-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CWCdflTQTCJfIOElwCGRcnMfZ1v1s9sLju+R1hMA3JLsjT5Ab1A4T+FXJp98ovfh 6tb03r9f1WNRAhbxbDxPDQ== 0000912057-00-011834.txt : 20000317 0000912057-00-011834.hdr.sgml : 20000317 ACCESSION NUMBER: 0000912057-00-011834 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOTHEBYS HOLDINGS INC CENTRAL INDEX KEY: 0000823094 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 382478409 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09750 FILM NUMBER: 571040 BUSINESS ADDRESS: STREET 1: 500 NORTH WOODWARD AVENUE STREET 2: SUITE 100 CITY: BLOOMFIELD HILLS STATE: MI ZIP: 48304 BUSINESS PHONE: 2126067000 MAIL ADDRESS: STREET 1: 500 NORTH WOODWARD AVENUE STREET 2: SUITE 100 CITY: BLOOMFIELD HILLS STATE: MI ZIP: 48304 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999. OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________, AND COMMISSION FILE NUMBER 1-9750. ------------------------ SOTHEBY'S HOLDINGS, INC. (Exact name of registrant as specified in its charter) MICHIGAN 38-2478409 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 NORTH WOODWARD AVENUE, SUITE 100 48304 BLOOMFIELD HILLS, MICHIGAN (Zip Code) (Address of principal executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 646-2400 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Class A Limited Voting Common Stock, New York Stock Exchange $0.10 Par Value London Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ------------------------ 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 periods that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X As of March 6, 2000, the aggregate market value of the 24,568,738 shares of Class A Limited Voting Common Stock held by non-affiliates of the registrant was $540,512,236 based upon the closing price ($22.00) on the New York Stock Exchange composite tape on such date. (For this computation, the registrant has excluded the market value of all shares of its Class A Limited Voting Common Stock reported as beneficially owned by executive officers and directors of the registrant; such exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant.) As of March 6, 2000, there were outstanding 42,269,201 shares of Class A Limited Voting Common Stock (the "Class A Common Stock") and 16,585,650 shares of Class B Common Stock (the "Class B Common Stock"), freely convertible into 16,585,650 shares of Class A Common Stock. There is no public market for the registrant's Class B Common Stock, which is held by affiliates and non-affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the 2000 annual meeting of shareholders are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Sotheby's Holdings, Inc. (together with its subsidiaries, unless the context otherwise requires, the "Company") is one of the world's two largest auctioneers of fine arts, antiques and collectibles, offering property in over 80 collecting categories, among them paintings, jewelry, decorative arts, and books. The worldwide auction segment of the Company's business is conducted through a division known as "Sotheby's". In addition to both live and internet auctioneering, the auction segment is engaged in a number of related activities, including the purchase and resale of art and other collectibles and the brokering of art and collectible purchases and sales through private treaty sales. In certain circumstances the Company provides loans to finance the purchase of property, which is pledged as collateral for the loans, and shares in the gain (loss) if the property sells either above or below its investment. The Company also markets and brokers luxury residential real estate through its real estate segment, conducts art-related financing activities through its finance segment and is engaged in insurance brokerage, art education and restoration activities. The Company believes it is one of the world's leaders in art-related financing activities. The Company lends money generally secured by consigned art in order to facilitate clients' bringing property to auction and also makes loans to collectors, dealers, and museums secured by collections not presently intended for sale. The Company, through its subsidiary, Sotheby's International Realty, Inc. ("SIR"), is engaged in the marketing and brokering of luxury residential real estate. The Company was incorporated in Michigan in August 1983. In October 1983, the Company acquired Sotheby Parke Bernet Group Limited, which was then a publicly held company listed on the International Stock Exchange of the United Kingdom and the Republic of Ireland Limited (the "London Stock Exchange") and which, through its predecessors, had been engaged in the auction business since 1744. In 1988, the Company issued shares of Class A Common Stock to the public. The Class A Common Stock is listed on the New York Stock Exchange (the "NYSE") and the London Stock Exchange. THE AUCTION SEGMENT The purchase and sale of works of art in the international art market are effected through numerous dealers, the two major auction houses, the smaller auction houses and also directly between collectors. Although dealers and smaller auction houses generally do not report sales figures publicly, the Company believes that dealers account for the majority of the volume of transactions in the international art market. The Company and Christie's, a privately held auction house based in the United Kingdom, are the two largest art auction houses in the world. The Company conducted aggregate auction sales in 1999 of approximately $2.3 billion (approximately L1.4 billion). Christie's aggregate auction sales in 1999 were approximately $2.3 billion (L1.4 billion reported). The Company auctions a wide variety of property, including fine arts, jewelry, decorative arts, and rare books. In 1999, the Company's auction sales by type of property were as follows: fine arts accounted for approximately $1,299.6 million, or 58%, of auction sales; decorative arts accounted for approximately $642.6 million, or 28%, of auction sales; and jewelry, rare books and other property accounted for approximately $316.8 million, or 14%, of auction sales. Most of the objects auctioned by the Company are unique items, and their value, therefore, can only be estimated prior to sale. The Company's principal role as an auctioneer is to identify, evaluate and appraise works of art through its international staff of specialists; to stimulate purchaser interest through professional marketing techniques; and to match sellers and buyers through the auction process. In its role as auctioneer, the Company generally functions as an agent accepting property on consignment from its selling clients. The Company sells property as agent of the consignor, billing the buyer for property purchased, receiving payment from the buyer and remitting to the consignor the consignor's portion of the buyer's payment after deducting the Company's commissions, expenses, and applicable taxes. From time to time, the Company releases property sold at auction to buyers before the Company receives payment. In such event, the Company must pay the seller the net sale proceeds for the released property at the time payment is due to the consignor, even if the Company has not received payment from the buyer. On certain occasions, the Company will guarantee to the consignor a minimum price in connection with the sale of property at auction. The Company must perform under its guarantee only in the event that the property sells for less than the minimum price or the property does not sell, and, therefore, the Company must pay the difference between the sale price at auction and the amount of the guarantee. See Note N to the Consolidated Financial Statements under Item 8. Under certain guarantees, the Company participates in a share of the proceeds if the property under guarantee sells above an agreed minimum price. In addition, the Company is obligated under the terms of certain guarantees to fund a portion of the guarantee prior to the auction. All buyers pay a buyer's premium to the Company on auction purchases. The buyer's premium for internet purchases is 10% of the hammer (sale) price. For live auction purchases made at principal auction locations and for most collecting categories, it is 15% of the hammer (sale) price on items sold for $50,000 or less and, if the property is sold for more than $50,000, 15% of the first $50,000 and 10% on the remainder of the purchase price. On April 1, 2000, the Company will begin charging a buyer's premium, for live auction purchases at principal auction locations and for most collecting categories, of 20% of the hammer price on the first $15,000, 15% on the next $85,000 up to $100,000 and 10% on any amount over $100,000. The Company also charges consignors a selling commission. Until February 29, 2000, for sales over $100,000, a seller paid a commission equal to the lesser of (a) the rate applicable based on the total amount of property sold in a particular consignment; (b) the rate based on the total amount of property sold by the seller through the Company and its subsidiaries during the previous calendar year; or (c) the rate based upon the total amount of property sold to date by the seller through the Company and its subsidiaries during the current calendar year. On February 29, 2000, the Company instituted a new seller's commission structure which gives credit to the seller both for auction sales through the Company during the current year and for auction purchases made from the Company during the current year when determining the applicable commission rate to be paid. Under the new seller's commission structure, the applicable rate paid will continue to vary according to the type of seller, as it did under the old structure, with different rate schedules for private parties, art dealers, and museums. For sales under $100,000, the Company will continue to charge a seller's commission determined on a per lot basis according to a fixed schedule. In addition to auctioneering, the auction segment is engaged in a number of related activities, including the brokering of art and collectible purchases and sales through private treaty sales and the purchase and resale of art and other collectibles. For example, the Company acts as a principal through its investment in Acquavella Modern Art (the "Partnership" or "AMA"), a partnership consisting of a wholly-owned subsidiary of the Company and Acquavella Contemporary Art, Inc. The Company accounts for its investment in AMA under the equity method of accounting in the Consolidated Financial Statements under Item 8. The assets of the Partnership consist principally of art inventory. The Company reflects its 50% interest in the net assets of the Partnership in Investments in the Consolidated Balance Sheets under Item 8. This investment totaled $33.0 million and $34.3 million at December 31, 1999 and 1998, respectively. Since the Company has received the return of its initial investment, cash distributions are made on a 50-50 basis. To the extent that the Partnership requires working capital, the Company has agreed to lend the same to the Partnership. Any amounts loaned to the Partnership by the Company would 2 bear interest, compounded monthly, at the prime rate, plus 1%. As of December 31, 1999, no such amounts were outstanding. See Note F to the Consolidated Financial Statements under Item 8. The Company's auction business is seasonal, with peak revenues and operating income occurring in the second and fourth quarters of each year as a result of the traditional spring and fall art auction seasons. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-Seasonality" under Item 7. THE AUCTION MARKET AND COMPETITION Competition in the international art market is intense. A fundamental challenge facing any auctioneer or dealer is to obtain high quality and valuable property for sale. The Company's primary auction competitor is Christie's although a variety of Internet auction sites are beginning to provide competition in certain areas. See further discussion under this heading. The owner of a work of art wishing to sell it has three options: sale or consignment to, or private brokerage by, an art dealer; consignment to, or private sale by, an auction house; or private sale to a collector or museum without the use of an intermediary. The more valuable the property, the more likely it is that the owner will consider more than one option and will solicit proposals from more than one potential purchaser or agent, particularly if the seller is a fiduciary representing an estate or trust. A complex array of factors may influence the seller's decision. These factors include: the level of expertise of the dealer or auction house with respect to the property; the extent of the prior relationship, if any, between the seller and the firm; the reputation and historic level of achievement by a firm in attaining high sale prices in the property's specialized category; the breadth of staff expertise; the desire for privacy on the part of sellers and buyers; the amount of cash offered by a dealer or other purchaser to purchase the property outright compared with the estimates, guarantees or other financial options given by auction houses; the time that will elapse before the seller will receive sale proceeds; the desirability of a public auction in order to achieve the maximum possible price (a particular concern for fiduciary sellers); the amount of commission proposed by dealers or auction houses to sell a work on consignment; the cost, style and extent of presale marketing and promotion to be undertaken by a firm; recommendations by third parties consulted by the seller; personal interaction between the seller and the firm's staff; and the availability and extent of related services, such as a tax or insurance appraisal and short-term financing. The Company's ability to obtain high quality and valuable property for sale depends, in part, on the relationships that certain employees of the Company, particularly its senior art specialists or management, have established with potential sellers. In January 1999 the Company announced its plans to create a new distribution channel for auction sales on the Internet. In November 1999, the Company launched SOTHEBYS.AMAZON.COM, a co-branded auction site with Amazon.com Auctions, Inc., a subsidiary of Amazon.com, Inc. ("Amazon.com"). The Company and the more than 4,700 fine art, antique and collectibles professionals ("Dealer Associates") who are eligible to sell property on SOTHEBYS.AMAZON.COM offer property in the categories of collectibles and general art, antiques, jewelry and books. Amazon.com manages the day-to-day design and operations of SOTHEBYS.AMAZON.COM, markets SOTHEBYS.AMAZON.COM to its users, and provides a link to the Company's wholly-owned site, SOTHEBYS.COM. The Company relaunched its own website, SOTHEBYS.COM, in December 1999, adding Internet auctions, new design and content. More than 3,500 of the Dealer Associates, as well as the Company, have been selected to sell traditional fine and decorative arts, jewelry and books on SOTHEBYS.COM. The Company manages all operations of SOTHEBYS.COM. The Company believes that Internet distribution channels complement its live auction business and will permit it to reach a larger audience of potential buyers than was possible through more traditional marketing and sales channels. 