10-Q 1 bid-03312015x10q_xbrl.htm 10-Q BID- 03.31.2015-10Q_xbrl


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 March 31, 2015
Commission File Number 1-9750
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
38-2478409
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1334 York Avenue
New York, New York
 
10021
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (212) 606-7000

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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
As of April 30, 2015, there were 69,488,135 outstanding shares of Common Stock, par value $0.01 per share, of the registrant.
______________________________________________________________________________________________________




TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2#



PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

SOTHEBY’S
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Thousands of dollars, except per share data)
 
 
Three Months Ended
 
 
March 31, 2015
 
March 31, 2014
Revenues:
 
 

 
 

Agency
 
$
127,882

 
$
123,128

Principal
 
12,983

 
26,001

Finance
 
12,687

 
5,682

License fees
 
1,974

 
1,697

Other
 
149

 
303

Total revenues
 
155,675

 
156,811

Expenses:
 
 

 
 

Agency direct costs
 
11,839

 
10,437

Cost of Principal revenues
 
11,713

 
24,502

Cost of Finance revenues
 
3,388

 
710

Marketing
 
4,060

 
3,133

Salaries and related
 
62,930

 
65,756

General and administrative
 
34,729

 
37,332

Depreciation and amortization
 
4,782

 
5,147

CEO separation and transition costs (see Note 13)
 
4,189

 

Restructuring charges, net (see Note 14)
 
(359
)
 

Special charges (see Note 15)
 

 
5,703

Total expenses
 
137,271

 
152,720

Operating income
 
18,404

 
4,091

Interest income
 
129

 
416

Interest expense
 
(8,661
)
 
(8,783
)
Other expense
 
(1,959
)
 
(1,442
)
Income (loss) before taxes
 
7,913

 
(5,718
)
Equity in earnings of investees
 
1,144

 
154

Income tax expense
 
3,924

 
331

Net income (loss)
 
5,133

 
(5,895
)
Less: Net (loss) income attributable to noncontrolling interest

(69
)
 
219

Net income (loss) attributable to Sotheby's
 
$
5,202

 
$
(6,114
)
Basic and diluted earnings (loss) per share - Sotheby’s common shareholders
 
$
0.07

 
$
(0.09
)
Weighted average basic shares outstanding
 
69,090

 
69,143

Weighted average diluted shares outstanding
 
69,705

 
69,143

Cash dividends declared per common share
 
$
0.10

 
$
4.44

See accompanying Notes to Condensed Consolidated Financial Statements

3#



SOTHEBY’S
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(Thousands of dollars)

 
 
Three Months Ended
 
 
March 31, 2015

March 31, 2014
Net income (loss)
 
$
5,133

 
$
(5,895
)
Other comprehensive (loss) income:
 

 

Cumulative foreign currency translation adjustments, net of tax of ($1,667) and ($477)
 
(19,269
)
 
1,468

Reclassification of cumulative translation adjustment included in net income (loss)
 

 
2,058

Amortization of previously unrecognized net pension losses and prior service costs included in net income (loss), net of tax of $215 and $117
 
858

 
472

Other comprehensive (loss) income
 
(18,411
)
 
3,998

Comprehensive loss
 
(13,278
)
 
(1,897
)
Less: Comprehensive (loss) income attributable to noncontrolling interest
 
(69
)
 
219

Comprehensive loss attributable to Sotheby's
 
$
(13,209
)
 
$
(2,116
)
See accompanying Notes to Condensed Consolidated Financial Statements



4#



SOTHEBY’S
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Thousands of dollars)
 
 
March 31,
2015
 
December 31, 2014
 
March 31,
2014
 
 
 
 
A S S E T S
 
 

 
 
 
 

Current Assets:
 
 

 
 
 
 

Cash and cash equivalents
 
$
381,065

 
$
693,829

 
$
322,218

Restricted cash
 
11,467

 
32,837

 
17,495

Accounts receivable, net of allowance for doubtful accounts of $7,198, $7,318, and $7,030
 
476,228

 
913,743

 
522,886

Notes receivable, net of allowance for credit losses of $1,252, $1,166, and $1,821
 
83,564

 
130,796

 
163,443

Inventory
 
258,828

 
217,132

 
177,639

Deferred income taxes and income tax receivable
 
33,158

 
17,078

 
31,766

Prepaid expenses and other current assets
 
37,470

 
34,107

 
39,034

Total Current Assets
 
1,281,780

 
2,039,522

 
1,274,481

Notes receivable
 
671,595

 
568,942

 
315,067

Fixed assets, net of accumulated depreciation and amortization of $192,048, $191,260, and $182,178
 
357,498

 
364,382

 
375,779

Goodwill and other intangible assets, net of accumulated amortization of $5,062, $5,760, and $6,463
 
13,905

 
14,341

 
14,870

Equity method investments
 
41,476

 
10,210

 
10,744

Deferred income taxes and income tax receivable
 
31,999

 
38,202

 
48,395

Trust assets related to deferred compensation liability
 
50,684

 
50,490

 
52,984

Pension asset
 
28,664

 
28,993

 
38,997

Other long-term assets
 
19,317

 
19,738

 
19,421

Total Assets
 
$
2,496,918

 
$
3,134,820

 
$
2,150,738

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
 
$
401,560

 
$
980,470

 
$
413,641

Accounts payable and accrued liabilities
 
86,318

 
111,639

 
97,202

Accrued salaries and related costs
 
30,862

 
88,915

 
30,186

York Property Mortgage
 
218,642

 
218,728

 
3,581

Accrued and deferred income taxes
 
8,776

 
13,828

 
14,421

Other current liabilities
 
13,137

 
15,627

 
11,814

Total Current Liabilities
 
759,295

 
1,429,207

 
570,845

Credit facility borrowings
 
501,500

 
445,000

 
185,000

Long-term debt, net
 
300,000

 
300,000

 
515,161

Accrued and deferred income taxes
 
18,963

 
21,192

 
19,949

Deferred compensation liability
 
50,326

 
49,633

 
52,081

Other long-term liabilities
 
8,800

 
11,550

 
11,244

Total Liabilities
 
1,638,884

 
2,256,582

 
1,354,280

Commitments and contingencies (see Note 9)
 


 


 


Shareholders’ Equity:
 
 

 
 

 
 

Common Stock, $0.01 par value
 
700

 
695

 
695

Authorized shares—200,000,000
 
 

 
 
 
 

Issued shares—70,046,306, 69,550,073, and 69,494,869
 
 

 
 
 
 

Outstanding shares—69,488,135, 68,991,902, and 68,936,698
 
 
 
 
 
 
Additional paid-in capital
 
408,938

 
408,874

 
388,530

Treasury stock, at cost: 558,171 shares at March 31, 2015, December 31, 2014, and March 31, 2014
 
(25,000
)
 
(25,000
)
 
(25,000
)
Retained earnings
 
568,105

 
569,894

 
467,130

Accumulated other comprehensive loss
 
(95,177
)
 
(76,766
)
 
(35,455
)
Total Shareholders’ Equity
 
857,566

 
877,697

 
795,900

Noncontrolling interest
 
468

 
541

 
558

Total Equity
 
858,034

 
878,238

 
796,458

Total Liabilities and Shareholders’ Equity
 
$
2,496,918

 
$
3,134,820

 
$
2,150,738

See accompanying Notes to Condensed Consolidated Financial Statements

5#



SOTHEBY’S
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Thousands of dollars)
 
 
Three Months Ended
 
 
March 31,
2015
 
March 31,
2014
Operating Activities:
 
 

 
 

Net income (loss) attributable to Sotheby's
 
$
5,202

 
$
(6,114
)
Adjustments to reconcile net income (loss) attributable to Sotheby's to net cash used by operating activities:
 
 
 
 
Depreciation and amortization
 
4,782

 
5,147

Loss from cumulative translation adjustment upon liquidation of foreign subsidiary
 

 
2,058

Deferred income tax expense
 
4,685

 
415

Share-based payments
 
7,653

 
6,247

Net pension cost (benefit)
 
390

 
(173
)
Inventory writedowns and bad debt provisions
 
3,175

 
1,309

Amortization of debt discount
 
891

 
891

Excess tax benefits from share-based payments
 
(1,086
)
 
(3,121
)
Other
 
(1,236
)
 
894

Changes in assets and liabilities:
 
 

 
 

Accounts receivable
 
427,023

 
340,957

Due to consignors
 
(574,931
)
 
(524,796
)
Inventory
 
(47,172
)
 
(1,587
)
Prepaid expenses and other current assets
 
(2,419
)
 
(7,313
)
Other long-term assets
 
(2
)
 
(2,259
)
Deferred income tax assets and income tax receivable
 
(12,878
)
 
(11,189
)
Accrued income taxes and deferred income tax liabilities
 
(7,030
)
 
(12,856
)
Accounts payable and accrued liabilities and other liabilities
 
(84,410
)
 
(56,642
)
Net cash used by operating activities
 
(277,363
)
 
(268,132
)
Investing Activities:
 
 

 
 

Funding of notes receivable
 
(125,714
)
 
(75,661
)
Collections of notes receivable
 
74,186

 
88,730

Capital expenditures
 
(1,311
)
 
(2,210
)
Funding of equity method investment
 
(30,725
)
 

Distributions from equity investees
 
600

 
575

Proceeds from the sale of equity method investment
 
75

 
50

Decrease in restricted cash
 
17,806

 
14,556

Net cash (used) provided by investing activities
 
(65,083
)
 
26,040

Financing Activities:
 
 

 
 

Proceeds from credit facility borrowings
 
70,500

 
185,000

Repayments of credit facility borrowings
 
(14,000
)
 

Repayments of York Property Mortgage
 
(976
)
 
(927
)
Repurchase of common stock
 

 
(25,000
)
Dividends paid
 
(9,460
)
 
(310,809
)
Proceeds from exercise of employee stock options
 

 
967

Excess tax benefits from share-based payments
 
1,086

 
3,121

Funding of employee tax obligations upon the vesting of share-based payments
 
(8,897
)
 
(10,141
)
Net cash provided (used) by financing activities
 
38,253

 
(157,789
)
Effect of exchange rate changes on cash and cash equivalents
 
(8,571
)
 
784

Decrease in cash and cash equivalents
 
(312,764
)
 
(399,097
)
Cash and cash equivalents at beginning of period
 
693,829

 
721,315

Cash and cash equivalents at end of period
 
$
381,065

 
$
322,218

Supplemental information on non-cash investing and financing activities:
See Note 5 for information regarding non-cash transfers between Accounts Receivable (net) and Notes Receivable (net).
See accompanying Notes to Condensed Consolidated Financial Statements

6#



SOTHEBY’S
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation
The Condensed Consolidated Financial Statements included herein have been prepared by Sotheby’s pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America (the “U.S.”) have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the management of Sotheby’s believes that the disclosures herein are adequate to make the information presented not misleading and that all normal and recurring adjustments necessary for a fair presentation of the Condensed Consolidated Financial Statements are reflected in the interim periods presented. It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in Sotheby’s 2014 Annual Report on Form 10-K.
The Condensed Consolidated Financial Statements include the accounts of Sotheby’s wholly-owned subsidiaries and Sotheby's Beijing Auction Co., Ltd ("Sotheby's Beijing"), a joint venture in which Sotheby's has a controlling 80% ownership interest. The net (loss) income attributable to the minority owner of Sotheby's Beijing is reported as "Net (Loss) Income Attributable to Noncontrolling Interest" in the Condensed Consolidated Statements of Operations and the non-controlling 20% ownership interest is reported as "Noncontrolling Interest" within the Equity section of the Condensed Consolidated Balance Sheets.
Equity investments through which Sotheby’s exercises significant influence over the investee, but does not control, are accounted for using the equity method. Under the equity method, Sotheby’s share of investee earnings or losses is recorded within Equity in Earnings of Investees in the Condensed Consolidated Statements of Operations. Sotheby’s interest in the net assets of the investee is recorded within Equity Method Investments on the Condensed Consolidated Balance Sheets. Sotheby's equity method investees include Acquavella Modern Art and RM Sotheby's (see Note 7).       
2. Seasonality of Business
The worldwide art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. In the aggregate, second and fourth quarter Net Auction Sales1 represented 79% and 83% of total Net Auction Sales in 2014 and 2013, respectively, with auction commission revenues comprising approximately 81% of Sotheby's total revenues in those years. Accordingly, Sotheby’s financial results are seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters. Consequently, first and third quarter results have historically reflected lower revenues when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of Sotheby’s operating expenses.
3. Earnings (Loss) Per Share
Basic earnings (loss) per share—Basic earnings (loss) per share attributable to Sotheby's common shareholders is computed under the two-class method using the weighted average number of common shares outstanding during the period. The two-class method requires that the amount of net income attributable to participating securities be deducted from consolidated net income in the computation of basic earnings per share. In periods with a net loss, the net loss attributable to participating securities is not deducted from consolidated net loss in the computation of basic loss per share as the impact would be anti-dilutive. Sotheby's participating securities include unvested restricted stock units and restricted stock shares, which have non-forfeitable rights to dividends. (See Note 12 for information on Sotheby's share-based payment programs.)
Diluted earnings (loss) per share—Diluted earnings (loss) per share attributable to Sotheby's common shareholders is computed in a similar manner to basic earnings (loss) per share under the two-class method, using the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential common shares outstanding during the period. Sotheby's potential common shares currently include unvested performance share units held by employees, incremental common shares issuable upon the assumed exercise of employee stock options, and deferred stock units held by members of the Board of Directors. (See Note 12 for information on Sotheby's share-based payment programs.)
___________________________________________________________________
1 Net Auction Sales represents the hammer or sale price of property sold at auction.


