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Article by DailyStocks_admin    (04-01-08 06:36 AM)

The Daily Magic Formula Stock for 04/01/2008 is Sotheby's. According to the Magic Formula Investing Web Site, the ebit yield is 16% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Overview

Sotheby’s (or, together with its subsidiaries, unless the context otherwise requires, the “Company”) is one of the world’s two largest auctioneers of authenticated fine art, antiques and decorative art, jewelry and collectibles. In 2007, Sotheby’s accounted for $5.4 billion, or 48%, of the total aggregate auction sales of the two major auction houses that comprise the global auction market.

The Company’s operations are organized into three business segments: Auction, Finance and Dealer. In addition to auctioneering, the Company’s Auction segment is engaged in a number of related activities, including the brokering of private purchases and sales of fine art, jewelry and collectibles. The Company also operates as a dealer in works of art through its Dealer segment, conducts art-related financing activities through its Finance segment and is engaged, to a lesser extent, in licensing activities. A detailed explanation of the activities of each of the Company’s segments, as well as its licensing activities is provided below.

The Company was initially incorporated in Michigan in August 1983. In October 1983, the Company acquired Sotheby Parke Bernet Group Limited, which was then a publicly held company listed on the International Stock Exchange of the United Kingdom and which, through its predecessors, had been engaged in the auction business since 1744. In 1988, the Company issued shares of Class A Limited Voting Common Stock, par value $0.10 per share (the “Class A Stock”), to the public, which were listed on the New York Stock Exchange (the “NYSE”).

In June 2006, the Company (then named Sotheby’s Holdings, Inc.) reincorporated into the State of Delaware (the “Reincorporation”). The Reincorporation and related proposals were approved by the shareholders of Sotheby’s Holdings, Inc. at the annual meeting of shareholders on May 8, 2006. The Reincorporation was completed by means of a merger of Sotheby’s Holdings, Inc. with and into Sotheby’s Delaware, Inc., a Delaware corporation (“Sotheby’s Delaware”) and a wholly-owned subsidiary of Sotheby’s Holdings, Inc. incorporated for the purpose of effecting the Reincorporation, with Sotheby’s Delaware being the surviving corporation. Sotheby’s Delaware was renamed “Sotheby’s” upon completion of the merger.

In the merger, each outstanding share of Class A Stock was converted into one share of Common Stock of Sotheby’s Delaware (“Sotheby’s Delaware Stock”). As a result, holders of Class A Stock became holders of Sotheby’s Delaware Stock, and their rights as holders thereof are now governed by the General Corporation Law of the State of Delaware and the Certificate of Incorporation and By-Laws of Sotheby’s Delaware.

The Reincorporation was accounted for as a reverse merger, whereby, for accounting purposes, Sotheby’s Holdings, Inc. is considered the acquiror and the surviving corporation is treated as the successor to the historical operations of Sotheby’s Holdings, Inc. Accordingly, the historical financial statements of Sotheby’s Holdings, Inc. which were previously reported to the Securities and Exchange Commission (the “SEC”) on Forms 10-K and 10-Q, among other forms, are treated as the financial statements of the surviving corporation.

The Reincorporation did not result in any change in the business or principal facilities of Sotheby’s Holdings, Inc. Additionally, Sotheby’s Holdings, Inc. management and board of directors continued as the management and board of directors of Sotheby’s Delaware and Sotheby’s Delaware stock continued to trade on the NYSE under the symbol “BID.” Sotheby’s is the oldest company listed on the NYSE, as successor to a business that began in 1744.

Auction Segment

Description of Business

The purchase and sale of works of art in the international art market are primarily effected through the major auction houses, numerous dealers, smaller auction houses and also directly between collectors. Although dealers and smaller auction houses generally do not report sales figures publicly, the Company believes that dealers account for the majority of the volume of transactions in the international art market.

Sotheby’s and Christie’s International, PLC (“Christie’s”), a privately held, French-owned, auction house, are the two largest art auction houses in the world.

The Company auctions a wide variety of property, including fine art, antiques and decorative art, jewelry and collectibles. The objects auctioned by the Company are unique, and their value can only be estimated prior to sale. The Company’s principal role as an auctioneer is to identify, evaluate and appraise works of art through its international staff of specialists; to stimulate purchaser interest through professional marketing techniques; and to match sellers and buyers through the auction process.

In its role as auctioneer, the Company principally functions as an agent accepting property on consignment from its selling clients. The Company sells property as agent of the consignor, billing the buyer for property purchased, receiving payment from the buyer and remitting to the consignor the consignor’s portion of the buyer’s payment after deducting the Company’s commissions, expenses and applicable taxes and royalties. The Company’s auction commissions include those earned from the buyer (“buyer’s premium”) and those earned from the consignor (“seller’s commission”), both of which are calculated as a percentage of the hammer price of property sold at auction. In 2007, 2006 and 2005, auction commission revenues accounted for 83%, 83%, and 86%, respectively, of the Company’s consolidated revenues.

In certain situations, under negotiated arrangements or when the buyer takes possession of the property purchased at auction before payment is made, the Company is liable to the consignor for the net sale proceeds whether or not the buyer makes payment. (See Note E of Notes to Consolidated Financial Statements.)

From time to time in the ordinary course of business, the Company will guarantee to consignors a minimum price in connection with the sale of property at auction (an “auction guarantee”). In the event that the property sells for less than the minimum guaranteed price, the Company must perform under the auction guarantee by funding the difference between the sale price at auction and the amount of the auction guarantee. If the property does not sell, the amount of the guarantee must be paid, but the Company has the right to recover such amount through the future sale of the property. In some cases, the sale proceeds ultimately realized by the Company exceed the amount of any losses previously recognized on the auction guarantee. Additionally, the Company is generally entitled to a share of excess proceeds if the property under the auction guarantee sells above a minimum price. In addition, the Company is obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. In certain situations, the Company reduces its financial exposure under auction guarantees through auction commission sharing arrangements with partners. Partners may also assist the Company in valuing and marketing the property to be sold at auction. (See Note Q of Notes to Consolidated Financial Statements.)

In addition to auctioneering, the Auction segment is engaged in a number of related activities, including the brokering of private purchases and sales of fine art, jewelry and collectibles.

The worldwide art auction market has two principal selling seasons, spring and autumn. Accordingly, the auction business is seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters of each year. Consequently, first and third quarter results typically reflect a lower volume of auction activity when compared to the second and fourth quarters and, generally, a net loss due to the fixed nature of many of the Company’s operating expenses. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note X of Notes to Consolidated Financial Statements.)

The Auction Market and Competition

Competition in the international art market is intense. A fundamental challenge facing any auctioneer or dealer is to obtain high quality and valuable property for sale either as agent or as principal. The Company’s primary auction competitor is Christie’s and the Company also faces competition from a variety of dealers across all collecting categories.

The owner of a work of art wishing to sell it has four principal options: (1) sale or consignment to, or private sale by, an art dealer; (2) consignment to, or private sale by, an auction house; (3) private sale to a collector or museum without the use of an intermediary; or (4) for certain categories of property (in particular, collectibles) consignment to, or private sale through, an internet-based service. The more valuable the property, the more likely it is that the owner will consider more than one option and will solicit proposals from more than one potential purchaser or agent, particularly if the seller is a fiduciary representing an estate or trust. A complex array of factors may influence the seller’s decision. These factors, which are not ranked in any particular order, include:



•





The level and breadth of expertise of the dealer or auction house with respect to the property;



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The extent of the prior relationship, if any, between the dealer or auction house and its staff and the seller;



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The reputation and historic level of achievement by the dealer or auction house in attaining high sale prices in the property’s specialized category;



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The desire for privacy on the part of clients;



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The amount of cash offered by a dealer, auction house or other purchaser to purchase the property outright, which is greatly influenced by the amount and cost of capital resources available to such parties;



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The level of auction guarantees or the terms of other financial options offered by auction houses;



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The level of pre-sale estimates offered by auction houses;



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The desirability of a public auction in order to achieve the maximum possible price (a particular concern for fiduciary sellers, such as trustees and executors);



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The amount of commission charged by dealers or auction houses to sell a work on consignment;



•





The cost, style and extent of pre-sale marketing and promotion to be undertaken by a dealer or auction house;



•





Recommendations by third parties consulted by the seller;



•





The desire of clients to conduct business with a publicly traded company; and



•





The availability and extent of related services, such as tax or insurance appraisals and short-term financing.