3 The Company's success in developing and implementing its Internet strategy is substantially dependent upon the following factors: 1) competition in the Internet auction business; 2) the level of use of the Internet and online services; 3) consumer confidence in and acceptance of the Internet and other online services for commerce; 4) consumer confidence in Internet security; 5) the Company's ability to attract and maintain an active customer base and an active base of selected professional dealers selling property on its sites; 6) the functionality of the Company's computer and communication systems; 7) the Company's ability to upgrade and develop its systems and infrastructure to accommodate growth; 8) the success of the Company in attracting and retaining qualified personnel; and 9) government regulation of e-commerce generally. The market for auctioning items over the Internet has grown substantially in the past year and continues to evolve. There are a number of companies that provide business-to-consumer art and collectibles auction services, such as eBay's "Great Collections," iCollector.com and Artnet.com. Other Internet sites that offer art and collectibles at fixed prices include nextmonet.com, guild.com and art.com. Person-to-person auction sites such as eBay, Yahoo! and Amazon.com may also be competitors of the Company's Internet sites, particularly in the collectibles category. There are numerous companies that provide online person-to-person auction services such as eBay Inc. and Yahoo! Inc. as well as internet art auction firms such as Artnet.com and iCollector. Christie's, the Company's principal auction competitor, has not commenced Internet auction sales; however, it has announced that it intends to use its website as an adjunct to its traditional auctions. With respect to all statements made herein regarding the Company's Internet initiative, see Statement on Forward Looking Statements, incorporated by reference from Item 7. It is not possible to measure the entire international art market or to reach any conclusions regarding overall competition because dealers and smaller auction firms frequently do not publicly report annual sales totals. AUCTION REGULATION Regulation of the auction business varies from jurisdiction to jurisdiction. In many jurisdictions, the Company is subject to laws and regulations that are not directed solely toward the auction business, including, but not limited to, import and export regulations and value added sales taxes. Such regulations do not impose a material impediment to the worldwide business of the Company but do affect the market generally, and a material adverse change in such regulations could affect the business. In addition, the failure to comply with such local laws and regulations could subject the Company to civil and/or criminal penalties in such jurisdictions. THE FINANCE SEGMENT The Company provides financing generally secured by works of art and other personal property owned by its clients. The Company's financing activities are conducted through its wholly-owned direct and indirect subsidiaries. The Company generally makes two types of secured loans: (1) advances secured by consigned property to borrowers who are contractually committed, in the near term, to sell the property at auction or privately (a "consignor advance"); and (2) general purpose loans to collectors, museums or dealers secured by property not presently intended for sale. The consignor advance allows a consignor to receive funds shortly after consignment for an auction that will occur several weeks or months in the future, while preserving for the benefit of the consignor the potential of the auction process. The general purpose secured loans allow the Company to establish or enhance a mutually beneficial relationship with dealers and collectors. The loans are generally made with full recourse to the borrower. In certain instances, however, loans are made with recourse limited to the works of art pledged as security for the loan. To the extent that the Company is looking wholly or partially to the collateral for repayment of its loans, 4 repayment can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations where the borrower becomes subject to bankruptcy or insolvency laws, the Company's ability to realize on its collateral may be limited or delayed by the application of such laws. The majority of the Company's loans are variable interest rate loans. At December 31, 1999, $148.3 million of the total $190.8 million loan portfolio was due within one year. The Company regularly reviews its loan portfolio. Each loan is analyzed based on the current estimated realizable value of collateral securing the loan. For financial statement purposes, the Company establishes reserves for certain loans that the Company believes are under-collateralized and with respect to which the under-collateralized amount may not be collectible from the borrower. Reserves are established for probable losses inherent in the remainder of the loan portfolio based on historical data and current market conditions. See Notes B and D to the Consolidated Financial Statements under Item 8. The Company funds its financing activities through internally generated funds, through the issuance of commercial paper, through the issuance of its senior unsecured debt securities, and through its bank credit lines. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-Liquidity and Capital Resources" under Item 7 and Note H to the Consolidated Financial Statements under Item 8. THE FINANCE MARKET AND COMPETITION A considerable number of traditional lending sources offer conventional loans at a lower cost to borrowers than the average cost of those offered by the Company. However, the Company believes that only Christie's and a few other lenders are as willing to accept works of art as sole collateral. The Company believes that its financing alternatives are attractive to clients who wish to obtain liquidity from their art assets. THE REAL ESTATE SEGMENT SIR was founded in 1976 as a wholly-owned subsidiary of the Company. A natural extension of the Company's auction services, SIR's early mission was to assist fine arts, furniture and collectibles clients in buying and selling distinctive properties. Since that time SIR has evolved into a worldwide organization serving an international customer base. Today, SIR provides brokerage, marketing and consulting services for luxury residential, resort, farm and ranch properties nationally and internationally. SIR offers real estate clients a global network of brokerage operations, including 16 company-owned brokerage offices, five regional offices, and a buyers' representative in Hong Kong. The company-owned brokerage offices of SIR are located on the upper East Side and SoHo in Manhattan; Southampton, Bridgehampton and East Hampton, N.Y.; Palm Beach, Fla; Beverly Hills, Brentwood, Santa Barbara and San Francisco, CA.; Greenwich, Conn.; Santa Fe, N.M.; Sydney, Australia; London, England and, most recently, Jackson Hole, Wyoming and Paris, France. The Santa Fe office, formed from the acquisition of a local affiliate, and the SoHo, Santa Barbara and London offices were established in 1998. In 1999, The Jackson Hole office was formed through the acquisition of an affiliate, and the Paris Office was opened. SIR's five regional offices, located in Manhattan; Palm Beach, Fla.; Newport Beach, CA.; Boston, MA.; and Munich, Germany, manage the Company's affiliation with more than 180 independent brokerage offices in the U.S., Europe, Canada and the Caribbean. In selecting its affiliates, SIR evaluates a firm's expertise in the high-end segment of its local market, community reputation and dedication to customer service. Each affiliate is the exclusive SIR representative in its respective territory. Through the SIR global network, company-owned and affiliate offices offer buyers access to distinctive properties, in a range of prices, in both domestic and international luxury real estate markets. The 5 network, combined with SIR's connection to the Company's auction and finance businesses, provides sellers access to a unique, qualified group of buyers. REAL ESTATE COMPETITION SIR's primary competitors are small, local real estate brokerage firms that deal exclusively with luxury real estate and the "distinctive property" divisions of large regional and national real estate firms. Competition in the luxury real estate business takes many forms, including competition in commission rates, marketing expertise and the provision of personalized service to sellers and buyers. REAL ESTATE REGULATION The real estate brokerage business is subject to regulation in most jurisdictions in which SIR operates. Typically, individual real estate brokers and brokerage firms are subject to licensing requirements. Depending on a jurisdiction's requirements and the nature of SIR's business conducted there, SIR may register to conduct business, maintain a real estate brokerage license, and/or act as an exclusive marketing agent providing services to licensed real estate brokers in a particular jurisdiction. FACTORS EFFECTING OPERATING REVENUES The Company's Auction, Finance and Real Estate operating revenues are significantly influenced by a number of factors not within the Company's control, including: the overall strength of the international economy and financial markets and, in particular, the economies of the United States, the United Kingdom, and the major countries of continental Europe and Asia (principally Japan and Hong Kong); political conditions in various nations; the presence of export and exchange controls; local taxation of sales and donations of potential auction property; competition; and the amount of property being consigned to art auction houses. FINANCIAL AND GEOGRAPHICAL INFORMATION ABOUT OPERATING SEGMENTS See Note C to the Consolidated Financial Statements under Item 8 for financial and geographical information about the Company's operating segments. PERSONNEL At December 31, 1999, the Company had 2,172 employees: 995 located in North America; 806 in the United Kingdom and 371 in the rest of the world. The following table provides a breakdown of employees by operating segment as of December 31, 1999:
OPERATING SEGMENT NUMBER OF EMPLOYEES - ----------------- ------------------- Auction..................................................... 1,804 Realty...................................................... 103 Finance..................................................... 9 Others...................................................... 256 Total....................................................... 2,172
The Company regards its relations with its employees as good. ITEM 2. PROPERTIES Sotheby's, Inc., a wholly-owned subsidiary of the Company, is headquartered at 1334 York Avenue, New York, New York (the "York Property"). The Company also leases office and warehouse space in four other locations in the New York City area, and leases office and exhibition space in several other major 6 cities throughout the United States, including Los Angeles, San Francisco, Chicago, Palm Beach, Philadelphia, and Boston. The aforementioned office space is primarily utilized by Auction and Finance employees. York Avenue Development, Inc. ("York"), a wholly-owned subsidiary of Sotheby's, Inc., currently leases the York Property, comprising approximately 404,000 square feet, from an unaffiliated party under a 30-year lease expiring in 2009. In September 1999, York exercised its option under the York Property lease to purchase the York Property, entering into an Agreement of Sale and Purchase, dated as of September 9, 1999, between the current owner and York, which York then assigned to Sotheby's, Inc. Sotheby's, Inc. expects to assign this agreement to a controlled affiliate in the near future. The closing of this purchase will take place no later than July 2000. The Company has guaranteed Sotheby's, Inc.'s (and any assignee's) obligations under the purchase agreement. Upon the closing of this purchase, the Company has agreed to grant a mortgage on the property to the banks under its Bank Credit Agreement. (See "Management's Discussion and Analysis of Results of Operation and Financial Condition--Liquidity and Capital Resources" under Item 7). The Company is in the process of completing construction of a six-story addition at, and renovation of, the York Avenue Property. This construction will expand auction, warehouse and office space in New York City and will enable the Company to consolidate many of its operations in New York City. The capital expenditures relating to the construction and renovation project are currently estimated to be in the range of $151 million. SIR leases approximately 10,900 square feet of office space at 980 Madison Avenue, New York, New York, from unaffiliated parties under leases expiring in 2001. SIR also leases satellite office space at a number of locations, totaling another 59,400 square feet. The Company's U.K. operations (primarily Auction) are centered at New Bond Street, London, where the main salesrooms and administrative offices of Sotheby's (U.K.) are located. The New Bond Street premises are approximately 200,000 square feet in gross space. In addition, warehouse space is leased at King's House in West London. The Company also owns a salesroom in Sussex where it conducts auctions. The Company also leases office space primarily for Auction operations in various locations throughout continental Europe, including Amsterdam, Geneva, Madrid, Milan, Munich, Paris, and Zurich; in Asia, including Hong Kong, Seoul, Singapore, Taipei, and Tokyo; in Australia; in South America and in Canada. In management's opinion, the Company's worldwide premises are generally adequate for the current conduct of its business. ITEM 3. LEGAL PROCEEDINGS In May 1997, the Antitrust Division of the United States Department of Justice began an investigation of certain art dealers and major auction houses, including the Company and its principal competitor, Christie's. Among other matters, the investigation has reviewed whether Sotheby's and Christie's had any agreement regarding the amounts charged for commissions in connection with auctions. The Company has recently met with the Department of Justice in order to discuss a prompt and appropriate resolution of this investigation. The European Commission has also recently commenced an inquiry, and the Australian Competition Commission an investigation, regarding commissions charged by the Company and Christie's for auction services. A number of private civil complaints, styled as class action complaints, have also been filed against the Company alleging violation of federal and state antitrust laws based upon alleged agreements between Christie's and the Company regarding commission pricing. In addition, several shareholder class action complaints have been filed against the Company and certain of its directors and officers, alleging failure to disclose the alleged agreements and their impact on the Company's financial condition and results of 7 operations. And, a number of shareholder derivative suits have been filed against the directors of the Company based on allegations related to the foregoing lawsuits and investigations. Although the outcome of the investigation by the Department of Justice, other governmental inquiries and investigations and these various lawsuits cannot presently be determined, any loss resulting from these matters could well have a material impact on the Company's financial condition and/or results of operations. The amount of any such loss is not currently estimatable. (See Statement on Forward Looking Statements contained in Item 7 below). Included in the lawsuits described above are fifty-six purported class action lawsuits that have been filed against the Company and/or its wholly-owned subsidiary, Sotheby's, Inc., beginning January 30, 2000, alleging violations of the federal antitrust laws. Christie's International PLC or Christie's Inc. (collectively "Christie's") has also been named as a defendant in these actions. Fifty-three of these actions were filed in the United States District Court for the Southern District of New York, one was filed in the Eastern District of Michigan, one was filed in the Eastern District of Pennsylvania, and one was filed in the Northern District of California, which has since been withdrawn without prejudice. The complaints in these lawsuits purport to be brought on behalf of individuals that purchased and/or sold items auctioned by the defendants during various periods from January 1, 1992, to the present. The complaints generally allege, among other things, that the Company along with Christie's conspired to fix and raise the commissions charged to purchasers and sellers of art and other items at auction. The complaints seek treble damages, injunctive relief, attorneys' fees and costs. The Company has not yet answered or otherwise responded to these complaints. On February 23, 2000, the United States District Court for the Southern District of New York entered an Order consolidating virtually all of the actions filed in that court and all subsequently filed class action lawsuits. It is expected that the remaining filed actions in the Southern District of New York will also be part of the same consolidation action. It is also expected that the action filed in the Eastern District of Pennsylvania will be consolidated with the New York action. The Court's consolidation Order requires that a consolidated complaint be filed by March 15, 2000, and be referred to as IN RE AUCTION HOUSE ANTITRUST LITIGATION, No. 00 Civ. 0648. The complaint filed in the United States District Court for the Eastern District of Michigan is captioned SILVERMAN AND THE ESTATE OF CHARLES TOMICK V. SOTHEBY'S HOLDINGS, INC. AND CHRISTIES'S INTERNATIONAL PLC, No. 00-70660 (filed February 4, 2000). The complaint filed in the United States District Court for the Eastern District of Pennsylvania is captioned MASLOW V. CHRISTIE'S INTERNATIONAL PLC AND SOTHEBY'S HOLDINGS, INC., No. 00-CV-610 (filed February 2, 2000). In addition, on February 29, 2000, March 1, 2000 and March 10, 2000, three indirect purchaser class action lawsuits were filed against the Company, its subsidiary, Sotheby's, Inc., and Christie's in the Superior Court of the State of California, City and County of San Francisco, alleging violations of the Cartwright Act, California's antitrust statute, and the California Unfair Competition Act. The complaints are captioned CHRISTENSEN V. CHRISTIE'S INTERNATIONAL PLC, ET AL., No. 310313 (filed Feb. 29, 2000); HOWARD V. CHRISTIE'S INTERNATIONAL PLC, ET AL., No. 310362 (filed March 1, 2000) and LANG V. CHRISTIE'S INTERNATIONAL PLC ET AL., No. 310616 (filed March 10, 2000). The complaints in these lawsuits purport to be brought on behalf of the individuals that indirectly purchased items in California from one or more of the defendants. One complaint includes purchases during the period January 1, 1992 to February 6, 2000, one includes purchases during the period April 4, 1994 to March 1, 2000 and the third includes purchases from January 1, 1992 to March 10, 2000. The complaints generally allege, among other things, that the Company along with Christie's conspired to fix and raise the commissions charged to buyers and sellers of art and other items at auction, and that, as a result, such indirect purchasers paid more for art and other items than they otherwise would have paid in the absence of defendants' conduct. The complaints seek, among other things, treble damages in unspecified amounts, interest, disgorgement of gains, equitable relief, attorneys' fees and costs. The Company has not yet answered or otherwise responded to these complaints. 