7#



For the three months ended March 31, 2015, 1.3 million potential common shares related to unvested performance share units were excluded from the computation of diluted earnings per share because the profitability or stock price targets inherent in such awards were not achieved as of the balance sheet date. For the three months ended March 31, 2014, 2 million potential common shares were excluded from the computation of diluted earnings per share because Sotheby's reported a net loss for the period, and, therefore, their inclusion in the computation would be anti-dilutive.
The table below summarizes the computation of basic and diluted earnings (loss) per share for the three months ended March 31, 2015 and 2014 (in thousands, except per share amounts):
 
 
Three months ended March 31,
 
 
 
 
2015
 
2014
Basic:
 
 

 
 

Numerator:
 
 

 
 

Net income (loss) attributable to Sotheby’s
 
$
5,202

 
$
(6,114
)
Less: Net income attributable to participating securities
 
41

 

Net income (loss) attributable to Sotheby’s common shareholders
 
$
5,161

 
$
(6,114
)
Denominator:
 
 

 
 

Weighted average basic shares outstanding
 
69,090

 
69,143

Basic earnings (loss) per share - Sotheby’s common shareholders
 
$
0.07

 
$
(0.09
)
Diluted:
 
 

 
 

Numerator:
 
 

 
 

Net income (loss) attributable to Sotheby’s
 
$
5,202

 
$
(6,114
)
Less: Net income attributable to participating securities
 
41

 

Net income (loss) attributable to Sotheby’s common shareholders
 
$
5,161

 
$
(6,114
)
Denominator:
 
 

 
 

Weighted average common shares outstanding
 
69,090

 
69,143

Weighted average effect of Sotheby's dilutive potential common shares:
 
 
 
 
Performance share units
 
440

 

Deferred stock units
 
155

 

Stock options
 
20

 

Weighted average dilutive potential common shares outstanding
 
615

 

Weighted average diluted shares outstanding
 
69,705

 
69,143

Diluted earnings (loss) per share - Sotheby’s common shareholders
 
$
0.07

 
$
(0.09
)


8#



4. Segment Reporting
Sotheby’s operations are organized under three segments—Agency, Principal, and Finance. The table below presents Sotheby’s revenues and (loss) income before taxes by segment for the three months ended March 31, 2015 and 2014 (in thousands of dollars):
Three months ended March 31, 2015
 
Agency (a)
 
Principal
 
Finance (a)
 
All Other
 
Reconciling items (a)
 
Total
Revenues
 
$
127,882

 
$
12,983

 
$
15,957

 
$
2,123

 
$
(3,270
)
 
$
155,675

Segment (loss) income before taxes
 
$
(382
)
 
$
1,123

 
$
10,820

 
$
1,685

 
$
(5,333
)
 
$
7,913

Three months ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
123,128

 
$
26,001

 
$
8,947

 
$
2,000

 
$
(3,265
)
 
$
156,811

Segment (loss) income before taxes
 
$
(7,923
)
 
$
949

 
$
5,896

(b)
$
1,343

 
$
(5,983
)
 
$
(5,718
)
(a)
The reconciling items related to Revenues consist principally of amounts charged by the Finance segment to the Agency segment, including interest and facility fees related to certain loans made to Agency segment clients, as well as, beginning on January 1, 2015, fees charged for term loan collateral sold at auction or privately through the Agency segment during the period. For the three months ended March 31, 2015, such fees totaled $1.9 million. Prior period segment results for the three months ended March 31, 2014 have been adjusted to include $0.7 million of such fees. Each of the individual reconciling items related to segment income (loss) before taxes are listed in the table below.
(b) For the three months ended March 31, 2014, Finance segment income before taxes includes $1.1 million of intercompany charges from Sotheby's global treasury function.
For the three months ended March 31, 2015 and 2014, Agency segment revenues consist of the following (in thousands of dollars):
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Auction commissions
 
$
113,015

 
$
104,673

Private sale commissions
 
11,458

 
13,055

Auction guarantee and inventory activities
 
(751
)
 
670

Other Agency revenues (a)
 
4,160

 
4,730

Total Agency segment revenues
 
$
127,882

 
$
123,128

(a)
Includes commissions and other fees earned by Sotheby's on sales brokered by third parties, fees charged to clients for catalogue production and insurance, catalogue subscription revenues, and advertising revenues.

9#



The table below presents a reconciliation of segment income (loss) before taxes to consolidated income (loss) before taxes for the three months ended March 31, 2015 and 2014 (in thousands of dollars):
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Agency
 
$
(382
)
 
$
(7,923
)
Principal
 
1,123

 
949

Finance
 
10,820

 
5,896

All Other
 
1,685

 
1,343

Segment income before taxes
 
13,246

 
265

Reconciling items:
 
 
 
 
CEO separation and transition costs (see Note 13)
 
(4,189
)
 

Special charges (see Note 15)
 

 
(5,703
)
Equity in earnings of investees (a)
 
(1,144
)
 
(280
)
Income (loss) before taxes
 
$
7,913

 
$
(5,718
)
(a)
In the table above, Sotheby's share of earnings related to its equity investees is included as part of the (loss) income before taxes of the Agency and Principal segments, but is presented as a separate component of net income (loss) in the Condensed Consolidated Statements of Operations. For the three months ended March 31, 2015 and 2014, equity in earnings of investees related to the Principal segment was $0.4 million and $0.3 million, respectively. For the three months ended March 31, 2015, equity in earnings of investees related to the Agency segment was $0.7 million.
The table below presents Sotheby's assets by segment, as well as a reconciliation of segment assets to consolidated assets as of March 31, 2015, December 31, 2014, and March 31, 2014 (in thousands of dollars):
 
 
March 31, 2015
 
December 31, 2014
 
March 31, 2014
Agency
 
$
1,652,272

 
$
2,325,855

 
$
1,477,104

Principal
 
66,005

 
93,275

 
90,271

Finance
 
711,862

 
658,710

 
501,822

All Other
 
1,622

 
1,700

 
1,380

Total segment assets
 
2,431,761

 
3,079,540

 
2,070,577

Unallocated amounts:
 
 

 
 

 
 
Deferred tax assets and income tax receivable
 
65,157

 
55,280

 
80,161

Consolidated assets
 
$
2,496,918

 
$
3,134,820

 
$
2,150,738


10#



5. Receivables
Accounts Receivable, Net—Through its Agency segment, Sotheby's accepts property on consignment and matches sellers, also known as consignors, to buyers through the auction or private sale process. Following an auction or private sale, Sotheby's invoices the buyer for the purchase price of the property (including any commissions owed by the buyer), collects payment from the buyer, and remits to the consignor the net sale proceeds after deducting its commissions, expenses and applicable taxes and royalties.
Under Sotheby’s standard auction payment terms, payments from buyers are due no more than 30 days from the sale date and payments to consignors are due 35 days from the sale date. For private sales, payment from the buyer is typically due on the sale date, with the net sale proceeds being due to the consignor shortly thereafter. Extended payment terms are sometimes provided to an auction or private sale buyer. For auctions, the extent to which extended payment terms are provided to buyers can vary considerably from selling season to selling season. Extended payment terms typically extend the payment due date to a date that is no longer than one year from the sale date. In limited circumstances, the payment due date may be extended to a date that is beyond one year from the sale date. All extended payment term arrangements are approved by management under Sotheby's internal corporate governance policy. When providing extended payment terms, Sotheby’s attempts to match the timing of cash receipt from the buyer with the timing of payment to the consignor, but is not always successful in doing so.
In the limited circumstances when the payment due date is extended to a date that is beyond one year from the sale date, if the consignor does not provide Sotheby's matched payment terms, the receivable balance is reclassified from Accounts Receivable to Notes Receivable in the Condensed Consolidated Balance Sheets. As of March 31, 2015 and December 31, 2014, Notes Receivable within the Agency segment included $22.9 million and $22.7 million, respectively, of amounts reclassified from Accounts Receivable. As of March 31, 2014, there were no such Notes Receivable outstanding. (See discussion of Agency segment Notes Receivable below.)
Under the standard terms and conditions of its auction and private sales, Sotheby’s is not obligated to pay the consignor for property that has not been paid for by the buyer. If a buyer defaults on payment, the sale may be cancelled, and the property will be returned to the consignor. Alternatively, the consignor may reoffer the property at a future Sotheby's auction or negotiate a private sale with Sotheby's acting as its agent. In certain instances and subject to management approval under Sotheby’s internal corporate governance policy, the consignor may be paid the net sale proceeds before payment is collected from the buyer and/or the buyer may be allowed to take possession of the property before making payment. In situations when the buyer takes possession of the property before making payment, Sotheby’s is liable to the seller for the net sales proceeds whether or not the buyer makes payment. As of March 31, 2015, December 31, 2014, and March 31, 2014, Accounts Receivable (net) included $134.2 million, $116 million, and $176.1 million, respectively, related to situations when Sotheby's paid the consignor all or a portion of the net sales proceeds before payment was collected from the buyer. As of March 31, 2015, December 31, 2014, and March 31, 2014, Accounts Receivable (net) also included $48.7 million, $96.5 million, and $92.1 million, respectively, related to situations when the buyer was allowed to take possession of the property before making payment to Sotheby’s.

