. (See Note 13 of Notes
to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) Special Charges For the three and six months ended June 30, 2004 and 2003, the Company recorded the following Special Charges related to the investigation by the Antitrust Division of the United States Department of Justice (the “DOJ”), other governmental investigations and the related civil antitrust litigation: 44 Three
Months Ended Six
Months Ended 2004 2003 2004 2003 (Thousands
of dollars) Legal
and other professional fees $ 330
$ 44
$ 480
$ 552
Settlement
administration costs 256
549
419
574
Loss
on redemption of Discount Certificates 186
—
385
—
Settlement
of U.S. Antitrust opt out claim —
—
—
250
Total $ 772
$ 593
$ 1,284
$ 1,376
(See Note 12 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements,” for information on special charges.) Net Interest Expense For the three months ended June 30, 2004, net interest expense increased $1.0 million, or 15%, compared to the same period in 2003. This increase was primarily the result of the amortization of $0.7 million in interest expense related to the vendor’s commission discount certificates issued as part of the U.S. Antitrust Litigation settlement in May 2003 (see Note 12 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”). Also unfavorably influencing the comparison to the prior year is $0.7 million in interest income related to a delinquent client account that was determined to be collectible in the second quarter of 2003, for which there was no comparable event in the current year. For the six months
ended June 30, 2004, net interest expense increased $2.3 million, or 17%, compared
to the same period in the prior year. This increase was primarily due to $1.8
million in additional interest expense related to the York Property capital
lease obligation, which was initially recorded in February 2003, as well as
$1.4 million in interest expense related to the vendor’s commission discount
certificates issued as part of the U.S. Antitrust Litigation settlement in May
2003 (see Note 12 of Notes to Consolidated Financial Statements under Part I,
Item 1, “Financial Statements”). Also unfavorably influencing the
comparison to the prior year is $0.7 million in interest income related to a
delinquent client account that was determined to be collectible in the second
quarter of 2003, for which there was no comparable event in the current year.
These increases were partially offset by a $1.3 million reduction in interest
expense associated with the Company’s credit facility principally as a
result of decreased average outstanding borrowings and lower amortization of
credit facility fees. 45 (See Note 7 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) Income Tax Expense (Benefit) For the three and
six months ended June 30, 2004, the effective tax rate related to continuing
operations was approximately 34%, when compared to an effective tax rate of
37% and 35%, respectively, for the three and six months ended June 30, 2003.
The decreases in the effective tax rate resulted primarily from a difference
in foreign tax rates, as well as changes during the periods in the difference
between income or loss calculated for tax purposes and income or loss calculated
according to generally accepted accounting principles. FACILITIES REVIEW Management remains committed to further reducing costs. Accordingly, the Company continues to analyze, and when sensible, implement solutions that can bring efficiencies and cost savings to its business. For example, management is continuing to analyze its current premises, in particular the York Property, for both its current and future business needs in an effort to reduce its overhead costs. FINANCIAL CONDITION AS OF JUNE 30, 2004 This discussion should be read in conjunction with the Company’s Consolidated Statements of Cash Flows (see Part I, Item 1, “Financial Statements.”) For the six months ended June 30, 2004, total cash and cash equivalents related to the Company’s continuing and discontinued operations increased approximately $81.8 million primarily due to the factors discussed below. Net cash provided
by operations was approximately $32.2 million during the first half of 2004
and was principally due to the Company’s net income from continuing operations.
Also influencing cash provided by operations during the period was a $253.6
million increase in accounts receivable, partially offset by a $202.7 million
increase in due to consignors, both principally resulting from auction sales
occurring during the spring auction season. Additionally, during the first half
of 2004, prepaid expenses and other current assets and accounts payable and
accrued liabilities increased $20.9 million and $16.0 million, respectively.