8 The shareholder class action complaints referred to above are captioned: WEISS V. SOTHEBY'S HOLDING INC., ET AL., No. 00 Civ. 1041 (S.D.N.Y.) (filed Feb. 10, 2000); GOLDFEIN V. SOTHEBY'S HOLDINGS INC., ET AL., 00 Civ. 1125 (S.D.N.Y.) (filed Feb. 15, 2000); PATEL V. SOTHEBY'S HOLDINGS INC., ET AL., No. 00 Civ. 1258 (S.D.N.Y.) (filed Feb. 18, 2000); SLOAN V. SOTHEBY'S HOLDINGS INC., ET AL., No. 00 Civ. 1412 (S.D.N.Y.) (filed Feb. 24, 2000); MCGEEVER V. SOTHEBY'S HOLDINGS INC., ET AL., 00 Civ. 1570 (S.D.N.Y) (filed Feb 29, 2000); MAZZARINO V. SOTHEBY'S HOLDINGS, INC., 00 Civ. 1605 (S.D.N.Y) (filed March 2, 2000); EVERITT V. SOTHEBY'S HOLDINGS INC., ET AL., 00 CV7 0872DT (E.D. Mich.) (filed Feb. 16, 2000); LAKE V. SOTHEBY'S HOLDINGS INC., ET AL., No. 00 Civ. 1936 (S.D.N.Y.) (filed March 10, 2000) and CALDWELL V. SOTHEBY'S HOLDINGS, INC., ET AL., No. 00 Civ. 71216DT (E.D. Mich.) (filed March 7, 2000). These complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Plaintiffs seek to recover damages in unspecified amounts on behalf of themselves and all other purchasers of the Company's common stock during different class periods, most commonly February 11, 1997 through February 21, 2000. The Company has not yet answered or otherwise responded to these complaints. The shareholder derivative actions referred to above are styled CRANDON CAPITAL PARTNERS, L.P. V. TAUBMAN, ET AL., 00 Civ. 1373 (S.D.N.Y.) (filed February 23, 2000), and HUSCHER V. CURLEY, Case No. 00-021379-CZ (Mich. Cir. Ct. Oakland County) (filed Mar. 3, 2000). They name as defendants certain of the Company's directors, and the Company as a nominal defendant. The CRANDON complaint also names Sotheby's, Inc., a subsidiary of the Company, as a nominal defendant. These complaints allege various breaches of fiduciary duties, gross mismanagement and constructive fraud arising from the alleged agreements between the Company and Christie's. The CRANDON complaint also seeks indemnification from the defendants on behalf of the Company and Sotheby's Inc. to the extent that the Company and/or Sotheby's, Inc. is found liable for the individual defendants' failure to act in compliance with state law. The complaints seek damages in unspecified amounts on behalf of the Company (and in CRANDON, also on behalf of Sotheby's, Inc.). The Company has not yet answered or otherwise responded to these complaints. In addition, the Company's Board of Directors has recently received two letters on behalf of putative shareholders (including one letter from the plaintiff in the HUSCHER action), requesting that the Company investigate and commence litigation against the individuals responsible for the possible damage to the Company and Sotheby's, Inc. resulting from the alleged agreements between the Company and Christie's. The Company is also aware of governmental investigations in Italy and India arising from certain allegations of improper conduct by current and former Company employees. These allegations arose from an early 1997 television program aired in the United Kingdom as well as the publication of a related book. The Company has been in contact during the past several years with and is continuing to work with these authorities. The Company also becomes involved, from time to time, in various claims and lawsuits incidental to the ordinary course of its business. The Company does not believe that the outcome of any such pending claims or proceedings will have a material effect upon its business or financial condition. (See Statement on Forward Looking Statements, in Item 7 below.) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders during the fourth quarter of 1999. 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS MARKET INFORMATION The principal U.S. market for the Company's Class A Common Stock is the NYSE (symbol: BID). The Class A Common Stock is also traded on the London Stock Exchange. The Company also has Class B Common Stock, convertible on a share for share basis into Class A Common Stock. There is no public market for the Class B Common Stock. Per share cash dividends are equal for the Class A and Class B Common Stock. The quarterly price ranges on the New York Stock Exchange of the Class A Common Stock and dividends per share for 1999 and 1998 are shown in the following schedules:
1999 ------------------- CASH DIVIDEND QUARTER ENDED HIGH LOW DECLARED - ------------- -------- -------- ------------- March 31....................................... 41.500 27.062 $0.10 June 30........................................ 46.750 30.688 $0.10 September 30................................... 36.625 25.562 $0.10 December 31.................................... 36.000 25.167 $0.10
1998 ------------------- CASH DIVIDEND QUARTER ENDED HIGH LOW DECLARED - ------------- -------- -------- ------------- March 31....................................... 23.250 17.188 $0.10 June 30........................................ 24.500 21.438 $0.10 September 30................................... 24.375 16.500 $0.10 December 31.................................... 38.000 15.500 $0.10
The Company has announced that it will not pay a dividend for the first quarter of 2000. (See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources" under Item 7). The number of holders of record of the Class A Common Stock as of March 6, 2000 was 947. The number of holders of record of the Class B Common Stock as of March 6, 2000 was 27. 10 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) AUCTION SALES(1).............. $2,258,752 $1,939,743 $1,843,335 $1,599,595 $1,665,378 AUCTION AND RELATED REVENUES.................... 390,101 367,204 335,511 302,196 282,096 OTHER REVENUES................ 52,484 79,848 46,281 34,300 30,784 ---------- ---------- ---------- ---------- ---------- TOTAL REVENUES................ $ 442,585 $ 447,052 $ 381,792 $ 336,496 $ 312,880 ---------- ---------- ---------- ---------- ---------- OPERATING INCOME.............. $ 54,173 $ 80,778 (2) $ 67,759 (3) $ 68,208 $ 56,841 ---------- ---------- ---------- ---------- ---------- INCOME BEFORE TAXES........... $ 52,150 $ 73,813 (2) $ 64,457 (3) $ 68,244 $ 54,303 NET INCOME.................... $ 32,854 $ 45,025 (4) $ 40,608 (5) $ 40,946 $ 32,582 BASIC EARNINGS PER SHARE...... $ 0.57 $ 0.79 (4) $ 0.73 (5) $ 0.73 $ 0.58 DILUTED EARNINGS PER SHARE.... $ 0.56 $ 0.79 (4) $ 0.72 (5) $ 0.73 $ 0.58 CASH DIVIDENDS DECLARED PER SHARE....................... $ 0.40 $ 0.40 $ 0.40 $ 0.32 $ 0.24 WORKING CAPITAL............... $ 159,460 $ 132,326 $ 123,522 $ 57,966 $ 101,394 TOTAL ASSETS.................. 1,073,512 769,646 860,241 656,098 600,104 COMMERCIAL PAPER.............. -- -- 117,000 -- 38,000 LONG-TERM DEBT................ 100,000 -- -- -- -- NET (DEBT) CASH(6)............ (57,953) 69,140 (85,526) 63,675 (3,103) SHAREHOLDERS' EQUITY.......... 377,044 319,674 260,068 253,972 227,482
- ------------------------ (1) Auction sales represent sales at the hammer price plus buyer's premium. (2) Includes 1998 non-recurring charges of $15.2 million (3) Includes 1997 non-recurring charges of $11.7 million (4) Includes 1998 non-recurring charges of $9.3 million, after tax. (5) Includes 1997 non-recurring charges of $7.4 million, after tax. (6) Long-term debt, short-term borrowings and commercial paper less cash and cash equivalents 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999 AND 1998 Note C ("Segment Reporting") of the Consolidated Financial Statements should be read in conjunction with this discussion. Auction sales for Sotheby's Holdings, Inc. (together with its subsidiaries, the "Company") totaled $2,258.8 million during 1999, an increase of $319.0 million, or 16%, compared to the prior year. The increase in worldwide sales was due to a 24% increase in the average selling price per lot sold in 1999 as compared to 1998, partially offset by a 6% decrease in the number of lots sold. Auction sales recorded by the Company's foreign operations were not materially affected by translation to United States ("U.S.") dollars. The following is a geographical breakdown of the Company's auction sales for 1999 and 1998:
1999 1998 ---------- ---------- (THOUSANDS OF DOLLARS) NORTH AMERICA........................................ $1,264,475 $1,074,428 EUROPE............................................... 904,515 803,931 ASIA................................................. 89,762 61,384 ---------- ---------- TOTAL................................................ $2,258,752 $1,939,743 ========== ==========
The sales increase in North America of $190.1 million, or 18%, during 1999 was primarily a result of successful single-owner sales, most notably the paintings and sculptures from the Collection of Mr. and Mrs. John Hay Whitney, the Collection of Eleanore and Daniel Saidenberg, the sale of furniture, decorative and fine arts from the Estate of Mrs. John Hay Whitney, Masterpieces from the Time Museum including Watches, Clocks and Scientific Instruments and the Barry Halper Collection of baseball memorabilia, all of which there were no comparable sales in the prior year. The growth was also due to increases in Impressionist and Modern art and Contemporary art. The increase in sales was partially offset by a decrease in Old Masters Paintings and Drawings. Also, influencing the year to year comparison are single-owner sales in 1998 for which there were no comparable sales in 1999. The single owner sales in 1998 included the Reader's Digest Corporate Collection; the Collection of Jaime Ortiz-Patino comprised of silver, furniture, rare books and manuscripts and the Collection of H.R.H. the Duke and Duchess of Windsor. Sales in Europe, which for purposes of this discussion consist of the United Kingdom ("U.K.") and continental Europe ("the Continent"), increased $100.6 million, or 13%. The increase was primarily attributable to growth in Impressionist and Modern art, Old Masters Paintings and Drawings and French and Continental Furniture. Similarly contributing to the growth were the results of the single-owner sale of Important French and Italian Furniture, Porcelain, Paintings, Silver and Decorative Arts from the Estate of dott. Giuseppe Rossi and the sale of twenty-five works by Picasso from the private collection of Gianni Versace, for which there were no comparable sales in 1998. Asian sales increased $28.4 million, or 46%, primarily due to increases in Ceramics and Works of art and a successful single-owner sale for which there was no comparable sale in 1998. Worldwide revenues from auction and related operations increased $22.9 million, or 6%, in 1999 compared to 1998. This increase is primarily due to higher buyer's premium that resulted from the increased auction sales discussed above partially offset by decreased seller's commissions and expense recoveries. The decrease in seller's commissions is primarily due to sales mix and margin pressure for high-end single-owner collections, most notably in North America. The decrease in expense recoveries was primarily due to the inclusion in 1998 of recoveries from the Collection of H.R.H. the Duke and Duchess of Windsor for which there was no comparable sale in the current year. The Company cannot presently determine the impact, if any, on future sales and future revenues of the Department of Justice investigation and other related investigations and civil lawsuits, as discussed in more detail below. (See Statement on Forward Looking Statements) 12 On February 29, 2000, the Company announced a new commission structure for both buyers and sellers at its principal auction locations. The Company's new seller's commission represents a reduction in the fees charged to its sellers for all levels of aggregate transactions over $100,000. For buyers in most collecting categories, the Company will charge a buyer's premium of 20% of the hammer price on the first $15,000, 15% on the next $85,000 up to $100,000 and 10% on any amount over $100,000 on property sold. The buyer's premium on internet purchases is 10% of the hammer price. The Company is currently evaluating the estimated full impact of this commission change on its future revenues. Other revenues consist primarily of revenues from the Company's Real Estate and Finance operating segments. Other revenues decreased $27.4 million, or 34%, in 1999 compared to 1998. This decrease was primarily due to a decrease in Finance revenues, partially offset by an increase in Real Estate revenues. The decrease in Finance revenue was partially due to a decrease in the average loan portfolio balance to $176.8 million in 1999 from $301.2 in 1998. Also, significantly influencing the year to year comparison of revenues was the recognition of $21.0 million in origination fee revenue related to a significant loan, as discussed below, in 1998 with no comparable transaction in 1999. The decrease in the average loan portfolio balance was primarily due to a significant loan extended in May 1998 to a group of affiliated corporate borrowers, for which there was no comparable loan in 1999. The loan to this group was scheduled to mature on December 31, 2001; however, during the fourth quarter of 1998 it was repaid in full. The prepayment of this loan resulted in the recognition of $18.7 million of additional revenue in the fourth quarter of 1998 relating to the origination fee that would have been amortized through 2001. The increase in Real Estate revenue was primarily due to increased real estate unit sales from both mature and new Company owned brokerage offices. Direct costs of services (consisting of catalogue production and distribution costs as well as corporate marketing and sale marketing expenses) totaled $85.6 million in 1999, an increase of $9.3 million, or 12%, compared to 1998. This increase was primarily due to increased marketing expenses, a direct result of the Company's Internet initiative. Also, influencing the year to year comparison are the impact of costs associated with the sale of the Collection of H.R.H. the Duke and Duchess of Windsor which were partially recovered and reflected in auction and related revenue in 1998 with no comparable costs in 1999. Excluding non-recurring charges of $15.2 million in 1998, all other operating expenses (which consist of salaries and related costs, general and administrative expenses and depreciation and amortization) increased $28.1 million, or 10%, in 1999 compared to 1998. This increase was primarily due to a $17.5 million, or 16%, increase in general and administrative expenses, a $5.8 million, or 4%, increase in salaries and related costs and a $4.8 million, or 38%, increase in depreciation and amortization. The increase in general and administrative expenses was primarily due to Internet related expenses and, to a lesser extent, increased Information Technology costs related to new initiatives, provisions for property claims and associated legal fees, and costs associated with the Company's consolidation of its operations to the York Property. These increases were partially offset by a decrease in write-offs and provisions of uncollectible auction receivable accounts in 1999 as compared to 1998. The increase in salaries and related costs was primarily due to the Internet initiative and annual merit increases. Offsetting the aforementioned salaries and related costs increase was a reduction of accrued compensation costs of approximately $5.9 million previously expensed by the Company for its 1997 and 1998 Performance Share Purchase Plan ("PSP") option grants. The Company's management determined that fulfillment of the financial performance criteria for the 1997 and 1998 grants (necessary for these options to ultimately become exercisable under terms of the plan) are not likely to be achieved primarily due to the increased expenses related to the Company's Internet initiative. Also, influencing the year to year comparison was the $9.0 million of expense recorded in 1998 related to the PSP due to the appreciation of the Company's stock price during 1998. The increase in depreciation was primarily related to the commencement of depreciation on the floors currently in service of the York Property during the fourth quarter of 1999 and other capital projects that were placed in service during 1999. 