11#



Notes Receivable, Net—As of March 31, 2015, December 31, 2014, and March 31, 2014, Notes Receivable (net) consisted of the following (in thousands of dollars):
 
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Finance Segment:
 
 

 
 
 
 

   Consignor advances
 
$
38,190

 
$
25,994

 
$
96,338

   Term loans
 
661,657

 
618,447

 
360,830

        Total - Finance segment (net)
 
699,847

 
644,441

 
457,168

Agency Segment:
 
 
 
 
 
 
   Guarantee advances
 
25,000

 
25,000

 
7,725

   Consignor advances
 

 

 
3,000

   Other loans
 
25,036

 
24,760

 
2,142

        Total - Agency segment
 
50,036

 
49,760

 
12,867

Principal Segment:
 
 
 
 
 
 
   Secured loans
 
2,626

 
2,812

 
5,525

Other:
 
 
 
 
 
 
   Unsecured loan
 
2,650

 
2,725

 
2,950

          Total Notes Receivable (net)
 
$
755,159

 
$
699,738

 
$
478,510

Notes Receivable (Finance Segment)—The Finance segment provides certain collectors and art dealers with financing secured by works of art that Sotheby's either has in its possession or permits borrowers to possess. The Finance segment generally makes two types of secured loans: (1) advances secured by consigned property where the borrowers are contractually committed, in the near term, to sell the property through the Agency segment of Sotheby's (a “consignor advance”); and (2) general purpose term loans secured by property not presently intended for sale (a “term loan”).
Consignor advances allow sellers to receive funds upon consignment for an auction or private sale that will typically occur up to one year in the future and normally have short-term maturities. Term loans allow Sotheby's to establish or enhance mutually beneficial relationships with borrowers and may generate future auction or private sale consignments and/or purchases. Term loans normally have initial maturities of up to two years and typically carry a variable market rate of interest.
Prior to 2014, the lending activities of the Finance segment were funded primarily by the operating cash flows of the Agency segment, with the ability to supplement those cash flows with revolving credit facility borrowings. In January 2014, in order to reduce the Finance segment's cost of capital and enhance returns, Sotheby's established a separate capital structure for the Finance segment through which client loans are predominantly funded with borrowings drawn from a dedicated revolving credit facility. The establishment of the Finance segment's dedicated revolving credit facility in February 2014 has allowed management to debt fund a substantial portion of pre-existing loans and fund further growth of the loan portfolio. Cash balances are also used to fund a portion of the Finance segment loan portfolio, as appropriate. (See Note 6 for information related to the Finance segment's dedicated revolving credit facility.)
In certain situations, term loans are also made to refinance client auction and private sale purchases. For the three months ended March 31, 2015 and 2014, the Finance segment made $32.3 million and $7.1 million, respectively, of such loans. These loans are accounted for as non-cash transfers between Accounts Receivable (net) and Notes Receivable (net) and are, therefore, not reflected as the funding of Notes Receivable within investing activities in the Condensed Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such loans is classified within operating activities in the Condensed Consolidated Statements of Cash Flows. For the three months ended March 31, 2015 and 2014, such repayments totaled $10.7 million and $16.1 million, respectively. As of March 31, 2015, December 31, 2014, and March 31, 2014, Notes Receivable (net) included $112 million, $90.4 million, and $63.9 million, respectively, of such loans.
The collection of secured loans 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 when there are competing claims on the collateral and/or when a borrower becomes subject to bankruptcy or insolvency laws, Sotheby’s ability to realize on its collateral may be limited or delayed.

12#



Sotheby’s target loan-to-value (“LTV”) ratio, which is defined as the principal loan amount divided by the low auction estimate of the collateral, is 50%, but loans are routinely made with LTV ratios between 51% and 60% as the Finance segment credit facility permits borrowings on loans up to an LTV of 60%. In rare circumstances, loans are also made at an initial LTV ratio higher than 60%. The decision to make a loan with an LTV ratio above 50% is made by management based on an assessment of borrower credit risk. In addition, the LTV ratio of certain loans may increase above the 50% target due to decreases in the low auction estimates of the collateral. The revaluation of loan collateral is performed by Sotheby’s specialists on an annual basis or more frequently if there is a material change in circumstances related to the loan, the value of the collateral, the disposal plans for the collateral, or if an event of default occurs. Management believes that the LTV ratio is the critical credit quality indicator for Finance segment secured loans.
The table below provides the aggregate LTV ratio for the Finance segment loan portfolio as of March 31, 2015, December 31, 2014, and March 31, 2014 (in thousands of dollars):
 
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Finance segment secured loans
 
$
699,847

 
$
644,441

 
$
457,168

Low auction estimate of collateral
 
$
1,444,468

 
$
1,349,094

 
$
1,075,376

Aggregate LTV ratio
 
48
%
 
48
%
 
43
%
The table below provides the aggregate LTV ratio for Finance segment secured loans with an LTV ratio above 50% as of March 31, 2015, December 31, 2014, and March 31, 2014 (in thousands of dollars):
 
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Finance segment secured loans with an LTV ratio above 50%
 
$
432,967

 
$
329,135

 
$
169,783

Low auction estimate of collateral related to Finance segment secured loans with an LTV ratio above 50%
 
$
781,387

 
$
556,662

 
$
268,621

Aggregate LTV ratio of Finance segment secured loans with an LTV ratio above 50%
 
55
%
 
59
%
 
63
%
As of March 31, 2015, December 31, 2014, and March 31, 2014, the balance of Finance segment secured loans with an LTV ratio above 50% includes $334.5 million, $280.3 million, and $103.8 million, respectively, of loans with an LTV ratio between 51% and 60%.
The table below provides other credit quality information regarding Finance segment secured loans as of March 31, 2015, December 31, 2014, and March 31, 2014 (in thousands of dollars):
 
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
Total secured loans
 
$
699,847

 
$
644,441

 
$
457,168

Loans past due
 
$
16,269

 
$
22,409

 
$
18,791

Loans more than 90 days past due
 
$
10,000

 
$

 
$
12,483

Non-accrual loans
 
$

 
$

 
$

Impaired loans
 
$

 
$

 
$

Allowance for credit losses:
 
 
 
 

 
 

Allowance for credit losses for impaired loans
 
$

 
$

 
$

Allowance for credit losses based on historical data
 
1,252

 
1,166

 
1,821

Total allowance for credit losses - secured loans
 
$
1,252

 
$
1,166

 
$
1,821

Management considers a loan to be past due when principal payments are not paid in accordance with the stated terms of the loan. As of March 31, 2015, $16.3 million of the Notes Receivable (net) balance was considered to be past due, of which $10 million was more than 90 days past due. The collateral securing these loans has low auction estimates of approximately $57 million and $43 million, respectively, resulting in aggregate LTV ratios of 29% and 23%, respectively. Sotheby's is continuing to accrue interest on these past due loans. In April 2015, $15.7 million of the past due loan balance was refinanced on terms favorable to Sotheby's, and $0.6 million was repaid with interest.

13#



A non-accrual loan is a loan for which future Finance revenue is not recorded due to management’s determination that it is probable that future interest on the loan is not collectible. Any cash receipts subsequently received on non-accrual loans are first applied to reduce the recorded principal balance of the loan, with any proceeds in excess of the principal balance then applied to interest owed by the borrower. The recognition of Finance revenue may resume on a non-accrual loan if sufficient additional collateral is provided by the borrower or if management becomes aware of other circumstances that indicate that it is probable that the borrower will make future interest payments on the loan. As of March 31, 2015, December 31, 2014, and March 31, 2014, there were no non-accrual loans outstanding.
A loan is considered to be impaired when management determines that it is probable that a portion of the principal and interest owed by the borrower will not be recovered after taking into account the estimated realizable value of the collateral securing the loan, as well as the ability of the borrower to repay any shortfall between the value of the collateral and the amount of the loan. If a loan is considered to be impaired, Finance Revenue is no longer recognized and bad debt expense is recorded for any principal or accrued interest that is deemed uncollectible. As of March 31, 2015, December 31, 2014, and March 31, 2014, there were no impaired loans outstanding.
During the period January 1, 2015 to March 31, 2015, activity related to the Allowance for Credit Losses was as follows (in thousands of dollars):
    
Allowance for credit losses as of January 1, 2015
$
1,166

Change in loan loss provision
86

Allowance for credit losses as of March 31, 2015
$
1,252

As of March 31, 2015, unfunded commitments to extend additional credit through Sotheby's Finance segment were $30.2 million.
Notes Receivable (Agency Segment)—Sotheby’s is obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. In addition, in certain limited situations, the Agency segment will provide consignor advances to clients. Such auction guarantee and consignor advances are recorded on the Condensed Consolidated Balance Sheets within Notes Receivable (net). As of March 31, 2015, December 31, 2014, and March 31, 2014, auction guarantee advances totaled $25 million, $25 million, and $7.7 million, respectively. (See Note 10 for additional information related to auction guarantees.) As of March 31, 2014, Agency segment consignor advances totaled $3 million.
In the limited circumstances when the payment due date for an auction or private sale receivable is extended to a date that is beyond one year from the sale date, if the consignor does not provide Sotheby's matched payment terms, the receivable balance is reclassified from Accounts Receivable to Notes Receivable in the Condensed Consolidated Balance Sheets. As of March 31, 2015 and December 31, 2014, Notes Receivable within the Agency segment included $22.9 million and $22.7 million of amounts reclassified from Accounts Receivable against which Sotheby's held $3.7 million of collateral. As of March 31, 2014, there were no such Notes Receivable outstanding. These Notes Receivable are accounted for as non-cash transfers between Accounts Receivable (net) and Notes Receivable (net) and are, therefore, not reflected within Investing Activities in the Condensed Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such Notes Receivable is classified within Operating Activities in the Condensed Consolidated Statements of Cash Flows.
Under certain circumstances, Sotheby's, through its Agency segment, finances the purchase of works of art by unaffiliated art dealers through unsecured loans. As of March 31, 2015, December 31, 2014, and March 31, 2014, one such unsecured loan totaled $2.1 million. Sotheby's is no longer accruing interest with respect to this unsecured loan, but management believes that the $2.1 million balance is collectible based on discussions with the borrower.
Notes Receivable (Principal Segment)—Under certain circumstances, the Principal segment provides secured loans to certain art dealers to finance the purchase of works of art. In these situations, Sotheby's acquires a partial ownership interest in the purchased property in addition to providing the loan. Upon its eventual sale, the loan is repaid, and any profit or loss is shared by Sotheby's and the dealer according to their respective ownership interests. As of March 31, 2015, December 31, 2014, and March 31, 2014, such loans totaled $2.6 million, $2.8 million, and $5.5 million, respectively.
Notes Receivable (Other)—In the second quarter of 2013, Sotheby's sold its interest in an equity method investee for $4.3 million and, as a result, recognized a gain of $0.3 million. The sale price was funded by an upfront cash payment to Sotheby's of $0.8 million and the issuance of a $3.5 million unsecured loan. This loan matures in December 2018, is being charged a variable market rate of interest, and requires monthly payments during the loan term. As of March 31, 2015, December 31, 2014, and March 31, 2014 the carrying value of this loan was approximately $2.7 million, $2.7 million, and $3 million, respectively.