It is not possible to measure with any particular accuracy the entire international art market or to reach any conclusions regarding overall competition because dealers and auction firms frequently do not publicly report annual totals for auction sales, revenues or profits, and the amounts reported may not be verifiable.

Auction Regulation

Regulation of the auction business varies from jurisdiction to jurisdiction. In many jurisdictions, the Company is subject to laws and regulations that are not directed solely toward the auction business, including, but not limited to, import and export regulations, antitrust laws, cultural property ownership laws, data protection and privacy laws, anti-money laundering laws and value added sales taxes. In addition, the Company is subject to local auction regulations, such as New York City Auction Regulations Subchapter M of Title 6 §§ 2-121–2-125, et. seq. Such regulations do not impose a material impediment to the worldwide business of the Company but do affect the market generally, and a material adverse change in such regulations could affect the business. In addition, the failure to comply with such local laws and regulations could subject the Company to civil and/or criminal penalties in such jurisdictions. The Company has a Compliance Department which, amongst other activities, develops and updates compliance policies and audits, monitors, and provides training to Company employees on compliance with many of these laws and regulations.

Finance Segment

Description of Business

The Company’s Finance segment 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. Clients who borrow from the Finance segment are often unable to borrow on conventional terms from traditional lenders and are typically not highly interest rate sensitive. The Finance segment’s loans are predominantly variable interest rate loans. The Company’s financing activities are conducted through its wholly-owned subsidiaries.

The majority of the Company’s secured loans are made at loan to value ratios (principal loan amount divided by the low auction estimate of the collateral) of 50% or lower. However, the Company will also lend at loan to value ratios higher than 50%. Of the approximately $2 billion in total loans that the Finance segment has extended since 1991, the Company has experienced total loan losses of only approximately $11 million.

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 (a “term loan”). 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. Term loans allow the Company to establish or enhance mutually beneficial relationships with dealers and collectors and sometimes result in auction consignments. Secured loans are generally made with full recourse against the borrower. In certain instances, however, secured 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. In certain of these situations, the Company finances the purchase of works of art by art dealers through unsecured loans. The property purchased pursuant to such unsecured loans is sold privately or at auction with any profit or loss shared by the Company and the 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 Dealer segment.

(See Notes B and E of Notes to Consolidated Financial Statements.)

The Company funds its financing activities generally through operating cash flows supplemented by credit facility borrowings. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note J of Notes to Consolidated Financial Statements.)

The Finance Market and Competition

A considerable number of traditional lending sources offer conventional loans at a lower cost to borrowers than the average cost of those offered by the Company. Additionally, many traditional lenders offer borrowers a variety of integrated financial services such as wealth management services, which are not offered by the Company. Few lenders, however, are willing to accept works of art as sole collateral as they do not possess the ability both to appraise and to sell works of art within a vertically integrated organization. The Company believes that through a combination of its art expertise and skills in international law and finance, it has the ability to tailor attractive financing packages for clients who wish to obtain liquidity from their art assets.

Dealer Segment

Description of Business

On June 7, 2006, the Company entered into a sale and purchase agreement with Arcimboldo S.A. pursuant to which the Company acquired all the issued and outstanding shares of capital stock of Noortman Master Paintings B.V. (or “NMP”), one of the world’s leading art dealers specializing in Dutch and Flemish Old Master Paintings, as well as French Impressionist and Post-Impressionist paintings. NMP is based in Maastricht, The Netherlands. As an art dealer, NMP sells works of art directly to private collectors and museums and, from time-to-time, acts as a broker in private purchases and sales of art. NMP’s results are included in the Company’s Consolidated Income Statements as of June 1, 2006 and were not material to the Company’s consolidated financial statements in 2006.

In the fourth quarter of 2006, due to the acquisition of NMP and the resulting increase in the Company’s Dealer activities, certain activities which were previously included as part of the Auction segment were realigned with NMP and aggregated into a newly established Dealer segment. Such activities include:



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The investment in and resale of art and other collectibles directly by the Company.



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The investment in art through unsecured loans made by the Company to unaffiliated art dealers. (See Note E of Notes to Consolidated Financial Statements.)



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The activities of certain equity investees, including Acquavella Modern Art (or “AMA”). (See Note F of Notes to Consolidated Financial Statements.)



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The purchase and resale of art through an art dealer whose results are required to be consolidated with the Company’s results under generally accepted accounting principles. The Company has no equity investment in this entity. (See Note S of Notes to Consolidated Financial Statements.)

Robert C. Noortman, who was the Managing Director of NMP and sole shareholder of Arcimboldo S.A., died unexpectedly on January 14, 2007. NMP is continuing under the leadership of Mr. Noortman’s son, William Noortman. (See “Acquisition” below and Note C of Notes to Consolidated Financial Statements for a more detailed discussion of the acquisition of NMP and the impact of Mr. Noortman’s death.)

The Dealer Market and Competition

The Dealer segment operates in the same market as the Auction segment and is impacted to varying degrees by many of the same competitive factors (as discussed above under “The Auction Market and Competition”). The most prominent competitive factors impacting the Dealer segment, which are not ranked in any particular order, include: (i) relationships and personal interaction between the buyer or seller and the dealer; (ii) the level of specialized expertise of the dealer; and (iii) the ability of the dealer to finance purchases of art.

Discontinued Operations

In the fourth quarter of 2003, the Company committed to a plan to sell its domestic real estate brokerage business, Sotheby’s International Realty, Inc. (“SIR”), as well as most of its real estate brokerage offices outside of the U.S. As a result, such operations qualified for treatment as discontinued operations in the fourth quarter of 2003.

On February 17, 2004, the Company consummated the sale of SIR to a subsidiary of Realogy Corporation (“Realogy”), formerly Cendant Corporation. In conjunction with the sale, the Company entered into an agreement with Realogy 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 “Realogy License Agreement”). Initially, the Realogy License Agreement was applicable to the U.S., Canada, Israel, Mexico and certain Caribbean countries.

Also in conjunction with the sale, Realogy received options to acquire most of the other non-U.S. offices of the Company’s real estate brokerage business and to expand the Realogy License Agreement to cover the related trademarks in other countries outside the U.S., excluding Australia and New Zealand (the “International Options”). The International Options were exercised by Realogy and the Realogy License Agreement was amended to cover New Zealand during 2004. As a result, such operations qualified for treatment as discontinued operations in 2004.

In the fourth quarter of 2004, the Company committed to a plan to discontinue its real estate brokerage business in Australia and license the Sotheby’s International Realty trademark and certain related trademarks in Australia. The Company had expected to consummate a license agreement related to such trademarks some time in 2006, but such an agreement could not be reached on terms acceptable to the Company. As a result, in the second quarter of 2006, management decided to continue operating the Company’s real estate brokerage business in Australia. Accordingly, the operating results of this business, which had previously been reported as discontinued operations in the Consolidated Income Statements since the fourth quarter of 2004, have been reclassified into the Company’s results from continuing operations for all periods presented. The Australia real estate brokerage business, which is the only remaining component of the Company’s former Real Estate segment, is not material to the Company’s results of operations, financial condition or liquidity.

(See Note U of Notes to Consolidated Financial Statements.)