13 On January 19, 1999 the Company announced its intention to launch sothebys.com, a new Internet auction business for art, antiques, jewelry and collectibles. In July 1999, the Company and Amazon.com, Inc. entered into an agreement to launch a co-branded auction site, sothebys.amazon.com, that will be devoted to the general antiques collector and to the world of collectibles. In the fourth quarter of 1999, the Company launched sothebys.amazon.com and sothebys.com. Total Internet related expenses amounted to $42.1 million for the twelve months ended December 31, 1999. These expenses include primarily marketing, salary and related costs, professional fees and technology related costs. The Company continues to evaluate its planned expenditures for sothebys.com and sothebys.amazon.com. Although these investments are likely to have a dilutive effect on the Company's results in the near term, the Company believes that these expenditures are appropriate in light of the potential of the Internet business. During 1998, the Company recorded a non-recurring charge of $15.2 million relating to the construction of the York Property. Approximately $14.1 million of this amount was a non-cash charge resulting from the impairment of existing leasehold improvements and related furniture and fixtures. The remaining amount of approximately $1.1 million was a provision resulting from the cost of future rental obligations on rental space in New York City that will be abandoned as part of the Company's plan to consolidate many of its operations in New York City. As of December 31, 1999 and 1998, the Company has recorded in other liabilities on the Consolidated Balance Sheets approximately $1.1 million related to these future rental obligations, which will be paid out starting approximately in October, 2000 through September, 2003. The impact on future earnings related to the write-off of leasehold improvements and related furniture and fixtures will be immaterial as the assets written off are being replaced by the depreciable assets of the York Property. Interest income increased $0.8 million in 1999 compared to 1998 due to higher average cash balances throughout the year. Interest expense decreased $5.0 million in 1999 as compared to 1998 as a result of lower borrowings related to the decreased average loan portfolio and capitalized interest on the Company's York Property construction. The consolidated effective tax rate was 37% in 1999 compared to 39% in 1998. This decrease was primarily a result of higher earnings during 1998 in the United States. Net income decreased $12.2 million, or 27%, in 1999 compared to 1998. Diluted earnings per share for 1999 decreased to $0.56 from $0.79 in 1998. The impact on diluted earnings per share related to the Company's Internet operating loss was ($0.44) per share. The impact of the non-recurring charge on diluted earnings per share in 1998 was ($0.16). Movements in foreign currencies did not have a material impact on 1999 and 1998 revenues or expenses. In May 1997, the Antitrust Division of the United States Department of Justice began an investigation of certain art dealers and major auction houses, including the Company and its principal competitor, Christie's. Among other matters, the investigation has reviewed whether Sotheby's and Christie's had any agreement regarding the amounts charged for commissions in connection with auctions. The Company has recently met with the Department of Justice in order to discuss a prompt and appropriate resolution of this investigation. The European Commission has also recently commenced an inquiry, and the Australian Competition Commission an investigation, regarding commissions charged by the Company and Christie's for auction services. A number of private civil complaints, styled as class action complaints, have also been filed against the Company alleging violation of federal and state antitrust laws based upon alleged agreements between Christie's and the Company regarding commission pricing. In addition, several shareholder class action complaints have also been filed against the Company and certain of its directors and officers, alleging failure to disclose the alleged agreements and their impact on the Company's financial condition and results of operations. And, a number of shareholder derivative suits have been filed against the directors of the Company based on allegations related to the foregoing lawsuits and investigations. Although the outcome of the investigation by the Department of Justice, other governmental inquiries and investigations 14 and these various lawsuits cannot presently be determined, any loss resulting from these matters could well have a material impact on the Company's financial condition and/or results of operations. The amount of any such loss is not currently estimatable. (See Statement on Forward Looking Statements and "Legal Proceedings.") In February 2000, the Board of Directors of the Company announced a number of management changes. A. Alfred Taubman resigned as Chairman of the Company and Diana D. Brooks resigned as President and Chief Executive Officer of the Company. Concurrently, the Company announced the appointment of Michael Sovern, former President of Columbia University, as the new Chairman of the Company and the appointment of William F. Ruprecht as the President and Chief Executive Officer of the Company. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998 AND 1997 Note C ("Segment Reporting") of the Consolidated Financial Statements should be read in conjunction with this discussion. Auction sales for Sotheby's Holdings, Inc. (together with its subsidiaries, the "Company") totaled $1,939.7 million during 1998, an increase of $96.4 million, or 5%, compared to the prior year. The increase in worldwide sales was due to a 10% increase in the average selling price per lot sold in 1998 as compared to 1997, offset by a 4% decrease in the number of lots sold. Overall, worldwide sales of Fine Art increased 11%, led by increases in Contemporary art, 19(th) Century paintings and drawings, American paintings and drawings and Impressionist and Modern art, offset by a decrease in Old Master paintings. Other sales increases included Silver, English Furniture and French and Continental Furniture. Auction sales recorded by the Company's foreign operations were not materially affected by translation to United States ("U.S.") dollars. The following is a geographical breakdown of the Company's auction sales for 1998 and 1997:
1998 1997 ---------- ---------- (THOUSANDS OF DOLLARS) NORTH AMERICA........................................ $1,074,428 $ 919,028 EUROPE............................................... 803,931 828,192 ASIA................................................. 61,384 96,115 ---------- ---------- TOTAL................................................ $1,939,743 $1,843,335 ========== ==========
The sales increase in North America of $155.4 million, or 17%, during 1998 was primarily a result of broad-based growth in virtually every collecting category. The growth was due to increases in American paintings and drawings, 19(th) Century paintings and drawings, Impressionist and Modern art and Contemporary art. The growth was also due to the result of several outstanding single-owner sales, most notably the Reader's Digest Corporate Collection; the Collection of Jaime Ortiz-Patino comprised of silver, furniture, rare books and manuscripts, the Eulich Collection of American Western art and the Collection of H.R.H. the Duke and Duchess of Windsor. Sales in Europe, which for purposes of this discussion consists of the United Kingdom ("U.K.") and continental Europe ("the Continent"), decreased $24.3 million, or 3%. The decrease was primarily due to 1997 single-owner sales, most notably the sale of Illuminated Manuscripts from the Beck Collection for which there were no comparable sales in the current year, as well as a broad-based decrease in virtually every collecting category. Asian sales decreased $34.7 million, or 36%, primarily due to the slow down of the economies within Asia. Historically, Asia has accounted for approximately five percent of annual sales. Asia accounted for three percent of sales in 1998. Worldwide revenues from auction and related operations increased $31.7 million, or 9%, in 1998 compared to 1997. This increase is primarily due to a significant increase in principal activities and higher commission revenue (which consists of buyer's premium, seller's commission and expense recoveries) that resulted from the increased auction sales discussed above and expense recoveries associated with the sale of the Collection of H.R.H. the Duke and Duchess of Windsor. Principal activities include: net gains 15 (losses) on sales of inventory (including inventory obtained as a result of the auction process as well as inventory obtained for investment purposes); the Company's share of operating earnings (losses) from its investments in Acquavella Modern Art ("AMA") and other equity investments; net income (loss) earned from guarantees; and the net gains (losses) related to sales of secured loan collateral where the Company shares in the gain (loss) if the property sells either above or below a targeted amount. The increase in principal activities was primarily due to an increase in net income earned on guarantees, an increase in net gains related to sales of secured loan collateral that exceeded a targeted amount and an increase in the Company's share of operating results of AMA. Other revenues consist primarily of revenues from the Company's Real Estate and Finance operating segments. Other revenues increased $33.6 million, or 73%, in 1998 compared to 1997. This growth was primarily due to increases in both real estate and financing activities. The increase in Real Estate revenue was due primarily to increased real estate unit sales and from both mature and new Company owned brokerage and regional offices in the U.S. The increase in Finance revenue was due to an increase in the average loan portfolio balance to $301.2 million in 1998 from $215.8 in 1997 and the recognition of $21.0 million in origination fee revenue. The increase in the average loan portfolio balance was due to a loan extended in May 1998 to a group of affiliated corporate borrowers. The loan to this group was to mature on December 31, 2001; however, during the fourth quarter of 1998 it was repaid in full. The prepayment of this loan resulted in the recognition of $18.7 million of additional revenue in the fourth quarter relating to the origination fee that would have been amortized through 2001. Direct costs of services (consisting of catalogue production and distribution costs as well as corporate marketing and sale marketing expenses) totaled $76.3 million in 1998, an increase of $5.9 million, or 8%, compared to 1997. This increase was primarily a result of increased auction sales in 1998 and the impact of costs associated with the sale of the Collection of H.R.H. the Duke and Duchess of Windsor which were partially recovered and reflected in auction and related revenue. The increase was also due, to a lesser extent, to an increase in direct costs in the Real Estate segment related to an increase in units sold in 1998. Direct costs as a percentage of sales was consistent in 1998 and 1997. Excluding non-recurring charges of $15.2 and $11.7 million in 1998 and 1997, respectively, all other operating expenses (which consist of salaries and related costs, general and administrative expenses and depreciation and amortization) increased $42.8 million, or 18%, in 1998 compared to 1997. This increase was primarily due to a $22.0 million, or 17%, increase in salaries and related costs and a $19.2 million, or 22%, increase in general and administrative expenses. These increases were primarily a result of new initiatives and expertise; long term incentive plans, primarily the PSP, for which the related expense increased approximately $7.7 million in 1998 due to the appreciation of the Company's stock price and an increase in options granted; costs incurred by the Auction segment relating to the startup of the Paris office and initial internet related expenses; write-offs and provisions of uncollectible auction receivable accounts; and expenses for authenticity claims and settlements. In early 1997, a television program aired in the U.K. and a related book was published both of which contain certain allegations of improper or illegal conduct by current and former employees of the Company. In response to these allegations, the Board of Directors in February 1997 established a committee of independent directors to review the issues raised by the book and related matters. The Independent Review Committee retained outside independent counsel in the U.S. and the U.K. to assist and advise the Committee in its review. The Company's management also conducted its own internal review. Both reviews were completed in 1997. In 1997, the Company incurred $11.7 million of non-recurring charges that consisted primarily of legal and other professional fees associated with the Board of Directors' Independent Review Committee. These charges were paid in full as of December 31, 1999. 16 Interest income increased $0.5 million in 1998 compared to 1997 due to higher average cash balances throughout the year. Interest expense increased $4.5 million in 1998 as compared to 1997 as a result of additional commercial paper borrowings to fund the higher average loan portfolio. The consolidated effective tax rate was 39% in 1998 compared to 37% in 1997. This increase was primarily a result of higher earnings during 1998 in higher tax rate jurisdictions. Net income increased $4.4 million, or 11%, in 1998 compared to 1997. Diluted earnings per share for 1998 increased to $0.79 from $0.72 in 1997. Excluding non-recurring charges, net income increased 13% to $54.3 million. The impact of the non-recurring charges on diluted earnings per share was ($0.16) and ($0.13) in 1998 and 1997, respectively. Movements in foreign currencies did not have a material impact on 1998 revenues or expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's net debt position (total debt, which includes long-term debt, short-term borrowings and commercial paper less cash and cash equivalents) totaled $58.0 million at December 31, 1999, compared to a net cash position of $69.1 million at December 31, 1998 and net debt of $85.5 million at December 31, 1997. The significant change in net debt in 1999 compared to 1998 was primarily due to the Company's use of the proceeds from the $100 million unsecured debt offering in February 1999, as described in more detail below. Working capital (current assets less current liabilities) at December 31, 1999 was $159.5 million, compared to $132.3 million and $123.5 million at December 31, 1998 and 1997, respectively. The Company's client loan portfolio increased to $190.8 million at December 31, 1999, from $155.6 million at December 31, 1998. The client loan portfolio at December 31, 1997 was $276.4 million. These amounts include $42.5 million, $17.1 million and $112.0 million of loans that have a maturity of more than one year at December 31, 1999, 1998 and 1997, respectively. During the fourth quarter of 1998, a significant loan to a group of affiliated corporate borrowers was repaid in full. The loan to this group was scheduled to mature on December 31, 2001. The Company relies on internally generated funds and borrowings to meet its financing requirements. As a result of the recent events related to the Department of Justice investigation and other related investigations and civil lawsuits, as discussed previously, the Company amended and restated its $300 million Bank Credit Agreement during the first quarter of 2000. Under the amended and restated Bank Credit Agreement (the "Credit Agreement"), the Company has up to $300 million of committed senior secured financing with an international banking syndicate arranged through Chase Manhattan Bank available through July 11, 2001. The Company's obligations under the Credit Agreement are secured by substantially all the assets of the Company and its domestic subsidiaries. In addition, borrowings by the Company's U.K. based affiliates are secured by the Company's U.K. loan portfolio. The Company incurred arrangement and amendment fees of $4.1 million, which will be amortized over the expected term of the commitment. The Company may also issue up to $300 million of short-term notes pursuant to its U.S. commercial paper program. At December 31, 1999, there was no commercial paper outstanding. The Company supports any short-term notes issued under its U.S. commercial paper program with its committed credit facility under the Credit Agreement. The amount available for borrowings under the Credit Agreement is reduced by the outstanding commercial paper. Additionally, the Company has a $200 million shelf registration with the Securities and Exchange Commission for issuing senior unsecured debt securities, under which $100 million was available for issuance as of December 31, 1999. In February 1999, the Company sold a tranche of these debt securities for an aggregate offering price of $100 million at an effective interest rate of 6.98%. Subsequent to December 31, 1999, Moody's Investors Service, Standard and Poor's Ratings Group and other credit agencies downgraded the Company's long-term and short-term credit ratings. Both ratings remain on review. On July 23, 1999, Amazon.com, Inc. purchased one million of newly issued shares of the Company's Class A Common Stock at $35.44 per share, and purchased for $10 million, a three year warrant to purchase an additional one million shares at $100 per share. 