14#



6. Debt 
Revolving Credit Facilities—Sotheby's has a credit agreement with an international syndicate of lenders led by General Electric Capital Corporation. This credit agreement provides for separate dedicated revolving credit facilities for the Agency segment (the “Agency Credit Agreement”) and the Finance segment (the “Finance Credit Agreement”) (collectively, the “Credit Agreements”). The Credit Agreements have a maturity date of August 22, 2019.
The Agency Credit Agreement provides for an asset-based revolving credit facility the proceeds of which may be used primarily for the working capital and other general corporate needs of the Agency segment. The Finance Credit Agreement provides for an asset-based revolving credit facility the proceeds of which may be used primarily for the working capital and other general corporate needs of the Finance segment, including the funding of client loans. The Credit Agreements allow Sotheby's to transfer the proceeds of borrowings under each of the revolving credit facilities between the Agency and Finance segments.
The maximum aggregate borrowing capacity of the Credit Agreements, which is subject to a borrowing base, is $850 million, with $300 million committed to the Agency segment and $550 million committed to the Finance segment. The borrowing capacity of the Credit Agreements includes a $50 million incremental revolving credit facility with higher advance rates against certain assets and higher commitment and borrowing costs (the "Incremental Facility"). The Incremental Facility has a maturity date of August 21, 2015, which may be extended for an additional 365 days on an annual basis with the consent of the lenders who agree to extend their commitments under the Incremental Facility.
The Credit Agreements have a sub-limit of $200 million for borrowings in the U.K. and Hong Kong, with up to $50 million available for foreign borrowings under the Agency Credit Agreement and up to $150 million available for foreign borrowings under the Finance Credit Agreement. The Credit Agreements also include an accordion feature, which allows Sotheby’s to seek an increase to the combined borrowing capacity of the Credit Agreements until February 23, 2019 by an amount not to exceed $100 million in the aggregate.
The borrowing base under the Agency Credit Agreement is determined by a calculation that is primarily based upon a percentage of the carrying values of certain auction guarantee advances, a percentage of the carrying value of certain inventory, a percentage of the carrying value of certain extended payment term receivables arising from auction or private sale transactions, and the fair value of certain of Sotheby's trademarks. The borrowing base under the Finance Credit Agreement is determined by a calculation that is primarily based upon a percentage of the carrying values of certain loans in the Finance segment loan portfolio and the fair value of certain of Sotheby's trademarks.
The obligations under the Credit Agreements are cross-guaranteed and cross-collateralized. Domestic borrowers are jointly and severally liable for all obligations under the Credit Agreements and, subject to certain limitations, borrowers in the U.K. and Sotheby's Hong Kong Limited, are jointly and severally liable for all obligations of the foreign borrowers under the Credit Agreements. In addition, the obligations of the borrowers under the Credit Agreements are guaranteed by certain of their subsidiaries. Sotheby's obligations under the Credit Agreements are secured by liens on all or substantially all of the personal property of the entities that are borrowers and guarantors under the Credit Agreements.
The Credit Agreements contain certain customary affirmative and negative covenants including, but not limited to, limitations on capital expenditures, a $600 million limitation on net outstanding auction guarantees (i.e., auction guarantees less the impact of related risk and reward sharing arrangements), and limitations on the use of proceeds from borrowings under the Credit Agreements. However, the Credit Agreements do not limit dividend payments and Common Stock repurchases provided that, both before and after giving effect thereto: (i) there are no events of default, (ii) the aggregate available borrowing capacity equals or exceeds $100 million, and (iii) the Liquidity Amount, as defined in the Credit Agreements, equals or exceeds $200 million. The Credit Agreements also contain certain financial covenants, which are only applicable during certain defined compliance periods. These financial covenants were not applicable for the twelve month period ended March 31, 2015.
Sotheby’s has incurred aggregate fees of approximately $18.5 million in conjunction with the establishment of and subsequent amendments to its credit agreement with General Electric Capital Corporation. These fees are being amortized on a straight-line basis through the August 22, 2019 maturity date of the Credit Agreements.

15#



The following tables summarize information relevant to the Credit Agreements as of and for the periods ended March 31, 2015, December 31, 2014, and March 31, 2014 (in thousands of dollars):
As of and for the Three Months Ended March 31, 2015
 
Agency Credit Agreement
 
Finance Credit Agreement
 
Total
Maximum borrowing capacity (a)
 
$
300,000

 
$
550,000

 
$
850,000

Borrowing base
 
$
280,107

 
$
550,000

 
$
830,107

Borrowings outstanding
 
$

 
$
501,500

 
$
501,500

Available borrowing capacity (b)
 
$
280,107

 
$
48,500

 
$
328,607

Average borrowings outstanding
 
$

 
$
472,872

 
$
472,872

Borrowing Costs
 
$
706

 
$
3,388

 
$
4,094

As of and for the Year Ended December 31, 2014
 
Agency Credit Agreement
 
Finance Credit Agreement
 
Total
Maximum borrowing capacity (a)
 
$
300,000

 
$
550,000

 
$
850,000

Borrowing base
 
$
237,830

 
$
519,255

 
$
757,085

Borrowings outstanding
 
$

 
$
445,000

 
$
445,000

Available borrowing capacity (b)
 
$
237,830

 
$
74,255

 
$
312,085

Average borrowings outstanding
 
$

 
$
306,448

 
$
306,448

Borrowing Costs
 
$
2,240

 
$
8,740

 
$
10,980

As of and for the Three Months Ended March 31, 2014
 
Agency Credit Agreement
 
Finance Credit Agreement
 
Total
Maximum borrowing capacity (a)
 
$
150,000

 
$
450,000

 
$
600,000

Borrowing base
 
$
74,004

 
$
286,077

 
$
360,081

Borrowings outstanding
 
$

 
$
185,000

 
$
185,000

Available borrowing capacity (b)
 
$
74,004

 
$
101,077

 
$
175,081

Average borrowings outstanding
 
$

 
$
91,944

 
$
91,944

Borrowing Costs
 
$
597

 
$
710

 
$
1,307

(a) In August 2014, the Credit Agreements were amended and restated to, among other things, increase the maximum borrowing capacity of the Credit Agreements from $600 million to $850 million.
(b) The available borrowing capacity is calculated as the borrowing base less borrowings outstanding.
For the three months ended March 31, 2015 and 2014, borrowing costs related to the Finance Credit Agreement include interest of $3.2 million and $0.5 million, respectively, and fee amortization of $0.2 million and $0.2 million, respectively. For the year ended December 31, 2014, borrowing costs related to the Finance Credit Agreement include interest of $7.7 million and fee amortization of $1 million. Such borrowing costs are reflected in the Condensed Consolidated Statements of Operations as the Cost of Finance Revenues. For the three months ended March 31, 2015 and 2014, the weighted average cost of borrowings related to the Finance Credit Agreement was approximately 2.9% and 3.1%, respectively. For the year ended December 31, 2014, the weighted average cost of borrowings related to the Finance Credit Agreement was approximately 2.9%.
Borrowing costs related to the Agency Credit Agreement, which include interest and fee amortization, are reflected in the Condensed Consolidated Statements of Operations as Interest Expense. (See the table below for additional information related to Interest Expense associated with the Agency Credit Agreement.)

16#



Long-Term Debt—As of March 31, 2015, December 31, 2014, and March 31, 2014, Long-Term Debt consisted of the following (in thousands of dollars):
 
 
March 31,
2015
 
December 31,
2014
 
March 31,
2014
York Property Mortgage, net of unamortized discount of $891, $1,782, and $4,455
 
$
218,642

 
$
218,728

 
$
218,742

2022 Senior Notes
 
300,000

 
300,000

 
300,000

Less Current Portion:
 
 
 
 
 
 
     York Property Mortgage
 
(218,642
)
 
(218,728
)
 
(3,581
)
Total Long-Term Debt, net
 
$
300,000

 
$
300,000

 
$
515,161

(See the captioned sections below for information related to the York Property Mortgage and the 2022 Senior Notes.)
York Property Mortgage—On February 6, 2009, Sotheby's purchased the land and building located at 1334 York Avenue, New York, New York (the “York Property”) from RFR Holding Corp. (“RFR”) for a purchase price of $370 million. The York Property is home to Sotheby's sole North American auction salesroom and principal North American exhibition space, including S|2, Sotheby's private sale exhibition gallery. The York Property is also home to the U.S. operations of the Finance segment, as well as Sotheby's corporate offices.
Sotheby's financed the $370 million purchase price through an initial $50 million cash payment made in conjunction with the signing of the related purchase and sale agreement on January 11, 2008, an $85 million cash payment made when the purchase was consummated on February 6, 2009, and the assumption of an existing $235 million mortgage on the York Property (the "York Property Mortgage").
The York Property Mortgage matures on July 1, 2035, but has an optional pre-payment date of July 1, 2015 and bears an annual rate of interest of approximately 5.6%, which increases to 10.6% subsequent to July 1, 2015 unless the mortgage is repaid by that date. Management is currently exploring its options with respect to a long-term refinancing of the York Property Mortgage, with the intent of completing such a refinancing no later than July 1, 2015. Accordingly, the $218.6 million carrying value of the York Property Mortgage is classified as a current liability on Sotheby's Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014.
In conjunction with the final accounting for the York Property purchase in February 2009, the York Property Mortgage was recorded on Sotheby's balance sheet at its $212.1 million fair value. The resulting $22.9 million debt discount is being amortized to Interest Expense over the remaining expected term of the loan through June 2015. Sotheby's paid fees of $2.4 million in conjunction with the assumption of the York Property Mortgage, which are also being amortized to Interest Expense through June 2015. As of March 31, 2015, the fair value of the York Property Mortgage was approximately $220.3 million based on a present value calculation utilizing an interest rate obtained from a third party source. As such, this fair value measurement is considered to be a Level 3 fair value measurement in the fair value hierarchy as per Accounting Standards Codification 820, Fair Value Measurements ("ASC 820").
The York Property and the York Property Mortgage are held by 1334 York, LLC, a separate legal entity of Sotheby's that maintains its own books and records and whose results are ultimately consolidated into Sotheby's financial statements. The assets of 1334 York, LLC are not available to satisfy the obligations of other Sotheby's affiliates or any other entity.
2022 Senior Notes—On September 27, 2012, Sotheby's issued $300 million aggregate principal amount of 5.25% Senior Notes, due October 1, 2022 (the "2022 Senior Notes"). The 2022 Senior Notes were offered only to qualified institutional buyers in accordance with Rule 144A and to non-U.S. Persons under Regulation S of the Securities Act of 1933, as amended (the “Securities Act”). Holders of the 2022 Senior Notes do not have registration rights, and the 2022 Senior Notes have not been and will not be registered under the Securities Act.
The net proceeds from the issuance of the 2022 Senior Notes were approximately $293.7 million, after deducting fees paid to the initial purchasers, and were principally used to retire previously outstanding debt.
The 2022 Senior Notes are guaranteed, jointly and severally, on a senior unsecured basis by certain of Sotheby's existing and future domestic subsidiaries to the extent and on the same basis that such subsidiaries guarantee borrowings under the Credit Agreements. Interest on the 2022 Senior Notes is payable semi-annually in cash on April 1 and October 1 of each year.

17#



The 2022 Senior Notes are redeemable by Sotheby's, in whole or in part, on or after October 1, 2017, at specified redemption prices set forth in the underlying indenture, plus accrued and unpaid interest to, but excluding, the redemption date. Prior to October 1, 2017, the 2022 Senior Notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, plus a premium equal to the greater of 1% of the principal amount of the 2022 Senior Notes and a make-whole premium (as defined in the underlying indenture).
In addition, at any time prior to October 1, 2015, Sotheby's may redeem up to 35% of the aggregate principal amount of the 2022 Senior Notes with the net cash proceeds of certain equity offerings at the redemption price of 105.25% plus accrued and unpaid interest. The 2022 Senior Notes are not callable by holders unless Sotheby's is in default under the terms of the underlying indenture.
As of March 31, 2015, the $300 million principal amount of 2022 Senior Notes had a fair value of approximately $295.5 million based on a broker quoted price derived via a pricing model using observable and unobservable inputs. As such, this fair value measurement is considered to be a Level 3 fair value measurement in the fair value hierarchy as per ASC 820.
Future Principal and Interest Payments—The aggregate future principal and interest payments due under the Credit Agreements, the York Property Mortgage, and the 2022 Senior Notes during the five-year period after the March 31, 2015 balance sheet date are as follows (in thousands of dollars):
April 2015 to March 2016
$
239,357

April 2016 to March 2017
$
15,750

April 2017 to March 2018
$
15,750

April 2018 to March 2019
$
15,750

April 2019 to March 2020
$
517,250

Consistent with its presentation as a current liability on the March 31, 2015 Condensed Consolidated Balance Sheet, the table above assumes that the York Property Mortgage will be repaid on or before July 1, 2015. Management is currently exploring its options with respect to a long-term refinancing of the York Property Mortgage, with the intent of completing such a refinancing no later than July 1, 2015.
Interest Expense—For the three months ended March 31, 2015 and 2014, Interest Expense consisted of the following (in thousands of dollars):
 
 
Three Months Ended
 
 
March 31,
 
 
2015
 
2014
Agency Credit Agreement:
 
 
 
 
Amortization of amendment and arrangement fees
 
$
315

 
$
324

Commitment fees
 
391

 
273

Sub-total
 
706

 
597

York Property Mortgage
 
4,011

 
4,060

2022 Senior Notes
 
3,938

 
3,938

Other interest expense
 
6

 
188

Total Interest Expense
 
$
8,661

 
$
8,783

Other interest expense consists primarily of the amortization of debt issuance costs related to the 2022 Senior Notes.
7. Investment in RM Sotheby's
On February 18, 2015, Sotheby's acquired a 25% ownership interest in RM Auctions, an auction house for investment-quality automobiles, for $30.7 million. Following this investment, RM Auctions is now known as RM Sotheby's. In addition to the initial 25% ownership interest, Sotheby’s has governance participation and a comprehensive partnership agreement to work together to drive growth in the business. Over time, Sotheby’s will have opportunities to increase its ownership stake as the partnership evolves and grows.