Licensing

As discussed under “Discontinued Operations” above, in conjunction with the sale of SIR, the Company entered into an agreement with Realogy to license the SIR trademark and certain related trademarks. The Realogy License Agreement provides for an ongoing license fee during its term based on the volume of commerce transacted under the licensed trademarks. In 2007, 2006 and 2005, the Company earned $2.8 million, $2.6 million and $1.3 million, respectively, in license fee revenue related to the Realogy License Agreement. The Company continues to consider additional opportunities to license the Sotheby’s brand in businesses where appropriate.

Strategic Initiatives

Increased Focus on the Company’s Most Valuable Relationships

Management’s focus on the high-end of the art market has been an important contributor to the Company’s success in recent years. Accordingly, management is dedicating more of its time, energy and organization to broadening and extending the breadth and depth of relationships with major clients. These efforts are part of a multi-year strategy to invest in those areas which the Company’s major clients value most.

Over the past several years, the Company has made substantial investments in information technology designed to improve client service. A new portfolio of enterprise systems anchored by SAP has been deployed across the organization, which has enhanced the quality of information and processing of sales and inventory tracking, as well as data management. In addition, the Company has launched a new web-based client portal called “mySothebys,” which provides clients with real-time access to their account data and balances, as well as information on current and historical transactions, auction tracking services and enhanced media content. Client relationships are a key driver of the Company’s success, and the Company’s clients expect a consistently high level of service. Management believes these initiatives will have a meaningful impact on the future of the business.

Realign Operations to Enhance Profitability

In line with the Company’s strategy to focus on major clients, the Company has initiated significant changes to its business portfolio to enhance the long-term value of the franchise. This has resulted in the discontinuation of auctions at the Olympia sales center, the Company’s secondary salesroom in London, which has traditionally processed sales at a substantially lower price point than the Company’s other salesrooms. Similar efforts are well underway to reduce low-end sales categories in New York, Amsterdam and Milan, such as increasing the Company’s minimum lot thresholds to $5,000, € 4,000 and £3,000, depending on the location. As a result of these actions, management expects to continue to reduce the quantity of lots offered for sale at auction. The Company is investing in new staff in order to strengthen client relationships and grow revenues, which management expects will more than offset the lost revenue on lower end sales categories. However, there could be an unfavorable impact on short-term operating results. (See statement on Forward Looking Statements.)

Increase Exposure to Higher Growth Emerging Markets

The Company is making significant efforts to grow its presence in faster growing regions, particularly in emerging markets such as Russia, China and the Middle East. The Company has opened offices in Beijing and Moscow and is focused on establishing a greater presence in the Middle East. The growth of Russian wealth, attributable to the boom in global commodity prices, has driven spending across the luxury segment. The Russian Art Market at Sotheby’s has increased dramatically, from $5.5 million of Aggregate Auction Sales in 2000 to $190.9 million in 2007. Additionally, China’s economy has experienced explosive growth since 1990 with gross domestic product growth averaging over 9% during this period. This expansion has contributed to significant Asian Art Market growth over the last five years. Aggregate Auction Sales of Asian art at Sotheby’s have tripled from $124.1 million in 2001 to approximately $561.8 million in 2007, reflecting a cumulative annual growth rate of 29%.

Capitalize on Brand Extension Opportunities

As discussed above, the Company has licensed the SIR trademark and certain related trademarks in connection with the sale of the Company’s real estate business to Realogy in 2004. Since the sale, the Company has earned total license fee revenues of $6.8 million through December 31, 2007. Management intends to continue to further leverage the Sotheby’s brand in fine jewelry and other luxury retail categories. One such initiative is Sotheby’s Diamonds, a strategic relationship with the Steinmetz Diamond Group, a seller of rare diamonds and diamond jewelry.

Strategically Expand the Finance Segment

Within the Finance segment, management is focused on growing the Company’s loan portfolio and leveraging Finance segment activities in order to grow auction consignments. Customers who borrow or leverage art works to obtain cash are more likely to utilize the Company’s Auction segment if they decide to liquidate part or all of their portfolios.

Financial and Geographical Information about Segments

See Note D of Notes to Consolidated Financial Statements for financial and geographical information about the Company’s segments.

CEO BACKGROUND

Ms. Alexander was appointed Executive Vice President and Worldwide Head of Human Resources of the Company in October 2004. From January 1986 to October 2004, she served as Senior Vice President and Worldwide Head of Human Resources of the Company and has been employed by the Company since 1984.

Mr. Bailey became the Managing Director of Sotheby’s Europe in 1994. Since 1979, he has served in a number of different executive positions with Sotheby’s.

Mr. Buckley became the Managing Director of Sotheby’s North American regional auction business in January 2002. From 1999 to 2002, he served in various senior executive positions, including as Managing Director of Sothebys.com. Mr. Buckley also served as head of marketing operations for Sotheby’s North America from 1996 to 1999, having joined the Company in 1989.

Ms. Jackson became Executive Vice President, Global Business Development for the Company in February 2007. She previously had served as the Chief Executive Officer of WRC Media, Inc., a privately-held educational publisher, since 2005. From 2003 to 2005, Ms. Jackson was a partner at Ripplewood Holdings, a private equity fund. She served as Group President of InStyle, Real Simple, Parenting and Essence Magazines from 2002 to 2003, and was the founding publisher of InStyle in 1994. Since 2005, Ms. Jackson has served as a director of Bluefly, Inc., a publicly-held online retailer of designer brands.

Ms. Phillips became an Executive Vice President of the Company in October 2004. She became Worldwide Director of Press and Corporate Affairs in 1988 and was promoted to Senior Vice President in 1990. She joined Sotheby’s in 1985 as Manager of Corporate Information for Sotheby’s North America. Prior to joining Sotheby’s, she was with Hill & Knowlton the international public relations firm.

Mr. Pillsbury was appointed Executive Vice President and Worldwide General Counsel in February 2001. Mr. Pillsbury previously served as Senior Vice President and General Counsel of the Company from January 1998 until February 2001. From 1993 until January 1998, he was Senior Counsel to the law firm Davis Polk & Wardwell; from 1973 until 1993, he was a partner of that firm. Mr. Pillsbury also is a Director of The Chamber Music Society of Lincoln Center and a member of the Distribution Committee of the New York Community Trust.

Mr. Sheridan was appointed Executive Vice President and Chief Financial Officer of the Company in February 2001, having served as Senior Vice President and Chief Financial Officer of the Company between November 1996 and February 2001. From 1987 until November 1996, Mr. Sheridan was a partner at the accounting and consulting firm of Deloitte & Touche LLP. Mr. Sheridan also serves as a director of Alliance One International.

Dr. Ulmer became Senior Vice President and Chief Technology and Strategy Officer of the Company in 2006, having previously served as Senior Vice President and Chief Technology Officer since January 2000. He served as Senior Vice President of Information Technology from June 1997 until January 2000.

Mr. Vinciguerra became an Executive Vice President and Director of New Initiatives of the Company in January 2007. He previously served as the General Manager of Dell Western Europe from 2003 to 2006 and as the General Manager of Dell Southern Europe from 2000 to 2003. From 1998 to 2000, Mr. Vinciguerra was Senior Vice President, Strategic Planning of The Walt Disney Company. From 1994 to 1997, he was a vice president and partner of Bain and Co., where he had been employed since 1986.

Mr. Wickstrom became the Managing Director of Sotheby’s Global Auction Division in January 2002. In 2001, he was appointed Director of Strategic Projects of the Company, having previously served as a Senior Vice President and Associate General Counsel of the Company since 1996.

Mr. Zuckerman has been President of Sotheby’s Financial Services, Inc. since 1988 and Sotheby’s Ventures, LLC since 1997.