17 During 1999, the Company's primary sources of liquidity were derived from the issuance of the long-term debt securities, proceeds from the common stock and warrant, and operations, excluding the increase in accounts receivable and other receivables. The most significant cash uses during 1999 were the increase in accounts receivable and other receivables, capital expenditures, the net funding of the client loan portfolio, payment of shareholder dividends and the Internet initiative. During 1998, the Company's primary sources of liquidity were derived from collections of notes receivable, operations, and available cash balances. The most significant cash uses during 1998 were the funding of the client loan portfolio, repayment of commercial paper borrowings, capital expenditures, and payment of shareholder dividends. During 1998, the Company incurred a significant non-cash expense of $14.1 million related to the impairment of existing leasehold improvements and related furniture and fixtures, as noted previously. Such item did not have an impact on the Company's liquidity. During 1997, the Company's primary sources of liquidity were derived from commercial paper borrowings supplemented by available cash balances and operations. The most significant cash uses during 1997 were the net funding of the client loan portfolio, payment of shareholder dividends and repurchases of common stock. While the Company paid shareholder dividends in 1999, 1998 and 1997, due to the significant cash needs required for the funding of the Internet initiative, capital expenditures anticipated for the completion of the construction of the York Property, as well as uncertainties surrounding the Department of Justice investigation and other related investigations and civil lawsuits, the Company did not declare a cash dividend for the first quarter of 2000. Management believes that this is an appropriate decision due to the Company's present and anticipated cash needs. Management will continue to assess the dividend in conjunction with operating results, capital spending needs, Internet spending requirements and developments in the Department of Justice investigation and other related investigations and civil lawsuits. Capital expenditures in 1999, consisting primarily of costs associated with the construction of the York Property, as defined below, the cost of replacing a significant majority of the Company's worldwide financial and information systems and Internet related costs, totaled $120.7 million. For 1998 and 1997, capital expenditures were $53.7 million and $17.5 million, respectively. The capital expenditures relating to the construction of the Company's current facility on York Avenue ("the York Property") are currently estimated to be in the range of $151 million, of which the Company has paid approximately $95 million through February 24, 2000. As of February 24, 2000, the Company had financial commitments in relation to this project of approximately $22.8 million. In September 1999, York Avenue Development, Inc. ("York"), a wholly owned subsidiary of Sotheby's Inc. (itself a wholly owned subsidiary of the Company), exercised its right, under its operating lease, to purchase the York Property. The closing of this purchase will take place no later than July 2000. The Company believes that it has sufficient capital resources to carry out planned capital spending relating to this project. From time to time, the Company has off-balance sheet commitments which include short-term commitments to consignors that property will sell at a minimum price and legally binding lending commitments in conjunction with the client loan program (See Note N to the Consolidated Financial Statements). The Company does not believe that material liquidity risk exists related to these commitments. The Company currently believes that operating cash flows and borrowings under the Credit Agreement will be adequate to meet its 2000 working capital requirements, which include the funding of the Company's client loan program, peak working capital requirements, other short-term commitments to consignors, the project on the York Property, the Company's Internet initiative and any legal fees and other amounts required to resolve the Department of Justice investigation. The Company currently believes that long-term capital requirements will be satisfied with future operating cash flows and current 18 capital resources, subject to the resolution of the Department of Justice investigation and other related investigations and civil lawsuits, as discussed previously. YEAR 2000. The Company has dedicated substantial resources over the past few years to address the potential issues related to Year 2000 programming concerns. As a result of those efforts, the Company has not experienced to date any material disruption in its operations in connection with, or following, the transition to the Year 2000. EUROPEAN MONETARY UNION. The Euro was introduced on January 1, 1999 as a wholesale currency. The eleven participating European Monetary Union member countries established fixed conversion rates between their existing currencies and the Euro. The existing currencies will continue to be used as legal tender through January 1, 2002; thereafter, on July 1, 2002, the existing currencies will be cancelled and Euro bills and coins will be used for cash transactions in the participating countries. The Company's European financial and cash management operations affected by the Euro conversion were adequately prepared for its introduction. For the transition period and the period after January 1, 2002, the Company's management will continue to analyze the potential business implications of converting to a common currency. The Company is unable to determine the ultimate financial impact of the Euro conversion on its operations, if any, given that the impact will be dependent upon the competitive situations that exist in the various regional markets in which the Company participates. (See Statement on Forward Looking Statements.) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company continuously evaluates its market risk associated with its financial instruments and forward exchange contracts during the course of its business. The Company's financial instruments include cash and cash equivalents, notes receivable, short term borrowings and long-term debt. The Company believes that its interest rate risk is minimal as a hypothetical ten percent increase or decrease in interest rates is immaterial to the Company's cash flow, earnings and fair value related to financial instruments. (See Statement on Forward Looking Statements.) The Company enters into forward exchange contracts to hedge foreign currency transactions. The Company's forward exchange contracts do not subject the Company to risk from exchange rate movements because gains and losses on such contracts offset gains and losses on the assets or transactions being hedged. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to forward exchange contracts, but the Company does not expect any counterparties to fail to meet their obligations given their high-credit ratings. At December 31, 1999, the Company has $8.7 million of notional value forward currency exchange contracts outstanding. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The carrying amounts of these contracts approximates their fair value at December 31, 1999. The Company believes that its foreign currency translation risk is minimal as a hypothetical 10% strengthening or weakening of the U.S. dollar relative to all other currencies is immaterial to the Company's cash flow and fair value related to financial instruments. (See statement on Forward Looking Statements.) FORWARD LOOKING STATEMENTS This Annual Report contains certain forward-looking statements, as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended, relating to future events and the financial performance of the Company, particularly with respect to the adequacy of working capital as well as additional capital necessary for the continued construction of the York Property. Such statements are only predictions and involve risks and uncertainties, resulting in the possibility that the actual events or performance will differ materially from such predictions. Major factors which the Company believes could 19 cause the actual results to differ materially from the predicted results in the forward-looking statements include, but are not limited to, the following, which are not listed in any particular rank order: (I) The Company's business is seasonal, with peak revenues and operating income occurring in the second and fourth quarters of each year as a result of the traditional spring and fall art auction season (II) The overall strength of the international economy and financial markets and, in particular, the economies of the United States, the United Kingdom and the major countries of continental Europe and Asia (principally Japan and Hong Kong) (III) Competition with other auctioneers and art dealers (IV) The volume of consigned property and the marketability at auction of such property (V) The expansion of the York Property (VI) The resolution of the Department of Justice Investigation and other related investigations and civil lawsuits (VII) The European Monetary Union (VIII) The Company's Internet initiative (IX) The demand for loans (X) Market risk SEASONALITY The worldwide art auction market has two principal selling seasons, spring and fall. During the summer and winter auction sales are considerably lower. The table below demonstrates that approximately 80% of the Company's auction sales are derived from the second and fourth quarters of the year (see Note Q to the Consolidated Financial Statements).
PERCENTAGE OF ANNUAL AUCTION SALES ------------------------------ 1999 1998 1997 -------- -------- -------- JANUARY-MARCH.............................................. 11% 13% 11% APRIL-JUNE................................................. 35 37 35 JULY-SEPTEMBER............................................. 6 8 8 OCTOBER-DECEMBER........................................... 48 42 46 --- --- --- 100% 100% 100%
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is required to be adopted for fiscal quarters of fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 effective January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company is currently evaluating the impact that the adoption of this statement will have on its financial position and results of operations. 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the discussion under this caption contained in Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT TO THE DIRECTORS AND SHAREHOLDERS OF SOTHEBY'S HOLDINGS, INC. We have audited the accompanying consolidated balance sheets of Sotheby's Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sotheby's Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP - ---------------------------- DELOITTE & TOUCHE LLP New York, New York February 24, 2000 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) REVENUES (Note B) Auction and related......................................... $390,101 $367,204 $335,511 Other....................................................... 52,484 79,848 46,281 -------- -------- -------- Total revenues.............................................. 442,585 447,052 381,792 EXPENSES Direct costs of services (Note B)........................... 85,563 76,313 70,364 Salaries and related costs (Notes K, L and N)............... 159,686 153,869 131,874 General and administrative (Note J)......................... 125,711 108,240 89,038 Depreciation and amortization (Notes B and G)............... 17,452 12,652 11,057 Non-recurring charges (Note O).............................. -- 15,200 11,700 -------- -------- -------- Total expenses.............................................. 388,412 366,274 314,033 -------- -------- -------- Operating income............................................ 54,173 80,778 67,759 -------- -------- -------- Interest income............................................. 4,373 3,560 3,047 Interest expense (Note H)................................... (5,589) (10,545) (6,018) Other income (expense)...................................... (807) 20 (331) -------- -------- -------- Income before taxes......................................... 52,150 73,813 64,457 Income taxes (Note I)....................................... 19,296 28,788 23,849 -------- -------- -------- Net income.................................................. $ 32,854 $ 45,025 $ 40,608 -------- -------- -------- Basic earnings per share (Note B)........................... $ 0.57 $ 0.79 $ 0.73 Diluted earnings per share (Note B)......................... $ 0.56 $ 0.79 $ 0.72 Dividends per share......................................... $ 0.40 $ 0.40 $ 0.40
See accompanying Notes to Consolidated Financial Statements 22 CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, ------------------------- 1999 1998 ---------- -------- (THOUSANDS OF DOLLARS) ASSETS CURRENT ASSETS: Cash and cash equivalents (Note B) $ 42,319 $ 71,238 Accounts and notes receivable, net of allowance for doubtful accounts of $11,085 and $14,585 (Note D) Accounts receivable....................................... 495,986 303,426 Notes receivable.......................................... 145,359 135,592 ---------- -------- Total accounts and notes receivable, net.................... 641,345 439,018 ---------- -------- Inventory, net (Note E)..................................... 20,843 16,915 Deferred income taxes (Note I).............................. 12,986 16,251 Prepaid expenses and other current assets (Note L).......... 18,754 23,756 ---------- -------- Total current assets........................................ 736,247 567,178 NON-CURRENT ASSETS: Notes receivable (Note D)................................... 42,535 17,115 Properties, less allowance for depreciation and amortization of $72,463 and $60,154 (Notes G and J)........................................... 232,661 108,914 Intangible assets, less allowance for amortization of $15,903 and $17,753 (Note G).............................. 24,124 34,088 Investments (Note F)........................................ 35,982 36,737 Other assets................................................ 1,963 5,614 ---------- -------- Total assets................................................ $1,073,512 $769,646 ========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Due to consignors (Note D).................................. $ 422,552 $289,987 Short-term borrowings (Note H).............................. 272 2,098 Accounts payable and accrued liabilities.................... 126,263 98,766 Deferred revenues........................................... 7,273 5,057 Accrued income taxes (Note I)............................... 20,427 38,944 ---------- -------- Total current liabilities................................... 576,787 434,852 LONG-TERM LIABILITIES: Long-term debt (Note H)..................................... 100,000 -- Deferred income taxes (Note I).............................. 9,126 6,202 Other liabilities........................................... 10,555 8,918 ---------- -------- Total liabilities........................................... 696,468 449,972 SHAREHOLDERS' EQUITY (Note K) Common stock, $.10 par value authorized shares--125,000,000 of class A and 75,000,000 of class B; Issued and outstanding shares 42,258,393 and 40,164,388 of class A, and 16,585,650 and 16,995,299 of class B at December 31, 1999 and 1998, respectively.................. 5,885 5,716 Additional paid-in capital.................................. 156,125 104,092 Retained earnings........................................... 228,261 219,383 Accumulated other comprehensive income...................... (13,227) (9,517) ---------- -------- Total shareholders' equity.................................. 377,044 319,674 ---------- -------- Total liabilities and shareholders' equity.................. $1,073,512 $769,646 ========== ========
See accompanying Notes to Consolidated Financial Statements 23 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (THOUSANDS OF DOLLARS) OPERATING ACTIVITIES Net income $ 32,854 $ 45,025 $ 40,608 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization 17,452 12,652 11,057 Stock compensation expense................................ (5,851) 9,025 1,300 Deferred income taxes..................................... 6,501 (9,969) (2,699) Tax benefit of stock option exercises................... 2,450 2,965 1,766 Write-off of leasehold improvements and furniture and fixtures.............................................. -- 14,100 -- Asset provisions........................................ 2,127 8,253 4,390 Other................................................... -- 402 307 Change in assets and liabilities: Decrease (increase) in prepaid expenses and other current assets.................................................. 4,556 (5,612) (3,830) (Increase) decrease in accounts and other receivables..... (198,539) 33,802 (96,924) (Increase) decrease in inventory.......................... (4,105) 4,960 (10,773) Decrease in intangible and other assets................... 3,179 507 633 Increase (decrease) in due to consignors.................. 136,503 (59,766) 75,097 (Decrease) increase in accrued income taxes............... (17,984) 15,376 (2,197) Increase in accounts payable, accrued liabilities, and other liabilities....................................... 17,973 20,524 7,371 --------- --------- --------- Net cash (used) provided by operating activities.......... (2,884) 92,244 26,106 INVESTING ACTIVITIES Increase in notes receivable................................ (164,003) (268,098) (215,323) Collections of notes receivable............................. 128,070 387,363 90,920 Capital expenditures........................................ (120,691) (53,735) (17,507) Decrease (increase) in investments.......................... 755 728 (1,632) Acquisitions, net of cash acquired.......................... (750) (1,875) (6,900) --------- --------- --------- Net cash (used) provided by investing activities............ (156,619) 64,383 (150,442) FINANCING ACTIVITIES Increase in long-term debt.................................. 100,000 -- -- (Decrease) increase in commercial paper..................... -- (117,000) 117,000 (Decrease) increase in short-term borrowings................ (1,826) 18 (2,260) Proceeds from issuance of common stock...................... 35,440 -- -- Proceeds from issuance of warrant to purchase common stock..................................................... 10,000 -- -- Proceeds from exercise of stock options and shares issued to directors................................................. 10,163 19,608 11,473 Repurchase of common stock.................................. -- -- (19,999) Dividends paid.............................................. (23,976) (22,669) (22,386) --------- --------- --------- Net cash provided (used) by financing activities............ 129,801 (120,043) 83,828 Effect of exchange rate changes on cash..................... 783 1,012 7,264 --------- --------- --------- (Decrease) increase in cash and cash equivalents............ (28,919) 37,596 (33,244) Cash and cash equivalents at beginning of year.............. 71,238 33,642 66,886 --------- --------- --------- Cash and cash equivalents at end of year.................... $ 42,319 $ 71,238 $ 33,642 --------- --------- --------- Non Cash investing activities: Capital asset and lease obligation additions.............. $ 12,323 $ -- $ -- --------- --------- ---------