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8. Defined Benefit Pension Plan
Sotheby’s sponsors a defined benefit pension plan covering U.K. employees who entered service prior to April 1, 2004 (the “U.K. Pension Plan”). The table below summarizes the components of the net pension cost (benefit) related to the U.K. Pension Plan for the three months ended March 31, 2015 and 2014 (in thousands of dollars):
 
 
 
Three months ended March 31,
 
 
2015
 
2014
Service cost
 
$
1,115

 
$
1,130

Interest cost
 
3,205

 
3,927

Expected return on plan assets
 
(5,004
)
 
(5,819
)
Amortization of previously unrecognized net pension losses
 
984

 
589

Amortization of prior service cost
 
90

 

Net pension cost (benefit)
 
$
390

 
$
(173
)
For the three months ended March 31, 2015, Sotheby's contributed $0.5 million to the U.K. Pension Plan, and total contributions for the year ending December 31, 2015 are expected to be approximately $2.1 million.
9. Commitments and Contingencies
Compensation Arrangements—As of March 31, 2015, Sotheby’s had compensation arrangements with certain senior employees, which expire at various points between December 2015 and March 31, 2020. Such arrangements may provide, among other benefits, for minimum salary levels and for compensation under Sotheby's incentive compensation programs that is payable only if specified Company and individual goals are attained. Additionally, under certain circumstances, certain of these arrangements provide annual share-based payments, severance payments, and other cash compensation. The aggregate remaining commitment for salaries and other cash compensation related to these compensation arrangements, excluding any participation in Sotheby’s incentive compensation programs, was approximately $22 million as of March 31, 2015.
Guarantees of Collection—A guarantee of collection is a guarantee to a consignor that, under certain conditions, Sotheby's will pay the consignor for property that has sold at auction, but has not yet been paid for by the purchaser. It is not a guarantee that the property will be sold at a certain minimum price.
Sotheby's has an outstanding guarantee of collection related to property that has been offered at auctions occurring through March 31, 2015 and which will be offered at future auctions. In the event a purchaser does not pay for any item sold at auction by the settlement date, which is 35 days after the date of each respective auction or such other date agreed to by the consignor, Sotheby's is required to pay the consignor the net sale proceeds up to the final pre-sale mid-estimate of the item, but Sotheby's would then take title to the property and have the right to pursue the defaulting buyer and/or reoffer the property at a future sale. As of March 31, 2015, the guarantee of collection related to property sold under this arrangement was $13.6 million.
As of March 31, 2015, Sotheby's has another outstanding guarantee of collection totaling $11.7 million related to an item sold at auction in the fourth quarter of 2014. The purchaser of this property is scheduled to pay the outstanding balance due in the second quarter of 2015.
Legal Actions—Sotheby’s becomes involved in various claims and lawsuits incidental to the ordinary course of its business, including the matters described below. Management is required to assess the likelihood of any adverse judgments or outcomes in these matters, as well as potential ranges of probable or reasonably possible losses. A determination of the amount of losses, if any, to be recorded or disclosed as a result of these contingencies is based on a careful analysis of each individual exposure with, in some cases, the assistance of outside legal counsel. The amount of losses recorded or disclosed for such contingencies may change in the future due to new developments in each matter or a change in settlement strategy. Management does not believe that the outcome of any of these pending claims or proceedings, individually and in the aggregate, will have a material adverse effect on Sotheby’s consolidated results of operations, financial condition and/or cash flows.

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Estate of Robert Graham, et al. v. Sotheby's, Inc. is a purported class action commenced in the U.S. District Court for the Central District of California in October 2011 on behalf of U.S. artists (and their estates) whose artworks were sold by Sotheby's in the State of California or at auction by California sellers and for which a royalty was allegedly due under the California Resale Royalties Act (the “Resale Royalties Act”). Plaintiffs seek unspecified damages, punitive damages and injunctive relief for alleged violations of the Resale Royalties Act and the California Unfair Competition Law. In January 2012, Sotheby’s filed a motion to dismiss the action on the grounds, among others, that the Resale Royalties Act violates the U.S. Constitution and is preempted by the U.S. Copyright Act of 1976. In February 2012, the plaintiffs filed their response to Sotheby's motion to dismiss. The court heard oral arguments on the motion to dismiss on March 12, 2012. On May 17, 2012, the court issued an order dismissing the action on the ground that the Resale Royalties Act violated the Commerce Clause of the U.S. Constitution. The plaintiffs have appealed this ruling. On May 5, 2015, an en banc panel of the U.S. Court of Appeals for the Ninth Circuit issued a decision affirming the lower court decision that the Resale Royalties Act was unconstitutional insofar as it sought to apply to sales outside of the state of California.
Third Point LLC v. Ruprecht, et al., Civil Action No. 9469-VCP (Del. Ch. 2014)—On March 25, 2014, Third Point LLC ("Third Point") filed a verified complaint against William F. Ruprecht, Peregrine A. M. Cavendish, Domenico De Sole, John M. Angelo, Steven B. Dodge, Daniel H. Meyer, Allen I. Questrom, Marsha E. Simms, Michael I. Sovern, Robert S. Taubman, Diana L. Taylor and Dennis M. Weibling (collectively, the “Directors”) and nominal defendant Sotheby’s. Third Point alleged that the Directors breached their fiduciary duties of loyalty and due care in adopting a shareholder rights plan (the “Rights Plan”) on October 4, 2013 and enforcing the plan against Third Point on March 21, 2014 by denying Third Point’s request that it be treated as a 13G filer under the Rights Plan to allow it to acquire up to 20% of Sotheby’s outstanding Common Stock. Third Point alleged that the Rights Plan was not a reasonable response to a legitimate threat to Sotheby’s and alleged that the adoption and continuation of the Rights Plan hindered its ability to wage an effective proxy contest. The complaint sought a declaration that the Directors breached their fiduciary duties and that the Rights Plan was unenforceable, and sought an order that Sotheby’s be required to redeem the Rights Plan in its entirety, or in the alternative, be enjoined from enforcing the Rights Plan against Third Point, or be required to amend the Rights Plan to allow Third Point to acquire up to 20% of Sotheby’s outstanding Common Stock. Along with its complaint, Third Point moved for expedited proceedings. On April 10, 2014, the Court ordered partial coordination with The Employees Retirement System of the City of St. Louis v. Ruprecht, et al., Civil Action No. 9497-VCP and Louisiana Municipal Employees Retirement System v. Ruprecht, et al., Civil Action No.--9508-VCP, which are discussed below (together, the "Stockholder Actions"), with this action. On May 2, 2014, following briefing and argument on plaintiffs’ motions for preliminary injunctions in the coordinated actions, the Court issued a Memorandum Opinion denying the motion. Specifically, the Court found that plaintiffs failed to show a likelihood of success on the merits of their claims. On May 4, 2014, Sotheby's entered into a support agreement that, among other things, resolved the previously pending proxy contest. As part of this support agreement, Third Point agreed to dismiss with prejudice this litigation. On May 6, 2014, Third Point filed a notice of dismissal terminating its case.
The Employees Retirement System of the City of St. Louis v. Ruprecht, et al., Civil Action No. 9497-VCP (Del. Ch. 2014)—On April 1, 2014, the Employees Retirement System of the City of St. Louis, the plaintiff, on behalf of a putative class of Sotheby’s stockholders, filed a verified class action complaint against the Directors and nominal defendant Sotheby’s. The plaintiff alleged in two counts that the Directors breached their fiduciary duties in adopting the Rights Plan and by including so-called “proxy puts” in certain Sotheby’s credit agreements. The plaintiff alleged that the Rights Plan was discriminatory, was designed to entrench current board members, and undermined the proxy contest that was being conducted by Third Point. In addition, the plaintiff alleged that the Directors endorsed credit agreements containing “proxy put” provisions that were unnecessary, preemptive defensive measures designed to insulate Directors from proxy contests. The plaintiff sought judgment preliminarily and permanently enjoining the Rights Plan, judgment preliminarily enjoining the Directors from using any proxies solicited before they “approve” the Third Point nominees for directorships, and a declaration that the Rights Plan was unenforceable and that the Directors breached their fiduciary duties to the putative class. On April 10, 2014, the Court ordered partial coordination of this action and Louisiana Municipal Employees Retirement System v. Ruprecht, et al., Civil Action No. --9508-VCP with the prior pending action in Third Point LLC v. Ruprecht, et al., Civil Action No. 9469-VCP. On May 2, 2014, following briefing and argument on plaintiffs’ motions for preliminary injunctions in the coordinated actions, the Court issued a Memorandum Opinion denying the motion. Specifically, the Court found that plaintiffs failed to show a likelihood of success on the merits of their claims. On June 4, 2014, the plaintiffs in this action and in the Louisiana Municipal Employees Retirement System action discussed below jointly filed a motion for an order dismissing the Stockholder Actions as moot and for an award of attorneys’ fees and expenses in the amount of $3.5 million. On July 25, 2014, Sotheby’s filed a brief in opposition to the plaintiffs’ motion. A hearing on the motion was held on August 14, 2014. Prior to the Court’s resolution of the motion, the parties agreed to a settlement. On January 15, 2015, the Court entered a stipulation agreed to by the parties and an order regarding dismissal of the Stockholder Actions and an award of attorneys’ fees and expenses (the “Order”). As required by the Order, Sotheby’s is notifying stockholders that the Stockholder Actions are moot and that defendants, through their insurer, have paid to plaintiffs’ counsel $1.6 million in full satisfaction of their application for attorneys’ fees and expenses in the Stockholder Actions. As Sotheby’s directors and officers insurance carrier funded the full $1.6 million payment, the