COMPENSATION

Salary

Each NEO receives a base salary to provide regular income to the executive. Base salary is the foundation for each NEO’s compensation package and is payment for the services performed, regardless of the Company’s success. Accordingly, base salary is only one component of the compensation package. Other components, including discretionary bonuses and equity awards, allow for a range of compensation levels based on company and individual performance.

The annual base salary for William F. Ruprecht, Sotheby’s CEO, is presently set for the next four years under his 2006 employment arrangement.

The Committee determines appropriate base salary levels for its NEOs through several means:



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Market data analyzed by Cook for similar positions at United States public companies having similar financial attributes, such as market capitalization or earnings, and at public companies in the retail, apparel, luxury goods and other industries.



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Market data for positions similar to that of Mr. Woodhead at various United Kingdom public companies.



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Historical individual and Company performance as well as expected future potential, all of which have subjective aspects.

Discretionary Bonus

The Company bases its discretionary cash bonuses for NEOs upon the achievement of both Company and individual performance objectives. These bonuses, however, are not based solely on fixed formulas tied to objective performance goals set in advance. These bonuses are paid from a bonus pool approved by the Committee.

The Company has an annual review process for each NEO. The Committee reviews the performance of William Ruprecht, the Company’s CEO. As part of this process, Mr. Ruprecht prepares for the Committee a written list of accomplishments for the prior year based on the annual objectives established by the Committee in the first quarter of that year. The Committee reviews and discusses this list with Mr. Ruprecht. Susan Alexander, the Company’s Executive Vice President and Worldwide Head of Human Resources, provides context regarding the CEO’s performance as requested by the Committee. For each other NEO, Mr. Ruprecht individually reviews that NEO’s performance with the Committee and recommends to the Committee the individual bonus awards and modifications to future compensation in consultation with Ms. Alexander.

If all personal objectives are met, an NEO is entitled to receive up to 100% of the bonus target amount, subject to satisfactory Company financial performance. Depending on both Company profitability and individual performance, the NEO can receive up to 200% of bonus target if he exceeds his objectives. However, there is a cap of 150% of the bonus target amount for NEOs who participate in the Executive Bonus Plan, which is described in the next section. From time to time, the Committee has increased or decreased the recommended bonus amounts.

Performance-Based Bonus

The Company pays performance-based cash compensation only if the Company meets objective performance criteria set in advance. Under the Company’s Executive Bonus Plan, or EBP, a small group of eligible senior executives, including certain NEOs, may receive awards based on the fulfillment of objective performance criteria established by the Committee during the first quarter of each year. In 2006, 21 senior executives participated in the EBP, and, in 2007, 25 senior executives are participating in the EBP. To date, the Committee has based these bonuses on Company net income. A participant is eligible to receive a performance bonus only if the Company achieves the minimum level of net income for the applicable year. The Company will pay higher bonus amounts if net income exceeds various threshold levels above the base level. The measuring period for the performance standard is one fiscal year.

The Company’s net income slightly exceeded the maximum EBP payout threshold for 2005, and, accordingly, the Committee materially increased the various payout thresholds for 2006 from 2005 levels. Nevertheless, 2006 net income greatly exceeded the performance thresholds due to the Company’s exceptional financial success in 2006. Taking this into account, the Committee has increased the 2007 EBP performance thresholds at the minimum and maximum payout levels by a much greater percentage than the 2006 increase. With respect to 2007, the Committee believes that the minimum payout threshold could be achieved if the Company’s performance substantially exceeds the Company’s average historical performance in recent years, but that the likelihood of achieving the maximum payout threshold under the EBP will be challenging relative to the maximum payout thresholds of prior years.

Until 2006, this plan required that the Company pay these awards 50% in cash and 50% in restricted stock upon fulfillment of the performance criteria. The Committee amended the EBP in 2006 to permit payment of these awards 100% in restricted stock.

The Committee then required that certain NEOs and other senior executives receive EBP awards 100% in restricted stock as a condition to those individuals participating in a new form of equity incentive, restricted stock grants with a long-term performance vesting feature, or Performance Shares. See the discussion below under “Long Term Performance—Related Equity Compensation.” This change also helped to address the conclusion in the Cook analysis that certain of these individuals’ compensation should contain a higher proportion of equity to cash.

Mr. Ruprecht no longer participates in the EBP and instead received a grant of Performance Shares in 2006 and is entitled to receive annual restricted stock grants, subject to agreed maximum and minimum levels, the variability of which is determined largely by reference to the EBP’s performance criteria.

Subject to shareholder approval at the Meeting, the Board and the Committee have approved an amendment and restatement of the EBP, effective as of January 1, 2007. The primary purpose of revising the EBP is to increase the Committee’s flexibility in determining the terms of plan awards and to address tax deductibility issues under Internal Revenue Code Section 162(m). For a detailed discussion of the Section 162(m) issues, see “Tax Treatment of NEO Compensation” below in this discussion. With respect to the proposed material changes to the EBP, see “Proposal 3—Approval of Sotheby’s Executive Bonus Plan (as amended and restated effective January 1, 2007)” in this Proxy Statement.

Medium Term Equity Compensation

This category of awards covers discretionary restricted stock grants under the Restricted Stock Plan. Because these awards vest over time and become more valuable to the recipient as Sotheby’s stock price increases, the Committee believes these are a useful form of medium term incentive compensation under certain circumstances. During 2006, the Company made limited grants of this type to NEOs in conjunction with the shift towards equity compensation having predetermined, performance-based criteria.

In 2006, Mr. Ruprecht received a restricted stock grant in connection with his employment contract, and Mr. Bailey also received an award of this type. Mr. Ruprecht’s employment arrangement provides for additional restricted stock grants annually. However, the value of these grants will fluctuate over a range depending largely upon the extent to which the performance criteria of the EBP are satisfied.

From time to time, the Committee expects to make discretionary restricted stock grants under appropriate circumstances.

Medium Term Performance-Based Equity Compensation

As described above, under “Short Term Cash Compensation—Performance- Based Bonus,” the Company makes awards under the EBP either in cash and restricted stock or, for certain participants, solely in restricted stock upon the fulfillment of predetermined, objective performance criteria. The Company issues these EBP restricted stock awards through the Restricted Stock Plan.

Long Term Performance-Related Equity Compensation

In 2006, the Company developed and began to award Performance Shares, which are restricted stock shares that vest only upon the achievement of predetermined cumulative three and five year company financial performance criteria established by the Committee. The Performance Shares add a long-term performance component to certain NEOs’ and other senior executives’ compensation packages that the Committee believes is necessary for a well-balanced program. Because there is more risk to the participant as a result of the level of performance criteria, which must be achieved over an extended time period, the Performance Share awards have a greater potential pay-out than shorter term equity awards, such as those under the EBP. The historically cyclical nature of the art market over multiple years is the primary reason why these criteria are likely to be more difficult to achieve than those set for shorter term equity awards. Performance Shares are awarded under the Restricted Stock Plan.

For the Performance Shares granted in 2006, restricted stock awarded will vest three and five years after the grant date only upon the occurrence of either:



•





A compound increase in shareholder return, including stock price and dividends

OR


•


A compound cumulative increase in Sotheby’s net income

In designing the Performance Shares program, the Committee relied in part on analyses and recommendations from Cook, a nationally recognized executive compensation consulting firm. The Committee determined that the net income target as an alternative to the stockholder return target was desirable because the Company’s stock price might not reflect the Company’s actual financial performance at any given point in time. Fluctuations in the Company’s stock price can occur due to the art market’s cyclical nature and the cyclical nature of the economy and stock market in general. The net income target provides an alternative measure of successful financial performance.

The measuring period for Mr. Ruprecht’s Performance Shares with respect to the net income criteria differs from that applicable to Messrs. Woodhead’s and Sheridan’s Performance shares since their respective agreements were entered into at different times. For a detailed discussion of the terms of these awards, see the “Grants of Plan-Based Awards” table and the accompanying narrative in this proxy statement.