See accompanying Notes to Consolidated Financial Statements 24 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED ADDITIONAL OTHER COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE INCOME STOCK CAPITAL EARNINGS INCOME -------------- -------- ---------- -------- ------------- (THOUSANDS OF DOLLARS) BALANCE AT DECEMBER 31, 1996..................... $5,589 $ 78,882 $178,805 $ (5,856) ------ -------- -------- -------- Comprehensive income: Net Income..................................... $40,608 40,608 Other comprehensive income, net of tax Foreign currency translation................. (3,886) (3,886) ------- Other comprehensive income..................... (3,886) ------- Comprehensive income............................. 36,722 ======= Stock options exercised.......................... 112 11,361 Tax benefit associated with exercise of stock options........................................ 1,766 Shares issued to directors....................... 1 242 Repurchase of common stock....................... (120) (20,619) Stock compensation expense....................... 1,300 Dividends........................................ (22,386) ------ -------- -------- -------- BALANCE AT DECEMBER 31, 1997..................... $5,582 $ 72,932 $197,027 $ (9,742) ------ -------- -------- -------- Comprehensive income: Net Income..................................... $45,025 45,025 Other comprehensive income, net of tax Foreign currency translation................. 225 225 ------- Other comprehensive income..................... 225 ------- Comprehensive income............................. 45,250 ======= Stock options exercised.......................... 133 19,475 Tax benefit associated with exercise of stock options........................................ 2,965 Shares issued to directors....................... 1 179 Stock compensation expense....................... 8,541 Dividends........................................ (22,669) ------ -------- -------- -------- BALANCE AT DECEMBER 31, 1998..................... $5,716 $104,092 $219,383 $ (9,517) ------ -------- -------- -------- Comprehensive income: Net Income..................................... $32,854 32,854 Other comprehensive income, net of tax Foreign currency translation................. (3,710) (3,710) ------- Other comprehensive income..................... (3,710) ------- Comprehensive income............................. 29,144 ======= Stock options exercised.......................... 68 9,568 Tax benefit associated with exercise of stock options........................................ 2,450 Issuance of common stock......................... 100 35,340 Issuance of warrant to purchase common stock..... 10,000 Shares issued to directors....................... 1 526 Stock compensation expense....................... (5,851) Dividends........................................ (23,976) ------ -------- -------- -------- BALANCE AT DECEMBER 31, 1999..................... $5,885 $156,125 $228,261 $(13,227) ------ -------- -------- --------
See accompanying Notes to Consolidated Financial Statements 25 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE-A ORGANIZATION AND BUSINESS Sotheby's Holdings, Inc. (together with its subsidiaries, the "Company") conducts live and internet auctions and private sales of fine art, jewelry and decorative art. Auction activities occur primarily in New York and London, but are also conducted elsewhere in North America, Europe and Asia. In addition, the Company is engaged in art-related financing activities, the marketing and brokering of luxury real estate, fine arts education and art-related restoration. NOTE-B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the accounts of Sotheby's Holdings, Inc., and its wholly-owned subsidiaries. The Company's investments in Acquavella Modern Art ("AMA") and another affiliate (see Note F) are accounted for under the equity method. REVENUE RECOGNITION Auction and related revenues are generally recognized at the date of sale less estimates for allowances. Subscription revenue from auction catalogues is recognized over the twelve-month period of the subscription from the date of receipt of the proceeds. Auction and related revenues also include principal activities. Principal activities consist of net gains (losses) on sales of inventories, the Company's share of operating earnings (losses) from its investment in AMA and its other equity investment, net income (loss) earned from guarantees, and the net gains (losses) related to sales of secured loan collateral where the Company shares in the gain (loss) if the property sells either above or below a targeted amount. Other revenues consist principally of revenues from art-related financing activities and real estate operations. Other revenues are generally recognized at the time service is rendered or revenue is earned by the Company. Revenues from the Real Estate segment are net of commission payments to independent contractors. DIRECT COSTS OF SERVICES Direct costs of services primarily include the costs of obtaining and marketing property for auctions. CASH EQUIVALENTS Cash equivalents are liquid investments comprised primarily of bank and time deposits with an original maturity of three months or less. These investments are carried at cost, which approximates market value. PROPERTIES Properties, consisting primarily of buildings and improvements, leaseholds and leasehold improvements, furniture and fixtures and equipment, are stated on the cost basis. Direct external and internal computer software development costs subsequent to the preliminary stage of development are capitalized. Depreciation is computed principally on the straight-line method over the assets' estimated useful lives. Leaseholds and leasehold improvements are amortized over the lesser of the life of the lease or the estimated useful life of the improvement. Equipment includes capitalized software which reflects costs related to purchased software. These costs are amortized on a straight-line basis over the estimated useful life of the software. The Company capitalizes interest on projects when construction requires a period of time to get the assets ready for their intended use. Capitalized interest is allocated to properties and amortized over the life of the related assets. Capitalized interest totaled approximately $2.8 million and $0.5 million in 1999 and 1998, respectively. General and administrative expenses include repairs and maintenance. FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, short-term borrowings and notes receivable are a reasonable estimate of their fair value due to the variable interest rates 26 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) associated with each of these financial instruments. The fair value of long-term debt is approximately $94.1 million. DERIVATIVES The Company enters into forward exchange contracts to hedge foreign currency transactions. The Company's forward exchange contracts do not subject the Company to risk from exchange rate movements because gains and losses on such contracts offset gains and losses on the assets or transactions being hedged. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to forward exchange contracts, but the Company does not expect any counterparties to fail to meet their obligations given their high-credit ratings. Gains and losses on contracts to hedge identifiable foreign currency commitments are recognized in income and offset the foreign exchange gains and losses on the underlying transactions. Premium or discount on forward contracts is amortized to interest expense over the life of the contract. At December 31, 1999, the Company has 8.7 million of notional value forward currency exchange contracts outstanding. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The carrying amounts of these contracts approximate their fair vlaue at December 31, 1999. INVENTORY Inventory consists of objects obtained incidental to the auction process as well as for investment purposes. Inventory is valued at the lower of cost or management's estimate of net realizable value. ALLOWANCE FOR LOAN LOSSES The Company regularly reviews its loan portfolio. Each loan is analyzed based on the current estimated realizable value of the collateral securing the loan. The Company establishes reserves for specific loans that the Company believes are under-collateralized and with respect to which the under-collateralized amount may not be collectible from the borrower. A general reserve is established for probable losses inherent in the remainder of the loan portfolio based on historical data and current market conditions. INTANGIBLE ASSETS Intangible assets include goodwill and subscriber lists. Goodwill is being amortized over fifteen to forty years. The amounts assigned to other intangible assets are amortized on a straight-line basis over estimated useful lives not to exceed twenty-five years. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. EARNINGS PER SHARE Basic earnings per share is based on the weighted average number of outstanding shares of common stock. Diluted earnings per share is based on the weighted average number of shares of common stock and common stock equivalents (stock options and warrant). The basic and diluted weighted average number of shares used for the earnings per share calculations were as follows:
1999 1998 1997 -------- -------- -------- (IN MILLIONS) BASIC..................................................... 58.1 56.7 56.0 DILUTIVE EFFECT OF OPTIONS................................ 1.0 0.6 0.3 ---- ---- ---- DILUTED................................................... 59.1 57.3 56.3
There were no reconciling items between net income for basic and diluted earnings per share. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated at year-end exchange rates. Income statement amounts are translated using weighted average monthly 27 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) exchange rates during the year. Gains and losses resulting from translating foreign currency financial statements are recorded in accumulated other comprehensive income until the subsidiary is sold or substantially liquidated. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Accordingly, pro forma net income and earnings per share information has been presented in Note K as required under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." RECLASSIFICATIONS Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform with the current presentation. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. COMPREHENSIVE INCOME The Company has adopted SFAS No. 130 "Reporting Comprehensive Income" which requires certain transactions to be included as adjustments to net income in order to report comprehensive income. These transactions referred to as other comprehensive income represent items that, under previous accounting standards, bypassed the statement of income and were reported directly as adjustments to the equity section of the balance sheet. The Company's other comprehensive income consists of the change in the foreign currency translation adjustment amount during the period and is reported in the consolidated statement of changes in shareholders' equity. The foreign currency translation adjustment amount previously reported as a separate component of shareholders' equity is now included in accumulated other comprehensive income in the Consolidated Balance Sheets. PENSION ARRANGEMENTS The Company has adopted the provisions of SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits" NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted for fiscal quarters of fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 effective January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company is currently evaluating the impact that the adoption of this statement will have on its financial position and results of operations. NOTE-C SEGMENT REPORTING SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. It also establishes standards for related disclosures about products and services, major customers and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision 28 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-C SEGMENT REPORTING (CONTINUED) making group is comprised of the Chief Executive Officer and the senior executives of each of the Company's operating segments. The Company has three reportable operating segments consisting of Auction, Real Estate and Finance. The Auction segment is an aggregation of operations in North America, Europe and Asia as they are similar in service, customers, and the way the service is provided. The Auction segment conducts auctions of property in which the Company generally functions as an agent accepting property on consignment from its selling clients. In addition to auctioneering, the auction segment is engaged in a number of related activities including the purchase and resale of art and other collectibles and the brokering of art collectible purchases and sales through private treaty sales. The Real Estate segment markets and brokers luxury real estate. The Finance segment provides art-related financing generally secured by works of art and other personal property owned by its clients. The Other segment primarily includes art education and restoration activities. The Company's reportable operating segments are strategic business units that offer different services. They are managed separately because each business requires different resources and strategies. The Company evaluates performance based on segment profit or loss from operations before income taxes, not including nonrecurring charges and foreign exchange gains and losses. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (NOTE B). Revenues are attributed to geographic areas based on the location of the actual sale. All amounts in the tables below are in thousands of dollars. For the year ended December 31, 1999:
AUCTION REAL ESTATE FINANCE OTHER TOTAL -------- ----------- -------- -------- -------- Revenues..................................... $390,101 $30,264 $14,804 $7,416 $442,585 Interest Income.............................. 13,109 24 1 58 13,192 Interest Expense............................. 5,573 -- 16 -- 5,589 Depreciation and Amortization................ 15,673 1,389 -- 390 17,452 Segment Profit/(Loss)........................ 43,015 6,570 3,283 (718) 52,150
For the year ended December 31, 1998:
AUCTION REAL ESTATE FINANCE OTHER TOTAL -------- ----------- -------- -------- -------- Revenues..................................... $367,204 $25,097 $47,876 $6,875 $447,052 Interest Income.............................. 19,044 -- 44 43 19,131 Interest Expense............................. 10,480 14 48 3 10,545 Depreciation and Amortization................ 11,218 1,124 -- 310 12,652 Segment Profit/(Loss)........................ 58,156 4,053 27,501 (697) 89,013
For the year ended December 31, 1997:
AUCTION REAL ESTATE FINANCE OTHER TOTAL -------- ----------- -------- -------- -------- Revenues.................................... $335,511 $19,359 $20,235 $ 6,687 $381,792 Interest Income............................. 14,931 10 -- 35 14,976 Interest Expense............................ 5,960 13 39 6 6,018 Depreciation and Amortization............... 9,978 774 -- 305 11,057 Segment Profit/(Loss)....................... 67,992 3,938 5,337 (1,110) 76,157
29 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-C SEGMENT REPORTING (CONTINUED) A reconciliation of the totals reported for the operating segments to the applicable line items in the Consolidated Financial Statements is as follows:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- REVENUES: Total revenues for reportable segments...... $435,169 $440,177 $375,105 Other revenues.............................. 7,416 6,875 6,687 -------- -------- -------- Total consolidated revenues............... $442,585 $447,052 $381,792 ======== ======== ======== PROFIT: Total profit for reportable segments........ $ 52,868 $ 89,710 $ 77,267 Other profit (loss)......................... (718) (697) (1,110) Unallocated amounts: Non-Recurring Charges..................... -- (15,200) (11,700) -------- -------- -------- Consolidated income before tax............ $ 52,150 $ 73,813 $ 64,457 ======== ======== ========
Other Significant items:
SEGMENT TOTALS ELIMINATIONS CONSOLIDATED TOTAL -------------- ------------ ------------------ 1999 Interest income..................... $13,192 ($ 8,819)(1) $ 4,373 Interest expense.................... 5,589 -- 5,589 Depreciation and amortization....... 17,452 -- 17,452 1998 Interest income..................... $19,131 ($15,571)(1) $ 3,560 Interest expense.................... 10,545 -- 10,545 Depreciation and amortization....... 12,652 -- 12,652 1997 Interest income..................... $14,976 ($11,929)(1) $ 3,047 Interest expense.................... 6,018 -- 6,018 Depreciation and amortization....... 11,057 -- 11,057
- ------------------------ (1) Represents the elimination of interest charged by Auction to Finance for funding Finance's loan portfolio. 30 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-C SEGMENT REPORTING (CONTINUED) Information concerning geographical areas was as follows:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- REVENUES United States............................... $248,223 $272,182 $175,899 United Kingdom.............................. 141,115 132,325 138,509 Other International Countries............... 53,247 42,545 67,384 -------- -------- -------- Total..................................... $442,585 $447,052 $381,792 ======== ======== ========