The increase in prepaid expenses and other current assets was principally attributable
to a $12.5 million receivable due from the Company’s partner in an auction
guarantee. Also contributing to the increase in prepaid expenses and other current
assets was a $4 million insurance recovery accrued during the second quarter
of 2004, as discussed in more detail above in the discussion on “General
and Administrative Expenses.” The increase in accounts payable and accrued
liabilities was principally attributable to a higher accrual of incentive bonus
costs related to the improvement in the Company’s second quarter results. Net cash provided
by investing activities was approximately $66.8 million during the first half
of 2004 and was principally due to the collection of maturing client loans during
the first half of 2004, as well as the proceeds received from the sale of the
Company’s domestic real estate brokerage business on February 17, 2004
(see “Sale of Sotheby’s International Realty, Inc.” above and
Note 3 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial
Statements”). These investing cash inflows were partially offset by the
funding of consignor advances during the period. 46 Net cash used by financing activities was approximately $17.4 million during the six months ended June 30, 2004 and was principally due to the net repayment of credit facility borrowings. OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS The following table summarizes the Company’s material contractual obligations and commitments as of June 30, 2004. Payments Due by Period Total Less Than 1 to 3 3 to 5 After (Thousands of dollars) Long-term debt (1): Principal payments $ 100,000 $ — $ — $ 100,000 $ — Interest payments 33,802 6,875 13,750 13,177 — Sub-total 133,802 6,875 13,750 113,177 — Other commitments: York Property capital lease 415,971 18,025 37,920 39,224 320,802 Operating lease obligations 86,766 14,384 22,391 15,067 34,924 DOJ antitrust fine (2) 27,000 12,000 15,000 — — Auction guarantees (3) 6,500 6,500 — — — Employment agreements (4) 6,750 3,375 3,375 — — Sub-total 542,987 54,284 78,686 54,291 355,726 Total $ 676,789 $ 61,159 $ 92,436 $ 167,468 $ 355,726 (1) Represents the aggregate outstanding principal and semi-annual interest payments due on the Company’s long-term debt. (See Note 7 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) (2) Represents the remaining fine payable to the DOJ. (See Note 12 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) (3) On certain occasions, the Company will guarantee to the consignor a minimum price in connection with the sale of property at auction. The Company must perform under its guarantee only in the event that the property sells for less than the minimum price and, therefore, the Company must pay the difference between the sale price at auction and the amount of the guarantee. If the property does not sell, the amount of the guarantee must be paid, but the Company has the right to recover such amount through the future sale of the property. (See Note 11 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) (4) Represents the remaining commitment for future salaries related to employment agreements with a number of employees, excluding incentive bonuses. (See Note 10 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) 47 The vendor’s commission discount certificates (the “Discount Certificates”) that were distributed as part of the U.S. Antitrust Litigation settlement (see Note 12 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”) are fully redeemable in connection with any auction that is conducted by the Company or Christie’s International, PLC in the U.S. or the U.K. The Discount Certificates may be used to satisfy consignment charges involving vendor’s commission, risk of loss and/or catalogue illustration. The Discount Certificates will expire on May 14, 2008 and cannot be redeemed subsequent to that date; however, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. As of June 30, 2004, the outstanding face value of unused Discount Certificates that the Company could be required to
redeem was approximately $59.3 million. Additionally, in certain situations, the Company makes short-term commitments to consignors to extend additional credit. However, potential consignor advances related to such commitments are subject to certain limitations and conditions. The total amount of such commitments was approximately $10.5 million as of June 30, 2004. (See Notes 5 and 10 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) DERIVATIVE INSTRUMENTS The Company utilizes forward exchange contracts to manage exposures related to foreign currency risks, which primarily arise from short-term foreign currency denominated intercompany balances. Generally, such intercompany balances are centrally funded and settled through the Company’s global treasury function. The Company’s objective for holding such derivative instruments is to minimize foreign currency risks using the most effective methods to eliminate or reduce the impacts of these exposures. The forward exchange contracts entered into by the Company are used as economic cash flow hedges of the Company’s exposure to short-term foreign currency denominated intercompany balances. Such forward exchange contracts are typically short-term with settlement dates no more than one month from their inception. These contracts are not designated as hedging instruments under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and are recorded in the Company’s Consolidated Balance Sheets at fair value, which is based on referenced market rates. Changes in the fair value of the Company’s forward exchange contracts are recognized currently in earnings and are 48 generally offset by the revaluation of the underlying intercompany balances in accordance with SFAS No. 52, “Foreign Currency Translation.” As of June 30, 2004
and 2003, the assets relating to the Company’s forward exchange contracts
were approximately $28,000 and $38,000, respectively. As of December 31, 2003,
the Consolidated Balance Sheets included an asset of approximately $0.3 million
relating to the Company’s forward exchange contracts. These assets are
recorded within prepaid expenses and other current assets and reflect the fair
value of the outstanding forward exchange contracts. (See Note 9 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) CONTINGENCIES See Notes 10, 11 and
12 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial
Statements” for information on contingencies. LIQUIDITY AND CAPITAL RESOURCES As discussed in more
detail above, on February 17, 2004, the Company consummated the sale of its
domestic real estate brokerage business and received net cash proceeds of approximately
$94.2 million. (See “Sale of Sotheby’s International Realty, Inc.”