The Committee does not presently anticipate issuing additional Performance Shares.

Retirement Benefits Compensation

For this retirement benefits discussion, the term “Company” also refers to Sotheby’s, Inc., a wholly-owned subsidiary of Sotheby’s, and all other direct or indirect subsidiaries of Sotheby’s.

401(k) Plan

The Sotheby’s, Inc. Retirement Savings Plan, or 401(k) plan, is the primary retirement benefit offered to all United States employees. Participants are provided a matching contribution of up to 6% of eligible compensation and are also eligible to share in Company profit sharing contributions to the 401(k) plan if the Committee, in its discretion, declares a profit sharing contribution for that year. The maximum profit sharing percentage is 4% of eligible compensation, and this amount was awarded for 2006.

Benefit Equalization Plan; New Deferred Compensation Plan

The United States-based NEOs and other senior executives have also historically participated in the Sotheby’s, Inc. Benefit Equalization Plan, which has allowed the pre-tax deferral of a portion of annual compensation. Effective January 1, 2007, the Company has adopted a new Deferred Compensation Plan to replace the Benefit Equalization Plan.

The Committee decided to revise the existing deferred compensation program in order to provide participants additional flexibility in retirement planning. The existing Benefit Equalization Plan did not contain a number of features that have become commonplace for these types of plans. For example, employees may now defer up to 80% (instead of 12%) of their base salary under the new plan and all or part of their discretionary bonus (instead of 12%) and/or their EBP cash awards. None of the changes, however, added any material cost to administering the deferred compensation program.

In designing the Deferred Compensation Plan and choosing among various service providers to administer the plan, the Company retained Hewitt Associates, a nationally recognized benefits consulting firm.

United Kingdom Pension Plan

The Company maintains a defined benefit pension plan only for its United Kingdom employees in which Messrs. Woodhead and Bailey participate.

A detailed discussion of the United States deferred compensation and United Kingdom pension plans accompanies the “Pension Benefits” table appearing in this proxy statement.

Perquisites and Other Benefits

In order to provide comprehensive and competitive compensation packages to its NEOs and other senior executives, the Company provides a limited number of perquisites to these individuals. The categories include: car allowances, club membership dues, financial planning services and life insurance premiums in addition to benefits available to all Sotheby’s full time employees, such as paid vacation and health insurance.

The Company believes that in light of the nature of the Company’s business and the need to provide NEOs with appropriate benefits for executives of this level, these perquisites are reasonable.

Outside Compensation Consultants

The Sotheby’s Compensation Committee Charter grants the Committee the power to retain and terminate compensation consultants and the sole authority to approve a consultant’s fees and other terms of an assignment.

Since 2005, the Committee has engaged Cook as its primary outside compensation consultant, focusing on NEO compensation. The Committee chose Cook after Committee Chairman Robert S. Taubman identified and interviewed several nationally recognized consulting firms. He also consulted with Ms. Alexander during this process. Prior to this engagement, Cook had not performed any services for the Company or the Committee.

Cook provided extensive consulting services to the Committee during negotiation of a new employment arrangement with Mr. Ruprecht during 2005 and early 2006. In addition, Cook has advised the Committee more generally regarding Mr. Sheridan’s compensation as CFO and that of the other NEOs.

Cook prepared a number of reports for the Committee and the Board of Directors regarding Mr. Ruprecht’s compensation. The Committee authorized Cook to communicate with Ms. Alexander to obtain information regarding compensation practices at the Company. Ms. Alexander also participated in extensive discussions with Committee members regarding the Cook reports and provided her views when requested by the Committee regarding the development of Mr. Ruprecht’s compensation package.

With the prior approval of the Committee or the Committee’s Chairman, Cook has performed a limited number of other services for the Company at Ms. Alexander’s request. These services concerned executive compensation matters and ultimately assisted the Committee in its compensation deliberations.

For example, in 2005 and 2006, Cook advised Sotheby’s regarding the design of its equity compensation plans generally. Most recently, Cook has provided the Company with recommendations to modify the EBP.

Because Cook does not analyze the compensation practices of United Kingdom companies, the Committee retained the internationally recognized compensation consulting firm of Watson Wyatt Worldwide to assist in assessing Mr. Woodhead’s compensation in connection with negotiating his Services Agreement. The Committee did not believe it was necessary to retain Watson Wyatt to assess Mr. Bailey’s compensation as it believes that a Cook survey concerning all NEO positions was adequate for this purpose. Prior to this engagement, Watson Wyatt had performed limited pension plan advisory services for a Company subsidiary.

MANAGEMENT DISCUSSION FROM LATEST 10K

Seasonality

The worldwide art auction market has two principal selling seasons, spring and autumn. Accordingly, the Company’s auction business is seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters of each year. Consequently, first and third quarter results typically reflect lower Net Auction Sales (as defined below under “Key Performance Indicators”) when compared to the second and fourth quarters and, generally, a net loss due to the fixed nature of many of the Company’s operating expenses. (See Note X of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for information on the Company’s quarterly results for the years ended December 31, 2007 and 2006.)

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with GAAP (as defined below under “Use of Non-GAAP Financial Measures”) requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may ultimately differ from management’s original estimates as future events and circumstances sometimes do not develop as expected. Note B of Notes to Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. In addition, management believes that the following are the most critical accounting estimates, which are not ranked in any particular order, which may affect the Company’s financial condition and/or results of operations.



(1)





Value of artworks —The art market is not a highly liquid trading market. As a result, the valuation of artworks is inherently subjective and the realizable value of artworks often varies over time. Accordingly, the Company is at risk as to the value of art held as inventory by its Auction and Dealer segments, the value of its investment in AMA and as to the value of artworks pledged as collateral for Finance segment loans. Additionally, the Company is at risk with respect to its ability to estimate the likely selling prices of works of art offered under auction guarantees.

If management determined that there was an other than temporary decline in the estimated realizable value of the artworks held in inventory by the Company or the inventory held by AMA, the Company would be required to evaluate whether to record losses in the Auction and/or Dealer segments to reduce the carrying values of its inventory and/or investment in AMA.

Additionally, to the extent that the Company is looking wholly or partially to the artworks pledged as collateral for repayment of Finance segment loans, repayment can be adversely impacted by a decline in the estimated realizable value of the collateral. Management reevaluates the value of the collateral for specific loans when it becomes aware of a situation where the estimated realizable value of the collateral may be less than the loan balance, and with respect to which the under-collateralized amount may not be collectible from the borrower. In the event that the estimated realizable value of the artworks pledged as collateral declines and becomes less than the corresponding loan balances, the Company would be required to assess whether it is necessary to record losses in the Finance segment to reduce the carrying value of specific loans, after taking into account the ability of borrowers to repay the loans.

Due to the inherent subjectivity involved in estimating the value of artworks, management’s judgments about the estimated realizable value of art held by its Auction and Dealer segments, the fair value of its auction guarantee liability, the value of its investment in AMA and the value of artworks pledged as collateral for Finance segment loans may prove, with the benefit of hindsight, to be inaccurate.

(See Notes B, E and Q of Notes to Consolidated Financial Statements.)


(2)

Pension Obligations —The pension obligations related to the Company’s U.K. defined benefit pension plan (the “U.K. Pension Plan”) are developed from an actuarial valuation. Inherent in





this valuation are key assumptions and estimates, including the discount rate, expected long-term return on plan assets, future compensation increases, mortality assumptions and other factors, which are updated on at least an annual basis. In determining these assumptions and estimates, management considers current market conditions, market indices and other relevant data.