20#



resolution of the Stockholder Actions did not result in any cost to Sotheby’s. The Order further provided that the Stockholder Actions would be dismissed as moot without further action of the Court unless another stockholder of Sotheby’s submitted a written objection to the Court within 30 days of the March 2, 2015 notice date. No stockholder objections were submitted within the applicable 30 day notice period.
Louisiana Municipal Employees Retirement System v. Ruprecht, et al., Civil Action No.--9508-VCP (Del. Ch. 2014)—On April 3, 2014, Louisiana Municipal Employees Retirement System, the plaintiff, on behalf of a putative class of Sotheby’s stockholders, filed a verified class action complaint against the Directors and nominal defendant Sotheby’s. The plaintiff alleged in two counts that the Directors breached their fiduciary duties in adopting the Rights Plan and by including so-called “proxy puts” in certain Sotheby’s credit agreements. The plaintiff alleged that the Rights Plan was discriminatory, was designed to entrench current board members, and undermined the proxy contest that was being conducted by Third Point. In addition, the plaintiff alleged that the Directors endorsed credit agreements containing “proxy put” provisions that were unnecessary, preemptive defensive measures designed to insulate Directors from proxy contests. The plaintiff sought judgment preliminarily and permanently enjoining the Rights Plan, judgment preliminarily enjoining the Directors from using any proxies solicited before they “approve” the Third Point nominees for directorships, and a declaration that the Rights Plan was unenforceable and that the Directors breached their fiduciary duties to the putative class. On April 10, 2014, the Court ordered partial coordination of this action and The Employees Retirement System of the City of St. Louis v. Ruprecht, et al., Civil Action No. 9497-VCP with the prior pending action in Third Point LLC v. Ruprecht, et al., Civil Action No. 9469-VCP. On May 2, 2014, following briefing and argument on plaintiffs’ motions for preliminary injunctions in the coordinated actions, the Court issued a Memorandum Opinion denying the motions. Specifically, the Court found that plaintiffs failed to show a likelihood of success on the merits of their claims. See The Employees Retirement System of the City of St. Louis v. Ruprecht, et al., Civil Action No. 9497-VCP (Del. Ch. 2014) above for the resolution of this action pursuant to the Order.
(See Note 5 for information related to unfunded commitments to extend additional credit through Sotheby's Finance segment. See Note 6 for information related to Sotheby's debt commitments. See Note 10 for information related to Sotheby's auction guarantees. See Note 17 for information related to Sotheby's income tax contingencies.)
10. Auction Guarantees
From time-to-time in the ordinary course of its business, Sotheby’s will guarantee to a consignor a minimum sale price in connection with the sale of property at auction (an “auction guarantee”). Sotheby’s is generally entitled to a share of the excess proceeds (the “overage”) if the property under the auction guarantee sells above the guaranteed price. In the event that the property sells for less than the guaranteed price, Sotheby’s 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 auction guarantee must be paid, but Sotheby’s has the right to recover such amount through the future sale of the property. Depending on the mix of items subject to a guarantee, in advance of peak selling seasons, a small number of guaranteed items may represent a substantial portion of the aggregate amount of outstanding auction guarantees.
In situations when the guaranteed property does not sell, the property is recorded as Inventory on the Condensed Consolidated Balance Sheets at the lower of cost (i.e., the amount paid under the auction guarantee) or management’s estimate of the property's net realizable value (i.e., the expected sale price upon disposition). The sale proceeds ultimately realized by Sotheby’s in these situations may equal, exceed, or be less than the amount recorded as Inventory.
Sotheby’s may reduce its financial exposure under auction guarantees through contractual risk and reward sharing arrangements. Such auction guarantee risk and reward sharing arrangements include irrevocable bids and partner sharing arrangements. An irrevocable bid is an arrangement under which a counterparty commits to bid a predetermined price on the guaranteed property. If the irrevocable bid is the winning bid, the counterparty purchases the property at the predetermined price plus the applicable buyer’s premium, which is the same amount that any other successful bidder would pay at that price. If the irrevocable bid is not the winning bid, the counterparty is generally entitled to receive a share of the auction commission earned on the sale and/or a share of any overage. In a partner sharing arrangement, a counterparty commits to fund: (i) a share of the difference between the sale price at auction and the amount of the auction guarantee if the property sells for less than the minimum guaranteed price or (ii) a share of the minimum guaranteed price if the property does not sell while taking ownership of a proportionate share of the unsold property. In exchange for accepting a share of the financial exposure under the auction guarantee, the counterparty in a partner sharing arrangement is generally entitled to receive a share of the auction commission earned if the property sells and/or a share of any overage.
The counterparties to Sotheby's auction guarantee risk and reward sharing arrangements are typically major international art dealers or major art collectors. Sotheby’s could be exposed to losses in the event any of these counterparties do not perform according to the terms of these contractual arrangements.

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Although irrevocable bid and partner sharing arrangements may be used to reduce the risk associated with auction guarantees, Sotheby's may also enter into auction guarantees without securing such arrangements. In these circumstances, Sotheby's could be exposed to auction guarantee losses and/or deterioration in auction commission margins if the underlying property fails to sell at the minimum guaranteed price. Furthermore, in such situations, Sotheby's liquidity could be reduced.
Sotheby's credit agreement has a covenant that imposes a $600 million limitation on net outstanding auction guarantees (i.e., auction guarantees less the impact of related risk and reward sharing arrangements). In addition to compliance with this covenant, Sotheby's use of auction guarantees is also subject to management and, in some cases, Board of Directors, approval.
As of March 31, 2015, Sotheby’s had outstanding auction guarantees totaling $201.9 million. Sotheby's financial exposure under these auction guarantees is reduced by irrevocable bids totaling $56.2 million. Each of these auction guarantees has a minimum guaranteed price that is within the range of the pre-sale auction estimates for the underlying property. A substantial portion of the property related to these auction guarantees is being offered at auctions in the second quarter of 2015.
Sotheby's is obligated under the terms of certain auction guarantees to advance all or a portion of the guaranteed amount prior to auction. As of March 31, 2015, $25 million of the guaranteed amount had been advanced by Sotheby's and is recorded on the Condensed Consolidated Balance Sheets within Notes Receivable (see Note 5). As of March 31, 2015, December 31, 2014, and March 31, 2014, the carrying value of the liability representing the estimated fair value of Sotheby’s obligation to perform under its auction guarantees totaled $7.3 million, $5.3 million, and $9.8 million, respectively, and is recorded on the Condensed Consolidated Balance Sheets within Accounts Payable and Accrued Liabilities.
As of May 6, 2015, Sotheby's had outstanding auction guarantees totaling $174 million and, as of that date, Sotheby's financial exposure was reduced by risk and reward sharing arrangements totaling $74.2 million. Each of the auction guarantees outstanding as of May 6, 2015 had a minimum guaranteed price that was within the range of the pre-sale auction estimates for the underlying property. Substantially all of the property related to these auction guarantees is being offered at auctions in the second quarter of 2015. As of May 6, 2015, $6.9 million of the guaranteed amount had been advanced by Sotheby's.
11. Shareholders' Equity and Dividends
Special Dividend and Common Stock Repurchase Program—In January 2014, Sotheby's completed a review of its capital allocation and financial policies and as a result: (i) established separate capital structures and financial policies for its Agency and Finance segments, (ii) declared a special dividend of $300 million ($4.34 per share), and (iii) authorized a 5-year, $150 million Common Stock repurchase program principally to offset the annual vesting of employee share-based payments.
The $300 million special dividend was paid on March 17, 2014 and was funded principally by the repatriation of $250 million of cash from Sotheby’s foreign subsidiaries, with the remaining $50 million funded by existing domestic cash balances. In conjunction with this special dividend, dividend equivalents of approximately $11 million were accrued on share-based payments to Sotheby's employees and charged against retained earnings, of which approximately $2 million and $4 million was paid in March 2015 and March 2014, respectively. (See Note 12 for information related to Sotheby's share-based payment programs.)
In conjunction with the Common Stock repurchase program, Sotheby's repurchased 558,171 shares of its Common Stock for an aggregate purchase price of $25 million ($44.79 per share) pursuant to an accelerated stock buyback agreement that was concluded in March 2014.
Quarterly Cash Dividends—On February 26, 2015, Sotheby's Board of Directors declared a quarterly dividend of $0.10 per share (approximately $6.9 million) that was paid on March 16, 2015 to shareholders of record as of March 9, 2015. On May 7, 2015, the Board of Directors declared a quarterly cash dividend of $0.10 per share (approximately $6.9 million) payable on June 15, 2015 to shareholders of record as of June 1, 2015. On February 27, 2014, the Board of Directors declared a quarterly dividend of $0.10 per share (approximately $6.9 million) that was paid on March 17, 2014 to shareholders of record as of March 10, 2014.


22#



12. Share-Based Payments
Share-based payments to employees include performance-based stock unit awards, restricted stock units, restricted stock, and stock options. A description of each of these share-based payments is provided below. Compensation expense related to share-based payments is generally recorded as a component of Salaries and Related Costs in the Condensed Consolidated Statements of Operations. However, share-based payment expense of $2 million recognized in the first quarter of 2015 related to fully vested restricted stock units granted to Thomas S. Smith, Jr. upon the commencement of his employment as Sotheby's President and Chief Executive Officer ("CEO") is reported within CEO Separation and Transition Costs (see Note 13).
For the three months ended March 31, 2015 and 2014, compensation expense related to share-based payments, including the $2 million charge classified within CEO Separation and Transition Costs, was as follows (in thousands of dollars):
    
 
 
Three months ended March 31,
 
 
 
 
2015
 
2014
Pre-Tax
 
$
7,653

 
$
6,247

After-Tax
 
$
4,831

 
$
4,152

For the three months ended March 31, 2015 and 2014, Sotheby's recognized $1.1 million and $3.1 million, respectively, of excess tax benefits related to share-based payment arrangements. These tax benefits represent the amount by which the tax deduction resulting from the exercise or vesting of share-based payments exceeds the tax benefit initially recognized in Sotheby's financial statements upon the amortization of compensation expense for these awards. Such excess tax benefits are recognized on the Condensed Consolidated Balance Sheets as an increase to Additional Paid-in Capital and are classified within Financing Activities in the Condensed Consolidated Statements of Cash Flows.
As of March 31, 2015, unrecognized compensation expense related to the unvested portion of share-based payments was $53.8 million. This compensation expense is expected to be amortized over a weighted-average period of approximately 2.9 years. Sotheby’s does not capitalize any compensation expense related to share-based payments to employees.
Sotheby's Restricted Stock Unit Plan—Sotheby's Second Amended and Restated Restricted Stock Unit Plan (the “Restricted Stock Unit Plan”) provides for the issuance of Restricted Stock Units (“RSU's”) to employees, subject to the approval of the Compensation Committee of the Board of Directors (the “Compensation Committee”). In making awards under the Restricted Stock Unit Plan, the Compensation Committee takes into account the nature of the services rendered by employees, their present and potential future contributions to Sotheby's success, and such other factors as the Compensation Committee in its discretion deems relevant.
RSU's issued under the Restricted Stock Unit Plan generally vest evenly over a three-year service period. Prior to vesting, holders of RSU's do not have voting rights, but are entitled to receive dividend equivalents. Dividend equivalents paid to holders of unvested RSU's are not forfeitable. RSU's may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.
Performance Share Units (or “PSU's”) are RSU's that generally vest over three or four years, subject to the achievement of certain profitability targets. Prior to vesting, holders of PSU's do not have voting rights and are not entitled to receive dividends or dividend equivalents. Dividend equivalents are generally credited to holders of PSU's and are only paid for the portion of PSU's that vest and become shares of Common Stock. PSU's may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.
As discussed in more detail below, in the first quarter of 2015, Sotheby's granted Thomas S. Smith, Jr., its new President and CEO, PSU's under the Restricted Stock Unit Plan with a single vesting opportunity after a five-year service period contingent upon the achievement of pre-determined levels of Sotheby's stock price appreciation. These PSU's do not have any voting or dividend equivalent rights. In addition, as discussed in more detail below under "CEO Share-Based Payment Awards," in the first quarter of 2015, Sotheby's also granted Mr. Smith 158,638 restricted stock shares and 47,070 fully vested RSU's outside of the Restricted Stock Unit Plan.