above and Note 3 of Notes to Consolidated Financial Statements under Part I,
Item 1, “Financial Statements.”) On March 4, 2004, the Company used
existing cash balances to repay the remaining $20 million in borrowings outstanding
under the senior secured term facility of its former credit agreement (the “Amended
and Restated Credit Agreement”). Additionally, on March 4, 2004, the Company
entered into a new senior secured credit agreement with General Electric Capital
Corporation (the “GE Capital Credit Agreement”). The GE Capital Credit
Agreement is available through March 4, 2007 and provides for borrowings of
up to $200 million provided by an international syndicate of lenders. Borrowings under the GE Capital Credit Agreement are available for the funding of the Company’s ordinary working capital requirements and general corporate needs. The Company paid commitment and arrangement fees of $3.0 million related to the GE Capital Credit Agreement, which are being amortized to interest expense over the three-year term of the agreement. 49 The Company’s obligations under the GE Capital Credit Agreement are secured by substantially all of the assets of the Company, as well as the assets of its subsidiaries in the U.S. and the U.K. The GE Capital Credit Agreement also contains financial covenants requiring the Company to not exceed $10 million in annual capital expenditures and to have a quarterly fixed charge coverage ratio of not less than 1.0. The financial covenant relating to capital expenditures is first effective for the year ending December 31, 2004, while the financial covenant relating to the fixed charge coverage ratio tests was first effective for the quarter ended June 30, 2004. The GE Capital Credit Agreement also has a covenant that prohibits the Company from making dividend payments. The Company is in compliance with its covenants. At the option of the Company, borrowings under the GE Capital Credit Agreement generally bear interest equal to: (i) 1.25% plus the higher of the Prime Rate or the Federal Funds Rate plus 0.5%, or (ii) LIBOR plus 2.75%. Beginning on March 31, 2005, the applicable interest rate charged for borrowings under the GE Capital Credit Agreement may be adjusted up or down depending on the Company’s performance under the quarterly fixed charge coverage ratio tests. As of June 30, 2004, the Company had no outstanding borrowings under the GE Capital Credit Agreement. The Company generally
relies on operating cash flows supplemented by borrowings to meet its liquidity
requirements. With the cash proceeds received upon the consummation of the sale
of SIR and borrowings available under the GE Capital Credit Agreement, the Company
has considerably more liquidity and financial flexibility than it has had in
the recent past. It is the Company’s present intention to use this additional
liquidity to expand its loan portfolio. (See statement on Forward Looking Statements.) The Company currently believes that operating cash flows, current cash balances and borrowings available under the GE Capital Credit Agreement will be adequate to meet its short-term and long-term commitments, operating needs and capital requirements through March 4, 2007. The Company’s
short-term operating needs and capital requirements include peak seasonal working
capital requirements, other short-term commitments to consignors, the funding
of the Company’s client loan portfolio and the funding of capital expenditures,
as well as the short-term commitments to be funded prior to July 1, 2005 included
in the table of contractual obligations above. 50 The Company’s
long-term operating needs and capital requirements include the potential funding
of the Company’s client loan portfolio and the funding of capital expenditures
beyond the next twelve months and through March 4, 2007, as well as the funding
of the Company’s long-term contractual obligations and commitments included
in the table of contractual obligations above through March 4, 2007. In addition to the short-term and long-term operating needs and capital requirements described above, the Company is obligated to fund the redemption of the Discount Certificates distributed as part of the U.S. Antitrust Litigation settlement (see Note 11 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”). As discussed above, the Discount Certificates are fully redeemable in connection with any auction that is conducted by the Company or Christie’s in the U.S. or the U.K. The Discount Certificates may be used to satisfy consignment charges involving vendor’s commission, risk of loss and/or catalogue illustration. The Discount Certificates will expire on May 14, 2008 and cannot be redeemed subsequent to that date; however, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. As of June 30,