The discount rate assumption represents the approximate weighted average rate at which the Company’s pension obligations could be effectively settled and is based on a hypothetical portfolio of high-quality corporate bonds with maturity dates approximating the length of time remaining until individual benefit payment dates. The discount rate used to calculate the $11.6 million in net pension cost related to the U.K. Pension Plan for 2007 was 4.8%. A hypothetical increase or decrease of 0.1% in this assumption (i.e., from 4.8% to 4.9% or from 4.8% to 4.7%) would result in a decrease or increase in net pension cost of approximately $0.8 million. As of the date of the most recent plan actuarial valuation (September 30, 2007), the discount rate used to calculate the $310.4 million benefit obligation related to the U.K. Pension Plan was 5.7%. A hypothetical increase or decrease of 0.1% in this assumption (i.e., from 5.7% to 5.8% or from 5.7% to 5.6%) would result in a decrease or increase in the benefit obligation of approximately $6.5 million.

The assumption for the expected long-term return on plan assets is based on expected future appreciation, as well as dividend and interest yields available in equity and bond markets as of the plan’s measurement date and weighted according to the composition of invested plan assets. The annual long-term return on plan assets used to calculate the $11.6 million in net pension cost related to the U.K. Pension Plan for 2007 was 7.5%. A hypothetical increase or decrease of 0.25% in this assumption (i.e., from 7.5% to 7.75% or from 7.5% to 7.25%) would result in a decrease or increase in net annual pension cost of approximately $0.7 million.

The mortality assumptions used in the actuarial valuation represent the approximate life expectancies for plan members based upon standardized data tables used by actuaries in the U.K. that include allowances for longer future life expectancies. A hypothetical 5% increase or decrease in life expectancies would result in an increase or decrease in net pension cost of approximately $0.5 million. Additionally, a hypothetical 5% increase or decrease in life expectancies would result in an increase or decrease in the benefit obligation of approximately $3 million.

The assumption for future annual compensation increases is established after considering historical salary data for U.K. employees and current economic data for inflation, as well as management’s expectations for future salary growth. The assumption for future annual compensation increases used to calculate the $11.6 million in net annual pension cost related to the U.K. Pension Plan for 2007 was 4.75%. A hypothetical increase or decrease of 0.25% in this assumption (i.e., from 4.75% to 5% or from 4.75% to 4.5%) would result in an increase or decrease in net pension cost of approximately $0.5 million. As of the date of the most recent plan actuarial valuation (September 30, 2007), the assumption for future annual compensation increases used to calculate the $310.4 million benefit obligation related to the U.K. Pension Plan was 5.2%. A hypothetical increase or decrease of 0.25% in this assumption (i.e., from 5.2% to 5.45% or from 5.2% to 4.95%) would result in an increase or decrease in the benefit obligation of approximately $2 million. As of the September 30, 2007 and 2006 actuarial valuations for the U.K. Pension Plan, pre-tax net actuarial losses totaled $14.2 million ($10.2 million, after tax) and $91 million ($63.7 million, after tax), respectively. These losses accumulated over several years as a result of differences in actual experience compared to projected experience and were specifically influenced by a general trend of lower discount rates in the U.K. during the 4-year period from 2003 to 2006, as well as the adoption of updated mortality tables in 2006 reflecting more recent data on longer life expectancies. However, during 2007, the trend of lower discount rates reversed and, as a result, the discount rate used to value the U.K. Pension Plan’s benefit obligations increased from 4.8% to 5.7% as of September 30, 2007, significantly contributing to the decrease in net actuarial losses. These losses, which are reflected in the Consolidated Balance Sheets on an after-tax basis within accumulated other comprehensive income (loss), are being systematically recognized as an




increase in future net pension cost in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” Such pre-tax losses in excess of 10% of the greater of the market-related value of plan assets or the plan’s projected benefit obligation are recognized over a period of approximately 14.4 years, which represents the average remaining service period of active employees expected to receive benefits under the plan.

(See Note O of Notes to Consolidated Financial Statements for additional information related to the U.K. Pension Plan, as well as the Company’s other material pension arrangements. Additionally, see “Employee Benefit Costs” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the years ended December 31, 2007 and 2006 for disclosure of a subsequent event that will impact the future funded status and net pension cost related to the U.K. Pension Plan.)



(3)





Settlement Liabilities —In conjunction with the settlement of certain civil litigation related to the investigation by the Antitrust Division of the U.S. Department of Justice (the “DOJ”), in May 2003 the Company issued to the class of plaintiffs vendor’s commission discount certificates (“Discount Certificates”) with a face value of $62.5 million. The Discount Certificates are fully redeemable in connection with any auction conducted by the Company or Christie’s in the U.S. or in the U.K. and may be used to satisfy consignment charges involving vendor’s commission, risk of loss and/or catalogue illustration. 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 is the amount recorded by the Company as a settlement liability for the Discount Certificates in the third quarter of 2000. 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 December 31, 2007, the outstanding face value of unused Discount Certificates that the Company could be required to redeem was $22.7 million, which is reflected as a current liability in the Consolidated Balance Sheets. Due to the unpredictability of Discount Certificate redemption activity, it is possible that actual future redemptions could be materially less than the current carrying value of the related liability, which would result in the reversal of any remaining liability upon the expiration of the Discount Certificates on May 14, 2008.

(See Note R of Notes to Consolidated Financial Statements.)



(4)

Income Taxes— The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income, and tax planning could change the effective tax rate and tax balances recorded by the Company.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

Note D (“Segment Reporting”) of Notes to Consolidated Financial Statements should be read in conjunction with this discussion.

Overview

For the year ended December 31, 2007, income from continuing operations increased $105.8 million to $213.1 million, doubling the results from the prior year. This improvement reflects the strength of the art market during the period, as Net Auction Sales and Private Sales (both defined below under “Key Performance Indicators”) increased significantly from the prior year. Total revenues for the year ended December 31, 2007 increased $252.9 million, or 38%, largely as a result of this higher level of sales activity. The increase in total revenues was partially offset by a higher level of operating expenses, which increased $174.3 million, or 37%, when compared to the prior year. Results for the year ended December 31, 2007 include an impairment loss ($15 million) and insurance recovery ($20 million) related to Noortman Master Paintings (see “Impairment Loss and Insurance Recovery” below), as well as a $4.8 million gain on the sale of land and buildings (see “Gain on Sale of Land and Buildings” below). Management currently anticipates a continuation of the strong international art market for the remainder of the first quarter of 2008 and is encouraged by the Company’s sales results to date in 2008. (See statement on Forward Looking Statements.)

Auction and Related Revenues

For the year ended December 31, 2007, auction and related revenues increased $201.8 million, or 32%, when compared to the prior year. This increase is principally due to increased auction commission revenues, and, to a much lesser extent, a higher level of private sale commissions. The overall increase in Auction and Related Revenues was partially offset by losses reflected in principal activities related to certain works offered at auction under guarantees. For the year ended December 31, 2007, auction and related revenues were favorably impacted by changes in foreign currency exchange rates, which contributed $33.3 million to the overall increase. The significant factors impacting the increase in auction and related revenues is explained in more detail below.

Auction Commission Revenues —For the year ended December 31, 2007, auction commission revenues increased $210 million, or 38%, when compared to the prior year, principally due to an increase in Net Auction Sales, partially offset by a slight decrease in auction commission margin. (See “Net Auction Sales” and “Auction Commission Margin” below for a discussion of these key performance indicators.) For the year ended December 31, 2007, auction commission revenues were favorably impacted by changes in foreign currency exchange rates, which contributed $30.2 million to the overall increase.