23#



For the three months ended March 31, 2015, in addition to the PSU's granted to Mr. Smith, Sotheby's issued share-based payment awards under the Restricted Stock Unit Plan with a total fair value of $28.2 million, as follows:
384,664 PSU's with a fair value of $16.9 million and a single vesting opportunity after a three-year service period, including:
304,882 PSU's with a fair value of $13.4 million, related almost entirely to Sotheby's incentive compensation programs, and
79,782 PSU's with a fair value of $3.5 million issued to William F. Ruprecht, Sotheby's former President and CEO. In accordance with the terms of his amended employment agreement, upon the termination of his employment on March 31, 2015, Mr. Ruprecht forfeited 60,109 PSU's from this award. Accordingly, Mr. Ruprecht ultimately retained 19,673 PSU's with a fair value of $0.9 million.
258,827 RSU's with annual vesting over a three-year service period and a fair value of $11.3 million, related almost entirely to Sotheby's incentive compensation programs.
CEO Share-Based Payment Awards—In the first quarter of 2015, share-based payment awards with a fair value of $16.5 million were granted to Thomas S. Smith, Jr., Sotheby's new President and CEO, upon the commencement of his employment on March 31, 2015. These awards consist of the following:
An inducement award of 158,638 shares of restricted stock with a fair value of $6.5 million, with periodic vesting opportunities between March 4, 2016 and September 1, 2017, which substantially correspond to the times when forfeited opportunities at Mr. Smith's previous employer would otherwise have become eligible to vest. These restricted stock shares were not issued pursuant to the Restricted Stock Unit Plan and have not been registered with the Securities and Exchange Commission. These shares have voting rights and a non-forfeitable right to dividends.
An inducement award of 47,070 fully vested RSU's with a fair value of $2 million awarded to Mr. Smith to compensate him for a portion of the annual bonus that he would have received from his previous employer. The Common Stock shares associated with this award will be distributed in three approximately equal installments on the third, fourth, and fifth anniversaries of the grant date. These RSU's were not issued pursuant to the Restricted Stock Unit Plan and have not been registered with the Securities and Exchange Commission. These RSU's will be credited with dividend equivalents based on the dividends paid on the underlying number of shares of Common Stock.
An award of 94,140 PSU's under the Restricted Stock Unit Plan with a fair value of $8 million and with a single vesting opportunity after a five-year service period contingent upon the achievement of pre-determined levels of Sotheby's stock price appreciation. This award provides opportunities to vest in incremental PSU's up to 350% of the initial award, such that the maximum number of shares that may be payable with respect to this award is 329,490 shares. These PSU's do not have a right to earn dividend equivalents.
Summary of Outstanding Share-Based Payment Awards—For the three months ended March 31, 2015, changes to the number of outstanding RSU’s, PSU’s, and Restricted Stock shares were as follows (shares in thousands)
 
 Number of RSU’s, PSU’s, and Restricted Stock Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2015
1,806

 
$
40.32

Granted
943

 
$
47.39

Vested
(549
)
 
$
39.31

Canceled
(172
)
 
$
42.07

Outstanding at March 31, 2015
2,028

 
$
43.74

As of March 31, 2015, 3.2 million units were available for future awards pursuant to the Restricted Stock Unit Plan. The aggregate fair value of RSU’s and PSU's that vested during the three months ended March 31, 2015 and 2014 was $22.9 million and $25.3 million, respectively, based on the closing price of Sotheby's Common Stock on the dates the shares vested.

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Stock Options—Stock options issued pursuant to the Sotheby's 1997 Stock Option Plan are exercisable into authorized, but unissued shares of Sotheby's Common Stock. Stock options vest evenly over four years and expire ten years after the date of grant. As of March 31, 2015, 104,100 shares of Common Stock were available for the issuance of stock options under the Stock Option Plan.
As of March 31, 2015, 50,000 stock options were outstanding and exercisable with a weighted average exercise price of $22.11 per share, a weighted average remaining contractual term of 4.9 years, and an aggregate intrinsic value of $1 million.
No stock options were exercised or granted during the three months ended March 31, 2015. For the three months ended March 31, 2014, the aggregate intrinsic value of options exercised was $1.2 million, the cash proceeds received as a result of these exercises was $1 million, and the associated excess tax benefit recognized was $0.3 million.
13. CEO Separation and Transition Costs
In the first quarter of 2015, Sotheby's recognized $4.2 million in costs associated with the hiring of Thomas S. Smith, Jr. as its President and Chief Executive Officer which are classified within CEO Separation and Transition Costs. These costs principally relate to compensation of $3.1 million owed to Mr. Smith to replace incentive compensation that he expected to receive from his previous employer and consist of a fully vested restricted stock unit award with a fair value of $2 million granted on March 31, 2015 and a $1.1 million cash payment that is due in September 2015. There is no required service period associated with this compensation. CEO Separation and Transition Costs also include approximately $1.1 million in recruitment and other professional fees associated with the CEO hiring process.
14. Restructuring Charges
On July 16, 2014, Sotheby's Board of Directors approved a restructuring plan (the "2014 Restructuring Plan") principally impacting Sotheby's operations in the United States and the U.K. The 2014 Restructuring Plan resulted in Restructuring Charges (net) of approximately $14.2 million in 2014, consisting of $13.9 million in employee termination benefits recognized in the second half of 2014 and approximately $0.3 million in lease exit costs recognized in the fourth quarter of 2014. A large majority of the headcount reductions resulting from the 2014 Restructuring Plan have been completed and the remainder will occur by June 30, 2015. For the three months ended March 31, 2015, Sotheby's recognized a benefit in Restructuring Charges (net) of $0.4 million related to adjustments to the accrual for employee termination benefits. As of March 31, 2015, Sotheby's has made payments of approximately $8.5 million related to the 2014 Restructuring Plan, and the related accrued liability has been reduced by $0.9 million as a result of foreign currency exchange rate changes. Accordingly, as of March 31, 2015, the remaining accrued liability related to the 2014 Restructuring Plan recorded on the Condensed Consolidated Balance Sheets within Accounts Payable and Accrued Liabilities was $4.4 million. This liability is expected to be settled through cash payments to be made principally in the second quarter of 2015.
15. Special Charges
In the first quarter of 2014, Sotheby's recognized special charges of $5.7 million related to third party advisory, legal, and other professional service fees directly associated with issues related to shareholder activism and the resulting proxy contest with Third Point. (See Note 9 for a summary of related legal actions.)

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16. Accumulated Other Comprehensive Loss
The following is a summary of the changes in Accumulated Other Comprehensive Loss for the three months ended March 31, 2015 and 2014 (in thousands of dollars):
Three months ended March 31, 2015
 
Foreign Currency Items
 
Defined Benefit Pension Items
 
Total
Balance at January 1, 2015
 
$
(33,223
)
 
$
(43,543
)
 
$
(76,766
)
Other comprehensive (loss) income before reclassifications
 
(21,458
)
 
2,189

 
(19,269
)
Amounts reclassified from accumulated other comprehensive loss
 

 
858

 
858

Net other comprehensive (loss) income
 
(21,458
)
 
3,047

 
(18,411
)
Balance at March 31, 2015
 
$
(54,681
)
 
$
(40,496
)
 
$
(95,177
)
 
 
 
 
 
 
 
Three months ended March 31, 2014
 
Foreign Currency Items
 
Defined Benefit Pension Items
 
Total
Balance at January 1, 2014
 
$
(1,352
)
 
$
(38,101
)
 
$
(39,453
)
Other comprehensive income (loss) before reclassifications
 
1,866

 
(398
)
 
1,468

Amounts reclassified from accumulated other comprehensive loss
 
2,058

 
472

 
2,530

Net other comprehensive income
 
3,924

 
74

 
3,998

Balance at March 31, 2014
 
$
2,572

 
$
(38,027
)
 
$
(35,455
)
Other Comprehensive (Loss) Income reflects the change in the foreign currency translation adjustment account during the period, including the change in the foreign currency translation adjustment account related to the U.K. Pension Plan. Such amounts are reported on a cumulative basis in Accumulated Other Comprehensive Loss on the Condensed Consolidated Balance Sheets.
For the three months ended March 31, 2015 and 2014, $0.9 million and $0.5 million (respectively, net of taxes) was reclassified from Accumulated Other Comprehensive Loss and recorded on a pre-tax basis to Salaries and Related Costs in the Condensed Consolidated Statements of Operations as a result of the amortization of previously unrecognized U.K. Pension Plan losses and prior service costs. (See Note 8 for information related to the U.K. Pension Plan.)
For the three months ended March 31, 2014, $2.1 million was reclassified from Accumulated Other Comprehensive Loss to Other Expense in the Condensed Consolidated Statements of Operations as a result of the cumulative translation adjustment that was recognized upon the liquidation of a foreign subsidiary.

26#



17. Uncertain Tax Positions
As of March 31, 2015, Sotheby’s liability for unrecognized tax benefits, excluding interest and penalties, was $20.6 million, representing a net decrease of $2.2 million when compared to the liability of $22.8 million as of December 31, 2014. This net decrease is primarily the result of both the expiration of the statute of limitations for certain tax years and the expected closing of tax audits for certain tax years, partially offset by the accrual of tax reserves related to transfer pricing. As of March 31, 2014, Sotheby’s liability for unrecognized tax benefits, excluding interest and penalties, was $22.9 million. As of March 31, 2015, December 31, 2014, and March 31, 2014, the total amount of unrecognized tax benefits that, if recognized, would favorably affect Sotheby’s effective tax rate was $12.7 million, $12.3 million, and $12 million, respectively. Sotheby’s believes it is reasonably possible that a decrease of $5.7 million in the balance of unrecognized tax benefits can occur within 12 months of the March 31, 2015 balance sheet date as a result of the expiration of statutes of limitations and the expected settlements of ongoing tax audits.
Sotheby’s is subject to taxation in the U.S. and various state and foreign jurisdictions and, as a result, is subject to ongoing tax audits in various jurisdictions. Sotheby’s U.S. federal, and various state, and foreign tax returns are currently under examination by taxing authorities. The earliest open tax year for the major jurisdictions in which Sotheby's does business, which include the U.S. (including various state and local jurisdictions), the U.K., and Hong Kong, is 2007.
Sotheby’s recognizes interest expense and penalties related to unrecognized tax benefits as a component of Income Tax Expense. The accrual for such interest and penalties decreased by $0.3 million for the three months ended March 31, 2015.
Sotheby’s policy is to record interest expense related to sales, value added and other non-income based taxes as Interest Expense in its Condensed Consolidated Statements of Operations. Penalties related to such taxes are recorded as General and Administrative Expenses in its Condensed Consolidated Statements of Operations. Interest expense and penalties related to income taxes are recorded as a component of Income Tax (Benefit) Expense in Sotheby’s Condensed Consolidated Statements of Operations.
18. Related Party Transactions
From time-to-time, in the ordinary course of business, related parties such as members of the Board of Directors and employees transact with Sotheby's to buy and sell property at auction and through private sales. For the three months ended March 31, 2015 and March 31, 2014, Sotheby’s recognized Agency Revenues of $0.7 million and $0.6 million, respectively, related to the sale and purchase of property by related parties.
As of March 31, 2015, December 31, 2014, and March 31, 2014, Accounts Receivable (net) included $0.3 million, $1.1 million, and $2.5 million, respectively, associated with auction or private sale purchases made by related parties.
19. Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, which introduces a new five-step framework for revenue recognition. The core principal of the standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This ASU also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. This standard will be effective for Sotheby’s beginning on January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the potential impact of adopting this new accounting standard on Sotheby’s financial statements.
In February 2015, the FASB issued ASU No. 2015-02 which eliminates the deferral of the requirements of ASU No. 2009-17 for certain interests in investment funds and provides a scope exception from Accounting Standards Codification Topic 810 for certain investments in money market funds. ASU No. 2015-02 also makes several modifications to the consolidation guidance for variable interest entities ("VIEs") and general partners’ investments in limited partnerships, as well as modifications to the evaluation of whether limited partnerships are VIEs or voting interest entities. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Management is currently assessing the potential impact of adopting this new accounting standard on Sotheby’s financial statements.

27#



In March 2015, the FASB issued ASU 2015-03, which changes the presentation of debt issuance costs in the balance sheet. ASU 2015-03 requires debt issuance costs to be included as a direct deduction from the related debt liability in the balance sheet. Under the current guidance, unamortized debt issuance costs are reported as assets in the balance sheet, but under the new standard, debt issuance costs will no longer be reported as assets. ASU 2015-03 will be effective for Sotheby’s beginning January 1, 2016 and must be applied retrospectively to each period presented. Management is currently assessing the potential impact of adopting this new accounting standard on Sotheby’s financial statements. 