2004, the outstanding face value of unused Discount Certificates that the Company could be required to redeem was approximately $59.3 million. FACTORS AFFECTING OPERATING RESULTS AND LIQUIDITY Operating results from the Company’s Auction and Finance segments, as well as the Company’s liquidity, are significantly influenced by a number of factors, many of which are not within the Company’s control. These factors, which are not ranked in any particular order, include: • The overall strength of the international economy and financial markets and, in particular, the economies of the U.S., the U.K., and the major countries or territories of Continental Europe and Asia (principally Japan and Hong Kong); • Interest rates, particularly with respect to the Finance segment’s client loan portfolio and the Company’s credit facility borrowings; • The impact of political conditions in various nations on the international economy and financial markets; 51 • Government laws and regulations which the Company is subject to, including, but not limited to, import and export regulations, cultural patrimony laws and value added sales taxes; • The effects of foreign currency exchange rate movements; • The seasonality of the Company’s auction business; • Competition with other auctioneers and art dealers, specifically in relation to the following factors: (a) the level of expertise of the dealer or auction house with respect to the property, (b) the extent of the prior relationship, if any, between the seller and the firm, (c) the reputation and historic level of achievement by a firm in attaining high sale prices in the property’s specialized category, (d) the breadth of staff expertise, (e) the desire for privacy on the part of sellers and buyers, (f) the amount of cash offered by a dealer, auction house or other purchaser to purchase the property outright compared with the estimates, guarantees or other financial options offered by the
Company, (g) the time that will elapse before the seller will receive sale proceeds, (h) the desirability of a public auction in order to achieve the maximum possible price, (i) the amount of commission proposed by dealers or auction houses to sell a work on consignment, (j) the cost, style and extent of presale marketing and promotion to be undertaken by a firm, (k) recommendations by third parties consulted by the seller, (l) personal interaction between the seller and the firm’s staff and (m) the availability and extent of related services, such as tax or insurance appraisal and short-term financing; • The amount of quality property being consigned to art auction houses (and, in particular, the number of single-owner sale consignments), as well as the ability of the Company to sell such property, both of which factors can cause auction and related revenues to be highly variable from period-to-period; • The demand for fine arts, antiques and collectibles; • The success of the Company in attracting and retaining qualified personnel, who have or can develop relationships with certain potential sellers and buyers; • The demand for art-related financing; 52 • The restrictive
covenants in the Company’s bank credit facility and senior unsecured
debt, which could adversely affect the Company’s business by limiting
its flexibility;
• The impact of any decline in the equity markets or decrease in interest rates on the assets and obligations of the Company’s U.K. defined benefit pension plan; • The uncertainty in future pension costs related to the Company’s U.K. defined benefit pension plan; • The impact of the variability in taxable income between the various jurisdictions where the Company does business on the effective tax rate; and • The ability of the Company to utilize its deferred tax assets. FORWARD LOOKING STATEMENTS This Form 10-Q contains certain forward looking statements, as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended, relating to future events and the financial performance of the Company. Such statements are only predictions and involve risks and uncertainties, resulting in the possibility that the actual events or performance will differ materially from such predictions. Major factors which the Company believes could cause the actual results to differ materially from the predicted results in the forward looking statements include, but are not limited to, the factors listed above under “Factors Affecting Operating Results and Liquidity”, which are not ranked in any particular order. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company continually evaluates its market risk associated with its financial instruments and forward exchange contracts during the course of its business. The Company’s financial instruments include cash and cash equivalents, restricted cash, notes receivable, consignor advances, credit facility borrowings, long-term debt, the fine payable to the United States Department of Justice and the settlement liability related to the Discount Certificates issued in connection with the U.S. Antitrust Litigation. 53 At June 30, 2004, a hypothetical 10% strengthening or weakening of the United States dollar relative to all other currencies would result in a decrease or increase in cash flow of approximately $5.3 million. Excluding the potential impact of this hypothetical strengthening or weakening of the United States dollar, the market risk of the Company’s financial instruments has not changed significantly as of June 30, 2004 from that set forth in the Company’s Form 10-K for the year ended December 31, 2003. At June 30, 2004, the Company had $82.1 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. As of June 30, 2004, the asset relating to the Company’s forward exchange contracts was not material. See Note 9 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements,” for additional information on the Company’s use of derivative instruments. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to forward exchange contracts, but the Company does not expect any counterparties to fail to meet their obligations given their high credit ratings. CONTROLS AND PROCEDURES As of June 30, 2004, the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2004. There has been no change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the Company’s fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 54 PART II: OTHER INFORMATION LEGAL PROCEEDINGS In April 1997, the Antitrust Division of the United States Department of Justice (the “DOJ”) began an investigation of certain art dealers and major auction houses, including the Company and its principal competitor, Christie’s International PLC (“Christie’s”). The Company has pled guilty to a violation of the United States (“U.S.”) antitrust laws in connection with a conspiracy to fix auction commission rates charged to sellers in the U.S. and elsewhere and, on February 2, 2001, the U.S. District Court for the Southern District of New York accepted the Company’s plea and imposed on the Company a fine of $45 million payable without interest over a period of five years. The Company has funded $18 million of the fine payable to the DOJ, and the remaining $27 million of the fine is payable as follows: (a) $12 million due February 6, 2005 and (b) $15 million due February 6, 2006. The
Canadian Competition Bureau is continuing to conduct an investigation regarding anti-competitive practices relating to commissions charged by the Company and Christie’s for auction services. The Company also becomes involved, from time to time, in various claims and lawsuits incidental to the ordinary course of its business. Management does not believe that the outcome of any of the pending claims or proceedings described above will have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity. (See Notes 10 and 12 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”) 55 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K (i) On May 7, 2004, the Company reported on Form 8-K that it had held its Annual Meeting of Shareholders. (ii) On May 10, 2004, the Company reported on Form 8-K that it had issued a press release discussing its results of operations for the quarter ended March 31, 2004. 56 Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOTHEBY’S HOLDINGS, INC. By: Michael L. Gillis Date: August 6, 2004 57 Exhibit No. Description 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 58
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(Thousands of dollars, except per share data)
2004
2003
2004
2003
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
2004
(UNAUDITED)
2003
2003
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Thousands of dollars)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Aggregate Auction Sales
June 30,
June 30,
2003
2003
June 30,
June 30,
June 30,
June 30,
2004
2003
2003
June 30,
June 30,
June 30,
June 30,
June 30,
June 30,
June 30,
2004
2003
2003
Certificates
(net)
Antitrust
Fine
(net)
Termination
Benefits
Contract
Termination
Costs
Provisions
Costs
June 30,
June 30,
June 30,
June 30,
ITEM 2:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
June 30,
June 30,
One Year
Years
Years
5 Years
/s/ Michael L. Gillis
Senior Vice President,
Controller and Chief
Accounting Officer