Net Auction Sales —For the year ended December 31, 2007, Net Auction Sales increased $1.4 billion, or 43%, to $4.6 billion, when compared to the prior year. During the year, Net Auction Sales were favorably impacted by changes in foreign currency exchange rates, which contributed approximately $161.3 million to the overall increase. The remainder of the increase is primarily due to the following factors:



•





A $551 million, or 100%, improvement in results from this year’s highly successful Contemporary Art sales in New York and Europe, which included auction records for numerous artists. Throughout the year, individual works sold at significantly higher average prices than in the prior year, indicative of the increased importance of the Contemporary Art market to the Company’s results. Current period Net Auction Sales include results from the inaugural December evening sale of Contemporary Art in Paris, which brought the highest total ever for a sale in this collecting category at a Sotheby’s salesroom in France.



•





A $162 million, or 20%, increase in Impressionist Art sales in New York and Europe, reflecting the continued strength of this market. In 2007, Impressionist works sold at higher average selling prices than in the prior year, despite lacking a marquee painting on the scale of Picasso’s Dora Maar with Cat, which sold for $85 million (hammer price) in 2006.



•





A $91 million increase in Antiquities sales in New York, which in 2007 included the record sales of The Guennol Lioness for $51 million and a bronze figure of Artemis and the Stag for $25.5 million. There were no comparably priced Antiquities offerings in the equivalent prior year sales.



•





A $90 million, or 36%, increase in sales in Asia, which includes auctions conducted in Hong Kong, Singapore and Australia.



•





A $65 million, or 32%, increase in sales of Old Master Paintings and Drawings, highlighted by the sale of Rembrandt’s Saint James the Greater for $23 million in New York in January 2007, for which there was no comparably priced painting sold in this collecting category in the prior year.



•





A $58 million, or 56%, increase in sales of Jewelry, primarily attributable to a $34.9 million increase in results from the Magnificent Jewels sales in Switzerland, which included the sale of the “Chloe Diamond” for $14.4 million, the second highest price ever for a diamond sold at auction.



•





A $46 million, or 55%, increase in Asian art sales in New York, reflecting continued market growth, especially in Chinese Contemporary Art.



•





A $42 million, or 97%, increase in sales of Russian Art in London, reflecting the continued growth of this market. Results for the current year include the inaugural Autumn sale of Russian Art in London, which set twelve new records for Russian artists and achieved the highest total ever for auction sales of Russian Art conducted anywhere in the world.



•





A $35 million, or 81%, increase in sales of French & Continental Furniture, primarily due to the Galerie Ariane Dandois single-owner sale in New York, for which there was no comparable sale in this collecting category in the prior year.

Auction Commission Margin —Auction commission margin represents total auction commission revenues as a percentage of Net Auction Sales. Typically, auction commission margins are higher for lower value works of art or collections, while higher valued property earns lower margins. In certain limited situations, auction commission margins are adversely impacted by arrangements whereby auction commissions are shared with consignors or with the Company’s partners in auction guarantees. In certain of these instances, the Company may share auction commissions with a consignor as part of an auction guarantee, typically in exchange for a portion of the hammer (sale) price in excess of a negotiated amount. Auction commissions are occasionally shared with auction guarantee partners as a result of management’s decision to reduce risk through sharing arrangements with such partners, whereby the Company reduces its financial exposure under an auction guarantee in exchange for sharing the auction commission.

Effective January 12, 2007, the Company increased its buyer’s premium charged on certain auction sales. In salesrooms in the U.S., the buyer’s premium was increased to 20% on the first $500,000 of the hammer (sale) price and 12% of any remaining amount over $500,000. In foreign salesrooms, these U.S. dollar thresholds were generally translated into an appropriate fixed local currency amount. Previously, for 2006 auction sales, the buyer’s premium charged on auction sales was generally 20% of the hammer price on the first $200,000 and 12% of any remaining amount over $200,000.

Effective September 1, 2007, the Company again increased its buyer’s premium charged on certain auction sales. In salesrooms in the U.S., the buyer’s premium became 25% of the hammer (sale) price on the first $20,000, 20% of the hammer (sale) price above $20,000 up to and including $500,000 and 12% of any remaining amount over $500,000. In foreign salesrooms, with certain exceptions, these U.S. dollar thresholds have been translated into an appropriate fixed local currency amount.

As detailed in the chart above under “Key Performance Indicators,” for the year ended December 31, 2007, the Company experienced a slight decrease in auction commission margin when compared to the prior year. The comparison of auction commission margin to the prior year is influenced by the following factors:



•





A change in sales mix, as a more significant portion of Net Auction Sales in 2007 was at the high-end of the Company’s business where auction commission margins are traditionally lower.



•





The favorable impact of the increases to the buyer’s premium rate structure discussed above which became effective in January and September 2007, and which largely offset the impact of the change in sales mix discussed above.

Principal Activities —Auction segment principal activities consist mainly of gains or losses related to auction guarantees including: (i) any share of overage or shortfall recognized when the guaranteed property is sold at auction, (ii) any writedowns of the carrying value of guaranteed property that failed to sell at auction and (iii) any subsequent recoveries or losses on the sale of guaranteed property that failed to sell at auction. To a much lesser extent Auction segment principal activities includes gains or losses related to the sale of other Auction segment inventory, as well as any writedowns in the carrying value of such inventory, which consists mainly of objects obtained incidental to the auction process primarily as a result of defaults by purchasers after the consignor has been paid.

As the market for high-end collecting categories has grown considerably over the last three years, competition between the Company and Christie’s, its principal competitor, has greatly increased. As a result of this competitive landscape, the Company’s use of auction guarantees as a means of securing such consignments has increased significantly during this period, enabled in part by the Company’s profitability and related improvement in liquidity and financial condition since 2004. Accordingly, for the years ended December 31, 2007, 2006 and 2005, the total amount of auction guarantees issued by the Company, net of the impact of risk sharing arrangements with partners, was approximately $902 million, $450 million and $131 million, respectively. When evaluating the performance of the Company’s portfolio of auction guarantees, management takes into consideration the overall revenues earned on guarantees, which includes auction commission revenues, as well as any guarantee gains or losses reflected in principal activities. On this basis, the Company has never experienced an annual net loss on its portfolio of auction guarantees. However, management continually monitors liquidity risk associated with the use of auction guarantees.

For the year ended December 31, 2007, principal activities decreased $36 million when compared to the prior year resulting in a principal activities loss of $22.4 million; which was largely due to $19.1 million of net losses principally related to certain works sold or offered at auction under auction guarantees during 2007 (approximately $14 million of which were recognized in the third quarter of 2007). Also unfavorably impacting the comparison of principal activities for the year ended December 31, 2007 to the prior year is $9 million in revenue related to auction guarantees earned in the second quarter of 2006 as a result of the Company sharing in a significant portion of the hammer price on a guaranteed property sold at auction in that period. The comparison to the prior period was further unfavorably impacted by a $6.3 million gain recognized in 2006 on the sale of a guaranteed painting that had failed to sell at auction in 2004. No comparable gain was recognized in 2007.

The impact of the overall guarantee loss in 2007 was more than offset by $76.9 million in auction commission revenues earned from property sold under auction guarantees during the period. Accordingly, in 2007, the Company recognized net revenues related to property sold under auction guarantees of approximately $57.8 million. By comparison, in 2006, the Company recognized a net guarantee gain of $15.3 million in addition to $47.5 million of auction commission revenues earned from property sold under auction guarantees. Accordingly, in 2006, the Company recognized net revenues related to property sold under auction guarantees of approximately $62.8 million. (Auction commission revenues are reported in the table above within “Auction Commission Revenues” and are not a component of “Principal Activities.”)