28#



ITEM 2:     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations (or “MD&A”) should be read in conjunction with Note 4 (“Segment Reporting”) of Notes to Condensed Consolidated Financial Statements.
Sotheby's Business
Sotheby’s is a global art business whose operations are organized under three segments: Agency, Principal, and Finance. The Agency segment earns commissions by matching buyers and sellers of authenticated fine art, decorative art, and jewelry (collectively, “art” or “works of art” or “artwork” or "property") through the auction or private sale process. The Principal segment earns revenues from the sale of artworks that have been purchased opportunistically by Sotheby’s. The Finance segment earns interest income through art-related financing activities by making loans that are secured by works of art.
The global art market is influenced over time by the overall strength and stability of the global economy, the financial markets of various countries, geopolitical conditions, and world events, all of which may impact the willingness of potential buyers and sellers to purchase and sell art. In addition, the amount and quality of art consigned for sale is influenced by other factors not within Sotheby’s control, and many consignments often become available as a result of the death or financial or marital difficulties of the owner. These factors cause the supply and demand for works of art to be unpredictable and may lead to significant variability in Sotheby's revenues from period to period.
Competition in the international art market is intense. A fundamental challenge facing any auctioneer or art dealer is to obtain high quality and valuable property for sale either as agent or as principal. Sotheby's primary global competitor is Christie’s International, PLC, a privately held, French-owned, auction house. In response to the competitive environment, Sotheby’s may offer consignors a variety of financial inducements such as auction commission sharing arrangements and auction guarantees as a means to secure high-value consignments. Although these inducements may lead to a higher level of auction consignments, they put pressure on auction commission margins, and auction guarantees introduce the possibility of incurring a loss on the transaction and reduced liquidity if the underlying property fails to sell at the minimum guaranteed price. To mitigate the pressure on auction commission margins, from time-to-time, Sotheby’s adjusts its commission rate structures. In addition, Sotheby’s may reduce its financial exposure under auction guarantees through contractual risk and reward sharing arrangements such as irrevocable bids under which a counterparty commits to bid a predetermined price on the guaranteed property.
Sotheby's is a service business in which the ability of its employees to source high-value works of art and develop and maintain relationships with potential sellers and buyers of art is essential to its success. Sotheby's business is highly dependent upon attracting and retaining qualified personnel and employee compensation is its most substantial operating expense. Sotheby’s also incurs significant costs to promote and conduct its auctions, as well as general and administrative expenses to support its global operations. While a large portion of Sotheby’s expenses are fixed, certain categories of expense are variable. For example, sale marketing costs are dependent upon the volume of auction activity and certain elements of employee compensation are a function of Sotheby’s profitability.
Industry Trends
In late-2009, the global art market began a period of expansion that has resulted in some of the most profitable years in Sotheby’s history, and the art market has remained strong to date. A significant driver of the expansion of the global art market and Sotheby’s profitability during this period has been the growth of the Contemporary and Asian art markets, as well as increased demand for art from clients in China and other emerging markets across several collecting categories.
As the global art market has grown, the value of the property sold by Sotheby's has increased and the competitive environment between Sotheby’s and Christie’s has intensified. These factors have resulted in a decline in auction commission margins over the past few years, with the competitive environment for high-value consignments causing an increase in the use of auction commission sharing arrangements and an increase in the use of auction guarantees, sometimes without the protection of irrevocable bids.
To help mitigate the recent decline in auction commission margins, in March 2013 and again in February 2015, management enacted increases in Sotheby’s buyer’s premium rate structure. (See "Auction Commission Margin" within the discussion of Agency segment results below.)

29#



To further leverage the growth of the global art market witnessed in recent years, Sotheby’s has developed its presence in emerging markets, particularly in China, and implemented initiatives to grow private sales, including the opening of dedicated private sale exhibition galleries in New York, London and Hong Kong, branded as S|2, that are focused on selling Contemporary Art.
Seasonality
The worldwide art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. In the aggregate, second and fourth quarter Net Auction Sales represented 79% and 83% of total Net Auction Sales in 2014 and 2013, respectively, with auction commission revenues comprising approximately 81% of Sotheby's total revenues in those years. Accordingly, Sotheby's financial results are seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters. Consequently, first and third quarter results have historically reflected lower revenues when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of Sotheby's operating expenses. Management believes that investors should focus on results for six and twelve month periods, which better reflect the business cycle of the art auction market.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2015
Overview
In the first quarter of 2015, Sotheby’s reported operating income of $18.4 million and Adjusted Operating Income* of $22.2 million, representing increases of $14.3 million and $12.4 million, respectively, when compared to the prior year. The increase in Adjusted Operating Income* is principally due to an 8% increase in auction commission revenues attributable to improved auction commission margins and 3% growth in Net Auction Sales. The comparison of first quarter Adjusted Operating Income* versus the prior year also benefits from the continued growth of the Finance segment loan portfolio, as well as a lower level of professional fees.
In the first quarter of 2015, Sotheby’s reported net income of $5.2 million, an $11.3 million improvement versus the ($6.1) million net loss reported in the prior year. This improvement is largely due to the factors discussed above, as well as a $3.1 million income tax charge recorded in the prior year quarter related to the enactment of new legislation in New York State.
Strategic Review
Sotheby's new Chief Executive Officer, Thomas S. Smith, Jr., has initiated a broad review of Sotheby's business, with the objective of implementing a multi-faceted growth strategy for the Company. Successful implementation of this strategy will require the building of talent and improvement of processes within the organization, as well as embracing technology so that it can be deployed more effectively both internally and through client-facing products. It will also require the effective allocation of capital in order to maximize shareholder value sustainably over time. In conjunction with this business review, management is reevaluating its expense projections for 2015 and is withdrawing expense guidance at this time.
With respect to return of capital, the Company may repurchase shares of Common Stock at any time under Sotheby’s existing $125 million share purchase authorization that was approved by the Board of Directors in January 2014. However, management and the Board of Directors are in the early stages of reviewing Sotheby’s growth options, and this review will occur over a number of months. Any share repurchases under this existing authorization will be subordinate to the requirements of Sotheby’s longer term growth needs and take into account market conditions.
(See Statement on Forward Looking Statements.)
___________________________________
* See "Non-GAAP Financial Measures" below for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP measure.

30#



Results of Operations for the Three Months Ended March 31, 2015 and 2014
The table below presents a summary of Sotheby’s consolidated results of operations for the three months ended March 31, 2015 and 2014 (in thousands of dollars, except per share data):
 
 
 
 
 
 
Favorable /(Unfavorable)
Three months ended March 31,
 
2015
 
2014
 
$ / % Change
 
% Change
Revenues:
 
 

 
 

 
 

 
 

Agency
 
$
127,882

 
$
123,128

 
$
4,754

 
4
%
Principal
 
12,983

 
26,001

 
(13,018
)
 
(50
%)
Finance
 
12,687

 
5,682

 
7,005

 
*

License fees
 
1,974

 
1,697

 
277

 
16
%
Other
 
149

 
303

 
(154
)
 
(51
%)
Total revenues
 
155,675

 
156,811

 
(1,136
)
 
(1
%)
Expenses:
 
 
 
 
 
 
 
 
Agency direct costs
 
11,839

 
10,437

 
(1,402
)
 
(13
%)
Cost of Principal revenues
 
11,713

 
24,502

 
12,789

 
52
%
Cost of Finance revenues
 
3,388

 
710

 
(2,678
)
 
*

Marketing
 
4,060

 
3,133

 
(927
)
 
(30
%)
Salaries and related
 
62,930

 
65,756

 
2,826

 
4
%
General and administrative
 
34,729

 
37,332

 
2,603

 
7
%
Depreciation and amortization
 
4,782

 
5,147

 
365

 
7
%
CEO separation and transition costs (a)
 
4,189

 

 
(4,189
)
 
N/A

Restructuring charges, net (b)
 
(359
)
 

 
359

 
N/A

Special charges (c)
 

 
5,703

 
5,703

 
100
%
Total expenses
 
137,271

 
152,720

 
15,449

 
10
%
Operating income
 
18,404

 
4,091

 
14,313

 
*

Net interest expense (d)
 
(8,532
)
 
(8,367
)
 
(165
)
 
(2
%)
Other expense
 
(1,959
)
 
(1,442
)
 
(517
)
 
(36
%)
Income (loss) before taxes
 
7,913

 
(5,718
)
 
13,631

 
N/A

Equity in earnings of investees
 
1,144

 
154

 
990

 
*

Income tax expense
 
3,924

 
331

 
(3,593
)
 
*

Net income (loss)
 
5,133

 
(5,895
)
 
11,028

 
N/A

Less: Net (loss) income attributable to noncontrolling interest
 
(69
)
 
219

 
(288
)
 
N/A

Net income (loss) attributable to Sotheby's
 
$
5,202

 
$
(6,114
)
 
$
11,316

 
N/A

Diluted earnings (loss) per share - Sotheby’s common shareholders
 
$
0.07

 
$
(0.09
)
 
$
0.16

 
N/A

Statistical Metrics:
 
 

 
 

 
 

 


Aggregate Auction Sales (e)
 
$
895,443

 
$
867,681

 
$
27,762

 
3
%
Net Auction Sales (f)
 
$
755,817

 
$
734,370

 
$
21,447

 
3
%
Private Sales (g)
 
$
137,491

 
$
147,350

 
$
(9,859
)
 
(7
%)
Consolidated Sales (h)
 
$
1,037,538

 
$
1,019,891

 
$
17,647

 
2
%
Adjusted Expenses (i)
 
$
118,340

 
$
121,805

 
$
3,465

 
3
%
Adjusted Operating Income (i)
 
$
22,234

 
$
9,794

 
$
12,440

 
*

Adjusted Net Income (Loss) (i)
 
$
7,423

 
$
(2,977
)
 
$
10,400

 
N/A

Adjusted Diluted Earnings (Loss) Per Share (i)
 
$
0.11

 
$
(0.04
)
 
$
0.15

 
N/A

Effective income tax rate
 
49.6%
 
(5.8%)
 
N/A

 
N/A


31#



Legend:
*
Represents a change in excess of 100%.
(a)
Includes compensation-related costs and professional fees associated with the hiring of Thomas S. Smith, Jr. as Sotheby's President and Chief Executive Officer.
(b)
Relates to adjustments made to the accrual for employee termination benefits associated with the 2014 Restructuring Plan.
(c)
Consists of expenses directly associated with issues related to shareholder activism and the resulting proxy contest with Third Point LLC ("Third Point").
(d)
Represents interest expense less interest income.
(e)
Represents the total hammer price of property sold at auction plus buyer’s premium.
(f)
Represents the total hammer price of property sold at auction.
(g)
Represents the total purchase price of property sold in private sales brokered by Sotheby’s, including its commissions.
(h)
Represents the sum of Aggregate Auction Sales, Private Sales, and Principal revenues. For the purposes of this calculation, the amount of Aggregate Auction Sales related to the sale of Principal segment inventory at Sotheby's auctions is eliminated. For the three months ended March 31, 2015 and 2014, such sales totaled $8.4 million and $21.1 million, respectively.
(i)
See "Non-GAAP Financial Measures" below for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP measure.

32#



Agency Segment
The Agency segment earns commissions by matching buyers and sellers (also known as consignors) of authenticated fine art, decorative art, and jewelry (collectively, “art” or “works of art” or “artwork” or "property") through the auction or private sale process. The table below presents a summary of Agency segment gross profit and related statistical metrics for the three months ended March 31, 2015 and 2014 (in thousands of dollars):
 
 
 
 
 
 
Favorable /(Unfavorable)
Three months ended March 31,
 
2015
 
2014
 
$ / % Change
 
% Change
Agency revenues:
 
 

 
 

 
 

 
 

  Auction commissions
 
$
113,015

 
$
104,673

 
$
8,342

 
8
%
  Private sale commissions
 
11,458

 
13,055

 
(1,597
)
 
(12
%)
  Auction guarantee and inventory activities
 
(751
)
 
670

 
(1,421
)
 
N/A

  Other Agency revenues
 
4,160

 
4,730

 
(570
)
 
(12
%)
      Total Agency revenues
 
127,882

 
123,128

 
4,754

 
4
%
Agency direct costs:
 
 
 
 
 
 
 
 
  Auction direct costs
 
10,082

 
8,878

 
(1,204
)
 
(14
%)
  Private sale expenses
 
1,757

 
1,559

 
(198
)
 
(13
%)
      Total Agency direct costs
 
11,839

 
10,437

 
(1,402
)
 
(13
%)
Intersegment costs:
 
 
 
 
 


 


Interest (a)
 
901

 
2,035

 
1,134

 
56
%
Facility fees (b)
 
424

 
498

 
74

 
15
%
Consignment fees (c)
 
1,945

 
732

 
(1,213
)
 
*