Private Sale Commissions —The level of private sale commissions earned by the Company can vary significantly from period to period. For the year ended December 31, 2007, private sales commissions increased $29 million, or 113%, when compared to the prior year. This significant increase was largely due to management’s continued commitment to pursue private sale opportunities in the currently strong international art market. Included in 2007 private sale commissions is the private sale of the Rostropovich-Vishnevskaya Collection of Russian Art in September 2007, which was originally scheduled to be sold at auction in September 2007 and for which there was no comparable individual private sale in the prior year.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

Overview

For the nine months ended September 30, 2007, income from continuing operations increased $72.7 million to $110.7 million, almost doubling the results for the same period in the prior year. This improvement reflects the strength of the art market during the period, as Net Auction Sales and Private Sales (both defined below under “Key Performance Indicators”) increased significantly from the prior year. Total revenues for the nine months ended September 30, 2007 increased $170.3 million, or 42%, largely as a result of this higher level of sales activity. The increase in total revenues was partially offset by a higher level of operating expenses, which increased $117.8 million, or 37%, when compared to the prior year. Results for the nine months ended September 30, 2007 include an impairment loss ($15 million) and insurance recovery ($20 million) related to Noortman Master Paintings, (“NMP”) (see “Impairment Loss and Insurance Recovery” below), as well as a $4.8 million gain on the sale of land and buildings (see “Gain on Sale of Land and Buildings” below.)

As discussed above, due to the seasonality of the Company’s auction business, third quarter results typically reflect a loss from continuing operations. Accordingly, in the third quarter of 2007, the Company reported a loss from continuing operations of $20.9 million, which represents a $9.5 million, or 31%, improvement when compared to the third quarter of 2006. This improvement is largely attributable to a $27.7 million, or 48%, increase in total revenues, primarily as a result of significantly higher Private Sales and Net Auction Sales. This overall improvement includes the impact of $14.6 million of losses incurred on certain auction guarantees in the November 2007 Impressionist and Modern Art sale. Such losses are reflected within auction and related revenues in the Company’s results for the third quarter, as these guarantees were outstanding as of September 30, 2007. The overall increase in total revenues was further offset by a $25.5 million, or 27%, increase in operating expenses.

The art market has shown considerable strength since the beginning of our autumn season and management remains positive for the remainder of 2007. However, the results of the Company’s November Impressionist and Modern Art sales fell below pre-sale expectations. Nevertheless, demand for great works of art remains high in this category. (See statement on Forward Looking Statements and Item 1A, “Risk Factors”)

Auction and Related Revenues

For the three months ended September 30, 2007, auction and related revenues increased $15.5 million, or 31%, when compared to the prior year. This increase is principally due to increased auction commission revenues and significantly higher private sale commissions, partially offset by lower principal activities. For the three months ended September 30, 2007, auction and related revenues were favorably impacted by changes in foreign currency exchange rates, which contributed $4.7 million to the overall increase. Each of the significant factors impacting the increase in auction and related revenues is explained in more detail below.

For the nine months ended September 30, 2007, auction and related revenues increased $126.5 million, or 33%, when compared to the prior year. This increase is principally due to increased auction commission revenues, and, to a much lesser extent, a higher level of private sale commissions, partially offset by lower principal activities. For the nine months ended September 30, 2007, auction and related revenues were favorably impacted by changes in foreign currency exchange rates, which contributed $22.1 million to the overall increase. Each of the significant factors impacting the increase in auction and related revenues is explained in more detail below.

Auction Commission Revenues —For the three and nine months ended September 30, 2007, auction commission revenues increased $15.8 million, or 38%, and $129.5 million, or 40%, respectively, when compared to the same periods in the prior year principally due to an increase in Net Auction Sales, partially offset by a slight decrease in auction commission margin. (See “Net Auction Sales” and “Auction Commission Margin” below for a discussion of these key performance indicators.) For the three and nine months ended September 30, 2007, auction commission revenues were favorably impacted by changes in foreign currency exchange rates, which contributed $3.4 million and $19.3 million, respectively, to the overall increase.

Net Auction Sales — For the three months ended September 30, 2007, Net Auction Sales increased $81 million, or 41%, when compared to the same period in the prior year. During the period, Net Auction Sales were favorably impacted by changes in foreign currency exchange rates, which contributed approximately $17.5 million to the overall increase. The remainder of the increase is attributable to the following factors:

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A $17.2 million, or 112%, improvement in results from the Chinese Contemporary Art sale held in September in New York. The exceptional results from this sale are indicative of the market growth and strength of this collecting category.

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A $12.6 million, or 72%, increase in single-owner sales, principally due to Net Auction Sales attributable to the Guy and Myriam Collection of Important Turner Watercolours for $23.1 million, for which there was no comparable single-owner sale in the prior period.

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A $4.8 million, or 9%, increase in results from the July Old Master Paintings sales in London.

Third quarter Net Auction Sales are also favorably impacted by the timing of certain sales conducted primarily in London. Specifically, results for the third quarter of 2007 include approximately $23.5 million in Net Auction Sales of 20 th Century British Art and Victorian and Edwardian Art. In 2006, the comparable auctions for these collecting categories were held in the second quarter.

For the nine months ended September 30, 2007, Net Auction Sales increased $830.3 million, or 43%, to $2.8 billion, when compared to the prior period. During the period, Net Auction Sales were favorably impacted by changes in foreign currency exchange rates, which contributed approximately $108.5 million to the overall increase. The remainder of the increase is primarily due to the following factors:












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A $394 million, or 49%, improvement in results from the winter and spring Impressionist and Contemporary Art sales conducted in New York and London. The significant improvement in these results is indicative of the strength of these fine arts markets during the period, as works sold at a significantly higher average selling price than in the prior period.












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A $63 million, or 60%, increase in year-to-date single-owner sales.












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A $47 million, or 57%, increase in Asian art sales in New York, reflecting the continued market growth especially in Chinese Contemporary Art.












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A $37 million increase in the spring Antiquities sale in New York, which in 2007 included the record sale of a bronze figure of Artemis and the Stag for $25.5 million, for which there was no comparably priced offering in the equivalent sale in the prior period.












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A $36 million, or 23%, increase in sales of Old Master Paintings and Drawings, highlighted by the sale of Rembrandt’s Saint James the Greater for $23 million in New York in January 2007, for which there was no comparably priced painting sold in the prior period in this collecting category.












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A $35 million, or 33%, increase in various-owner sales in Asia, which includes sales conducted in Hong Kong, Singapore and Australia.












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A $30 million, or 68%, increase in sales of 19th Century European Paintings in Europe.

Auction Commission Margin —Auction commission margin represents total auction commission revenues as a percentage of Net Auction Sales. Typically, auction commission margins are higher for lower value works of art or collections, while higher valued property earns lower margins. In certain limited situations, auction commission margins are adversely impacted by arrangements whereby auction commissions are shared with the consignor or with the Company’s partners in auction guarantees. In certain of these instances, the Company may share auction commissions with the consignor as part of an auction guarantee, typically in exchange for a portion of the hammer price in excess of a negotiated amount. Auction commissions are occasionally shared with auction guarantee partners as a result of management’s decision to reduce auction risk through sharing arrangements with such partners, whereby the Company reduces its financial exposure under an auction guarantee in exchange for sharing the auction commission.

Effective January 12, 2007, the Company increased its buyer’s premium charged on certain auction sales. In salesrooms in the U.S., the buyer’s premium was 20% on the first $500,000 of the hammer (sale) price and 12% of any remaining amount over $500,000. In foreign salesrooms, these U.S. dollar thresholds were generally translated into an appropriate fixed local currency amount. Previously, and for 2006 auction sales, the buyer’s premium charged on auction sales was generally 20% of the hammer price on the first $200,000 and 12% of any remaining amount over $200,000.

Effective September 1, 2007, the Company again increased its buyer’s premium charged on certain auction sales. In salesrooms in the U.S., the buyer’s premium is now 25% of the hammer (sale) price on the first $20,000, 20% of the hammer (sale) price above $20,000 up to and including $500,000 and 12% of any remaining amount over $500,000. In foreign salesrooms, with certain exceptions, these U.S. dollar thresholds have been translated into an appropriate fixed local currency amount.

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