NOTE-D ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consist of the following:
AS OF DECEMBER 31 ----------------------- 1999 1998 ---------- ---------- (THOUSANDS OF DOLLARS) ACCOUNTS AND OTHER RECEIVABLES.......................... $504,167 $315,137 ALLOWANCE FOR DOUBTFUL ACCOUNTS......................... (8,181) (11,711) -------- -------- 495,986 303,426 -------- -------- NOTES RECEIVABLE........................................ 190,798 155,581 ALLOWANCE FOR DOUBTFUL ACCOUNTS......................... (2,904) (2,874) -------- -------- 187,894 152,707 -------- -------- TOTAL................................................. $683,880 $456,133 ======== ========
Under the standard terms and conditions of the Company's auction sales, the Company is not obligated to pay consignors for items that have not been paid by the purchaser. If the purchaser defaults on payment, the Company has the right to cancel the sale and return the property to the owner, re-offer the property at auction, or negotiate a private sale. In certain situations, when the purchaser takes possession of the property before payment is made, the Company is liable to the seller for the net sale proceeds. As of December 31, 1999 and 1998, accounts receivable included approximately $237.0 million and $137.4 million, respectively, of such sales. As of February 24, 2000, $86.3 million of the amount outstanding at December 31, 1999 had been paid. Amounts outstanding at December 31, 1998 which remained outstanding at December 31, 1999 totaled $6.6 million. Management believes that adequate allowances have been established to provide for potential losses on these amounts. As of December 31, 1999, an amount equal to approximately 11% of the Company's accounts receivable balance was due from one purchaser. Notes receivable included $0.5 million at December 31, 1999, relating to loans to employees. The weighted average interest rate on these loans was 11.0% at December 31, 1999. The Company provides collectors, museums and dealers with financing generally secured by works of art that the Company typically controls and other personal property owned by its clients. The Company generally makes two types of secured loans: (1) advances secured by consigned property to borrowers who 31 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-D ACCOUNTS AND NOTES RECEIVABLE (CONTINUED) are contractually committed, in the near term, to sell the property at auction or privately (a "consignor advance"); and (2) general purpose loans to collectors, museums or dealers secured by property not presently intended for sale. The consignor advance enables a consignor to receive funds shortly after consignment for an auction that will occur several weeks or months in the future, while preserving for the benefit of the consignor the potential of the auction process. The general purpose secured loans allow the Company to establish or enhance a mutually beneficial relationship with dealers and collectors. The loans are generally made with full recourse to the borrower. In certain instances, however, loans are made with recourse limited to the works of art pledged as security for the loan. To the extent that the Company is looking wholly or partially to the collateral for repayment of its loans, repayment can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations where the borrower becomes subject to bankruptcy or insolvency laws, the Company's ability to realize on its collateral may be limited or delayed by the application of such laws. One individual loan amounted to approximately 11% of the notes receivable balance (current and non-current) at December 31, 1999. Although the Company's general policy is to make secured loans at loan to value ratios (principal loan amount divided by the low auction estimate of the collateral) of 50% or lower, the Company will lend, on a secured basis, at loan to value ratios higher than 50%. In addition, the Company will also lend, on a secured basis, amounts at loan to value ratios higher than 50% where the Company participates in a share of the sale proceeds if the property sells for more than an agreed target amount and the Company shares in a portion of the loss if the property does not sell at or above the target amount. The average interest rates charged on notes receivable were 8.2% and 8.7% at December 31, 1999 and 1998, respectively. The estimated fair value of notes receivable was $190.8 million and $155.6 million at December 31, 1999 and 1998. Interest income on impaired loans is recognized to the extent cash is received. Where there is doubt regarding the ultimate collectibility of principal for impaired loans, cash receipts, whether designated as principal or interest, are thereafter applied to reduce the recorded investment in the loan. Changes in the allowance for credit losses relating to notes receivable are as follows:
YEAR ENDED DECEMBER 31 ------------------- 1999 1998 -------- -------- (THOUSANDS OF DOLLARS) ALLOWANCE FOR CREDIT LOSSES AT DECEMBER 31, 1998 AND 1997... $2,874 $3,620 PROVISIONS.................................................. 50 250 WRITEOFFS AND OTHER......................................... (20) (996) ------ ------ ALLOWANCE FOR CREDIT LOSSES AT DECEMBER 31, 1999 AND 1998... $2,904 $2,874 ====== ======
NOTE-E INVENTORY Inventory consists principally of objects obtained incidental to the auction process primarily as a result of honoring authenticity claims of purchasers, purchasers defaulting on accounts receivable after the 32 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-E INVENTORY (CONTINUED) consignor has been paid, purchasing property at the minimum price guaranteed by the Company and purchases of property for investment purposes. The inventory and related allowances to adjust the cost of inventory to management's estimated net realizable value are as follows:
AS OF DECEMBER 31 ------------------- 1999 1998 -------- -------- (THOUSANDS OF DOLLARS) INVENTORY, AT COST........................................ $29,983 $26,337 NET REALIZABLE VALUE ALLOWANCES........................... (9,140) (9,422) ------- ------- TOTAL..................................................... $20,843 $16,915 ======= =======
NOTE-F INVESTMENTS On May 23, 1990, the Company purchased the common stock of the Pierre Matisse Gallery Corporation ("Matisse") for approximately $153 million. The assets of Matisse consisted of a collection of fine art (the "Matisse inventory"). Upon consummation of the purchase, the Company contributed the Matisse inventory to AMA and entered into the AMA partnership agreement with Acquavella Contemporary Art, Inc. to sell the Matisse inventory. The Company accounts for its investment in AMA under the equity method of accounting in the Consolidated Financial Statements, including its share of AMA's operating earnings (losses) in auction and related revenue. The total net assets of the partnership consist principally of the inventory described above. The Company reflects its 50% interest in the net assets of the partnership in investments in the Consolidated Balance Sheets. This investment totaled $33.0 million and $34.3 million at December 31, 1999 and 1998, respectively. To the extent that the partnership requires working capital, the Company has agreed to lend the same to the partnership. As of December 31, 1999, no such amounts were outstanding. In 1999 and 1998 the Company's investment in another affiliate totaled $3.0 million and $2.4 million, respectively. NOTE-G PROPERTIES Properties consist of the following:
AS OF DECEMBER 31 ----------------------- 1999 1998 ---------- ---------- (THOUSANDS OF DOLLARS) LAND.................................................... $ 17,786 $ 276 BUILDINGS AND BUILDING IMPROVEMENTS..................... 102,775 9,868 LEASEHOLDS AND LEASEHOLD IMPROVEMENTS................... 58,440 53,414 FURNITURE, FIXTURES AND EQUIPMENT....................... 110,284 66,638 CONSTRUCTION IN PROGRESS................................ 14,193 34,551 OTHER................................................... 1,646 4,321 -------- -------- 305,124 169,068 LESS: ACCUMULATED DEPRECIATION.......................... (72,463) (60,154) -------- -------- TOTAL................................................. $232,661 $108,914 ======== ========
33 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-G PROPERTIES (CONTINUED) Included in Properties are costs related to the construction of the Company's current facility on York Avenue (the "York Property"). In September of 1999, York Avenue Development, Inc. ("York"), a wholly owned subsidiary of Sotheby's, Inc. (itself a wholly owned subsidiary of the Company), exercised its right, under its operating lease, to purchase the York Property. The closing of this purchase will take place no later than July 2000. In connection with exercising the option, the Company reclassified approximately $9.6 million of intangible assets, previously accounted for as beneficial lease and air rights to Properties. Construction in progress relates principally to the expenditures on the construction of the York Property. These assets will be depreciated when they are put into use. NOTE-H CREDIT ARRANGEMENTS Short-term borrowings consist of the following:
AS OF DECEMBER 31 ------------------- 1999 1998 -------- -------- (THOUSANDS OF DOLLARS) BANK LINES OF CREDIT........................................ $248 $2,076 OTHER SHORT-TERM OBLIGATIONS................................ 24 22 ---- ------ $272 $2,098 ==== ======
BANK LINES OF CREDIT At December 31, 1999 and 1998, $0.3 million and $2.1 million, respectively, were outstanding under domestic and foreign lines of credit at weighted average annual interest rates of 4.00% and 3.97%, respectively. COMMERCIAL PAPER The Company may issue up to $300 million in notes under its U.S. commercial paper program. At December 31, 1999 and 1998 there were no outstanding commercial paper borrowings. The notes do not bear interest but are issued at a discount, which is negotiated by the Company and purchaser prior to each issuance. BANK CREDIT FACILITIES During the first quarter of 2000, the Company entered into an amended and restated Bank Credit Agreement (the "Credit Agreement") with its existing banking group, replacing its former Bank Credit Agreement dated July 11, 1996. The Credit Agreement is maintained to support the Company's commercial paper program and is available for general corporate purposes. The amount available for borrowings under the Credit Agreement is reduced by the outstanding commercial paper. Under the Credit Agreement, the Company has up to $300 million of committed senior secured financing with an international syndicate of banks arranged through Chase Manhattan Bank available through July 11, 2001. The Company's obligations under the Credit Agreement are secured by substantially all of the assets of the Company and its domestic subsidiaries. In addition, borrowings by the Company's U.K. based affiliates are secured by the Company's U.K. loan portfolio. Borrowings under the Credit Agreement are permitted in either U.S. dollars or pounds sterling. Interest rates on borrowings under the Credit Agreement are determined on a pricing matrix based on the Company's long-term debt rating assigned by Standard and Poor's Ratings Group and Moody's Investors Services. The Company incurred arrangement and amendment fees of $4.1 million, which will be amortized over the expected term of the 34 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-H CREDIT ARRANGEMENTS (CONTINUED) commitment. Commitment fees are determined on a similar pricing matrix based on the Company's long-term debt rating and charged quarterly in arrears. Commitment fees charged under the Company's prior credit agreement totaled $0.3 million in each of the years ended December 31, 1999, 1998 and 1997, respectively. The Credit Agreement contains certain financial covenants, including covenants requiring the Company to maintain a minimum net worth and interest coverage ratio (as defined) and to limit dividend payments. The Company had no outstanding borrowings under these facilities at December 31, 1999 and 1998. SENIOR UNSECURED DEBT In February 1999, the Company issued a tranche of long-term debt securities, pursuant to the Company's $200 million shelf registration with the Securities and Exchange Commission, for an aggregate offering price of $100 million. The ten-year notes have an effective interest rate of 6.98% payable semi-annually in February and August. The notes have covenants that impose limitations on the Company for placing liens on property and entering into certain sales-leaseback transactions. The Company was in compliance with these covenants at December 31, 1999. If and to the extent and only for so long as such obligations are required to be secured pursuant to the Trust Indenture under which the notes were issued, the obligations thereunder will be equally and ratably secured with certain specified indebtedness under the Credit Agreement. Interest paid on borrowings, net of capitalized interest, totaled $3.9 million, $9.3 million and $5.5 million in the years ended December 31, 1999, 1998, and 1997, respectively. NOTE-I INCOME TAXES The significant components of income tax expense attributed to continuing operations consist of the following:
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- (THOUSANDS OF DOLLARS) INCOME BEFORE TAXES Domestic.................................................. $26,423 $65,963 $19,514 Foreign................................................... 25,727 7,850 44,943 ------- ------- ------- Total..................................................... $52,150 $73,813 $64,457 ------- ------- ------- INCOME TAXES CURRENT Federal................................................... $ 1,546 $17,876 $ 7,136 State and local........................................... 1,098 13,009 3,824 Foreign................................................... 8,283 7,872 15,220 ------- ------- ------- 10,927 38,757 26,180 ------- ------- ------- INCOME TAXES DEFERRED Federal and State......................................... $ 7,478 $(6,887) $(3,426) Foreign................................................... 891 (3,082) 1,095 ------- ------- ------- 8,369 (9,969) (2,331) ------- ------- ------- Total..................................................... $19,296 $28,788 $23,849 ======= ======= =======
35 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-I INCOME TAXES (CONTINUED) The components of deferred income tax assets and liabilities are disclosed below:
AS OF DECEMBER 31 ------------------- 1999 1998 -------- -------- (THOUSANDS OF DOLLARS) DEFERRED TAX ASSETS Asset provisions and accrued liabilities.................. $15,622 $16,633 Tax loss and credit carryforwards......................... 9,199 8,595 ------- ------- 24,821 25,228 Valuation allowance....................................... (4,068) (3,389) ------- ------- Total..................................................... $20,753 $21,839 ------- ------- DEFERRED TAX LIABILITIES Basis difference in partnership assets.................... $11,998 $12,507 Difference between book and tax basis of depreciable amortizable assets...................................... 4,895 (718) ------- ------- Total..................................................... $16,893 $11,789 ======= =======
At December 31, 1999, the Company has tax loss and credit carryforwards of $9.2 million, having expiration dates ranging from 2002 to 2009. The Company provided a valuation allowance for certain foreign losses and tax credit carryforwards of $4.1 million and $3.4 million at December 31, 1999 and 1998, respectively. The valuation allowance increased (decreased) by $0.7 million and ($3.1) million at December 31, 1999 and 1998, respectively. The change in the valuation allowance in 1999 compared to 1998 resulted from management's evaluation of the utilization of U.S. and certain foreign operating loss and credit carryforwards. The effective tax rate varied from the statutory rate as follows:
YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 1997 -------- -------- -------- STATUTORY FEDERAL INCOME TAX RATE........................... 35.0% 35.0% 35.0% STATE AND LOCAL TAXES, NET OF FEDERAL TAX BENEFIT........... 5.4 5.7 3.9 FOREIGN TAXES AT RATES (LESS) GREATER THAN U.S. RATES....... (2.0) 0.8 (0.3) TAXABLE FOREIGN SOURCE INCOME............................... (5.6) (4.8) (2.5) EFFECT OF OPERATING LOSSES AND TAX CREDITS.................. 3.1 2.0 1.2 OTHER....................................................... 1.1 0.3 (0.3) ---- ---- ---- EFFECTIVE INCOME TAX RATE................................... 37.0% 39.0% 37.0% ==== ==== ====
Undistributed earnings of foreign subsidiaries included in consolidated retained earnings at December 31, 1999 and 1998 amounted to $41.2 million and $38.0 million, respectively. Such amounts are considered to be reinvested indefinitely or will be distributed from income that would not incur a significant tax consequence and, therefore, no provision has been made for taxes that would be payable upon distribution of these earnings. 36 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-I INCOME TAXES (CONTINUED) Total income tax payments, net of refunds, during 1999, 1998 and 1997 were $22.0 million, $25.4 million and $24.2 million respectively. The related tax (benefit) expense for the years ended December 31, 1999, 1998 and 1997 related to the foreign currency translation adjustment included in other comprehensive income was approximately ($2.2) million, $0.1 million and ($2.3) million, respectively. NOTE-J LEASE COMMITMENTS The Company conducts its business on premises leased in various locations under long-term operating leases expiring through 2060. Net rental payments under operating leases amounted to $16.8 million, $15.5 million and $13.1 million, respectively for the years ended December 31, 1999, 1998 and 1997. Future minimum lease payments under noncancelable operating leases in effect at December 31, 1999 are as follows:
(THOUSANDS OF DOLLARS) 2000...................................................... $ 14,538 2001...................................................... 12,099 2002...................................................... 10,910 2003...................................................... 10,017 2004...................................................... 8,537 THEREAFTER................................................ 63,008 -------- TOTAL FUTURE MINIMUM LEASE PAYMENTS....................... $119,109 ========
The future minimum lease payments have not been reduced by minimum sublease rental of $12.9 million due in the future under noncancelable subleases. In addition to the above rentals, under the terms of certain of the leases, the Company pays real estate taxes, utility costs and other increases based on a price-level index. The Company also has approximately $0.7 million in capital lease obligations of which a significant amount will be paid in 2000. NOTE-K SHAREHOLDERS' EQUITY COMMON STOCK Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes. Both classes of common stock share equally in cash dividend distributions, if any. The Class A Common Stock is traded on stock exchanges in both the U.S. and the U.K. On July 23, 1999, Amazon.com, Inc. purchased one million of newly issued shares of the Company's Class A Common Stock at $35.44 per share, and purchased for $10 million a three year warrant to purchase an additional one million shares at $100 per share. PREFERRED STOCK In addition to Class A and B Common Stock outstanding, the Company has the authority to issue 50,000,000 shares of Preferred Stock, no par value. No such shares were issued and outstanding at December 31, 1999 and 1998. 37 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-K SHAREHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS At December 31, 1999, the Company has reserved 9,125,000 shares of Class B Common Stock for future issuance in connection with the 1987 Stock Option Plan and the 1997 Stock Option Plan ("the Plan"). The Plan succeeded the 1987 Stock Option Plan. Pursuant to both stock option plans, options are granted with an exercise price equal to or greater than fair market value at the date of grant. Pursuant to the 1987 Stock Option Plan, options granted through September 1992 vest and become exercisable ratably during each of the fourth, fifth and sixth years after the date of grant. For options granted subsequent to September 1992 and through December 31, 1996, pursuant to the 1987 Stock Option Plan, and for options granted subsequent to January 1997, pursuant to the Plan, options vest and become exercisable ratably in each of the second, third, fourth, fifth and sixth years after the date of grant (except in the U.K. where options vest three-fifths in the fourth year and one-fifth in each of the fifth and sixth years after the date of grant). The options are exercisable into shares of Class B Common Stock, which are authorized but unissued shares. The shares of Class B Common Stock issued upon exercise are freely convertible into an equivalent number of shares of Class A Common Stock. At December 31, 1999, there were outstanding options under the Plan and the 1987 Stock Option Plan for the purchase of 9,198,593 shares, at prices ranging from $10.87 to $42.63 per share. Stock option transactions during 1999, 1998 and 1997 are summarized as follows (shares in thousands):
OPTIONS OUTSTANDING -------------------------------------------------------- SHARES RESERVED FOR ISSUANCE UNDER WEIGHTED THE PLAN SHARES PRICES AVERAGE PRICE -------------- -------- ------------ ------------- INITIAL GRANT SEPTEMBER 1, 1987............... 12,507 7,628 $1.50 $ 1.50 ------- ------ ------------ ------ BALANCE AT JANUARY 1, 1997.................... 8,397 5,775 $ 1.50-22.62 $12.86 OPTIONS EXPIRED--1987 OPTION PLAN........... (2,169) INITIAL GRANT JANUARY 1, 1997 FOR THE PLAN.... 6,000 Options granted............................. 2,279 $15.75-18.94 $17.72 Options canceled............................ (237) $10.87-17.13 $13.64 Options Exercised........................... (1,121) (1,121) $ 1.50-18.00 $10.23 ------- ------ ------------ ------ BALANCE AT DECEMBER 31, 1997.................. 11,107 6,696 $ 3.50-22.62 $14.92 Options granted............................. 3,037 $20.06-24.25 $22.67 Options canceled............................ (508) $10.87-22.62 $16.61 Options exercised........................... (1,329) (1,329) $ 3.50-18.69 $13.19 ------- ------ ------------ ------ BALANCE AT DECEMBER 31, 1998.................. 9,778 7,896 $10.87-24.25 $17.84 Options granted............................. 2,033 $25.63-42.63 $36.76 Options canceled............................ (77) $10.87-37.94 $23.72 Options exercised........................... (653) (653) $10.87-24.25 $14.45 ------- ------ ------------ ------ BALANCE AT DECEMBER 31, 1999.................. 9,125 9,199 $10.87-42.63 $21.94 ======= ====== ============ ======
38 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-K SHAREHOLDERS' EQUITY (CONTINUED) The following table summarizes information about options outstanding at December 31, 1999 (shares in thousands):
OPTIONS OUTSTANDING --------------------------------- OPTIONS EXERCISABLE WEIGHTED --------------------------- OUTSTANDING AVERAGE REMAINING WEIGHTED EXERCISABLE WEIGHTED RANGE OF PRICES AT 12/31/99 CONTRACTUAL LIFE AVERAGE PRICE AT 12/31/99 AVERAGE PRICE - --------------- ----------- ----------------- ------------- ----------- ------------- $7.01-14.00..................... 1,406 3.9 years $12.17 1,223 $12.36 $14.01-21.00.................... 3,978 7.0 years $18.03 1,624 $17.36 $21.01-28.00.................... 2,125 8.9 years $24.35 362 $24.16 $28.01-35.00.................... 585 9.7 years $33.05 -- -- $35.01-42.00.................... 1,088 9.3 years $37.85 127 $37.94 $42.01-42.63.................... 17 9.3 years $42.40 -- -- ----- ------ ------ 9,199 3,336 $17.05 ===== ====== ======
The weighted average fair value per share of options granted during the years ended December 31, 1999, 1998 and 1997 was $5.05, $7.36 and $6.47, respectively. At December 31, 1998 and 1997, 2,422,700 and 2,492,455 options were exercisable at a weighted average exercise price of $14.31 and $13.57, respectively. In February 2000, the Company approved an additional grant of 4,390,000 options pursuant to the Plan. See Note N. PERFORMANCE SHARE PURCHASE PLAN At December 31, 1999, the Company had reserved 2,000,000 shares of Class B Common Stock for issuance in connection with the Performance Share Purchase Plan (the "Performance Plan"). At December 31, 1999, 658,000 options were outstanding under the Performance Plan. The following table summarizes information about options outstanding at December 31, 1999 under the Performance Plan:
WEIGHTED OPTIONS OUTSTANDING SHARES PRICES AVERAGE PRICE - ------------------- -------- ---------- ------------- INITIAL GRANT FEBRUARY 1996 AND BALANCE AT DECEMBER 31, 1996...................................................... 215,000 $ 3.69 $3.69 Options granted........................................... 271,500 $ 4.29 $4.29 Options canceled.......................................... (56,000) $3.69-4.29 $4.02 ------- ---------- ----- BALANCE AT DECEMBER 31, 1997................................ 430,500 $3.69-4.29 $4.03 Options granted........................................... 315,000 $ 5.03 $5.03 Options canceled.......................................... (50,000) $3.69-4.29 $3.99 ------- ---------- ----- BALANCE AT DECEMBER 31, 1998................................ 695,500 $3.69-5.03 $4.48 Options canceled.......................................... (12,500) $4.29-5.03 $4.59 Options exercised......................................... (25,000) $ 3.69 $3.69 ------- ---------- ----- BALANCE AT DECEMBER 31, 1999................................ 658,000 $3.69-5.03 $4.52 ======= ========== =====
39 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-K SHAREHOLDERS' EQUITY (CONTINUED) Options granted under the Performance Plan will be exercisable upon the fulfillment of certain performance criteria, based on the Company's earnings per share or return on equity, or both, as determined by the Compensation Committee of the Board of Directors or the Section 162(m) Subcommittee thereof, as applicable, as well as fulfillment of time vesting requirements. The options, which generally have a three-year performance period, time vest regardless of achieving the performance goal, in one third increments on each of the third, fourth and fifth anniversaries of the date of grant. If the performance goal has been achieved at the time these options begin time vesting, the options will become exercisable when the time vesting requirement is met. If the performance goal has not been achieved by the end of the performance period, the options will not become exercisable upon vesting. Rather, the designated performance goal will automatically be adjusted and the performance period will be extended one year. Upon achievement of the adjusted performance goal, the options will be exercisable to the extent they have time vested. If the adjusted performance goal is not achieved by the end of the fifth year after the date of grant, the options will expire. During the term of each Performance Plan option, the option accrues dividend equivalents which are payable to the option holder when the option becomes exercisable. During 1997, the Audit and Compensation Committee approved an acceleration of the time vesting for options granted during 1996 and 1997. These options will time vest on the third anniversary of the date of the grant, provided that the performance goal is achieved. The performance goal for the 1996 grant was achieved and the options became exercisable on January 31, 1999. Pursuant to the Performance Plan, options are granted with an exercise price equal to at least 25% of the fair market value of the Class B Common Stock at the date of grant. During 1999, the Company's management determined that fulfillment of the financial performance criteria for the 1997 and 1998 grants (necessary for these options to ultimately become exercisable under the terms of the plan) are not likely to be achieved, even on an adjusted basis as described above. Accordingly, the Company recorded a reduction of accrued compensation cost of approximately $5.9 million previously expensed for its 1997 and 1998 Performance Share Purchase Plan option grants. The Company recognized compensation expense of $9.0 million and $1.3 million in 1998 and 1997 respectively, relating to the Performance Plan. The weighted average fair value per share of options granted during 1998 and 1997 was $14.02 and $11.99 respectively. PRO FORMA DISCLOSURE OF THE COMPENSATION COST FOR STOCK OPTION PLANS As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has elected to continue to measure stock-based compensation using the intrinsic value approach under APB Opinion No. 25, the former standard. If the former standard for measurement is elected, SFAS No. 123 requires supplemental disclosure to show the effects of using the new measurement criteria. Had compensation cost for the Plan and the Performance Plan been determined based on the fair value at the grant date for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS No. 123, 40 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-K SHAREHOLDERS' EQUITY (CONTINUED) the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- NET INCOME--AS REPORTED..................................... $32,854 $45,025 $40,608 NET INCOME--PRO FORMA....................................... $19,410 $42,704 $38,044 BASIC EARNINGS PER SHARE--AS REPORTED....................... $ 0.57 $ 0.79 $ 0.73 DILUTED EARNINGS PER SHARE--AS REPORTED..................... $ 0.56 $ 0.79 $ 0.72 BASIC EARNINGS PER SHARE--PRO FORMA......................... $ 0.33 $ 0.75 $ 0.68 DILUTED EARNINGS PER SHARE--PRO FORMA....................... $ 0.33 $ 0.75 $ 0.68
The pro forma information reflected above may not be representative of the amounts to be expected in future years as the fair value method of accounting contained in SFAS No.123 had not been applied to options granted prior to January 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for all grants prior to 1999: dividend yield of 2.1%; expected volatility of 30%; risk-free rate of return of 6%; and expected life of 7.5 years. For 1999, the following weighted average assumptions used were: dividend yield of 1.0%; expected volatility of 35%; risk-free rate of return of 5.4% and expected life of 7.5 years. The compensation cost generated by the Black-Scholes model may not be indicative of the future benefit received by the option holder. STOCK COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS Effective April 30, 1998, the Company amended the Director Stock Ownership Plan. At December 31, 1999, the Company has reserved 145,910 shares of Class A Common Stock for issuance in connection with the Stock Compensation Plan for Non-employee Directors (the "Plan"). During 1999 and 1998, 15,255 and 15,255 shares, respectively, were issued to non-employee directors under the Plan. During 1998 and 1997, 3,690, and 15,390 shares, respectively were issued to non-employee directors under the Director Stock Ownership Plan. STOCK REPURCHASE PROGRAMS In June of 1996, the Company authorized an increase in the number of shares of its outstanding Class A Common Stock to be acquired under the November 30, 1995 stock repurchase program from 1 million shares to 4 million shares. As of December 31, 1999, 2.5 million shares had been repurchased under this program. There were no repurchases of stock in 1999 and 1998. NOTE-L PENSION ARRANGEMENTS The Company has a U.S. defined contribution plan (the "Retirement Savings Plan") that covers employees after 90 days of service. The Company contributes 2% of each participant's compensation to the plan. In addition, participants may elect to contribute between 2% and 12% of their compensation, up to the maximum amount allowable under IRS regulations, on a pre-tax basis. Employee savings are matched by a Company contribution of up to an additional 6% of the participant's compensation. The Company's contributions amounted to $3.7 million, $2.7 million and $2.5 million for the years ended December 31, 1999, 1998 and 1997, respectively. 41 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-L PENSION ARRANGEMENTS (CONTINUED) The Company has an unfunded Benefits Equalization Plan ("BEP"). The BEP provides for certain officers eligible for the Retirement Savings Plan who are affected by limitations imposed by IRS regulations. Such officers may enter into agreements pursuant to which their salaries will be reduced and the Company will maintain accounts on their behalf in the amount of the difference between the aggregate amount of contributions that would have been made to the Retirement Savings Plan in the absence of the limitations, and the aggregate amount of contributions actually made to the Retirement Savings Plan. Employee savings are matched by a Company contribution of up to an additional 6%. The participant deferrals earn interest at a rate equal to 3.3% above the 10 year U.S. Treasury Bond rate. As of December 31, 1999 and 1998, the total unfunded liability of the BEP was $9.4 and $7.0 million respectively, and is included in other liabilities. The Company's contributions amounted to $0.9, $0.6 and $0.5 million for the years ended December 31, 1999, 1998 and 1997 respectively. The Company also contributes to a defined benefit pension plan covering substantially all employees in the U.K. on an annual basis. The following disclosure related to the defined benefit pension plan is in accordance with the provisions of SFAS No. 132 (see NOTE B). THE CHANGE IN THE PROJECTED BENEFIT OBLIGATION ("PBO") IS AS FOLLOWS:
AS OF DECEMBER 31, ------------------- 1999 1998 -------- -------- PBO at beginning of year.................................... $104,259 $ 97,400 Service Cost................................................ 5,118 4,891 Interest Cost............................................... 6,554 6,767 Employee contributions...................................... 794 818 Actuarial loss.............................................. (1,825) (3,746) Benefits paid............................................... (2,231) (2,161) Foreign currency exchange rate changes...................... (2,411) 290 -------- -------- PBO at end of year.......................................... $110,258 $104,259 ======== ========
42 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-L PENSION ARRANGEMENTS (CONTINUED) The change in the plan assets, the funded status and the amounts recognized in the Consolidated Balance Sheets are as follows:
AS OF DECEMBER 31, ------------------- 1999 1998 -------- -------- Fair value of plan assets at beginning of year.............. $137,436 $142,023 Actual return (loss) on plan assets......................... 25,950 (4,658) Employer contributions...................................... 1,456 983 Employee contributions...................................... 794 818 Benefits paid............................................... (2,231) (2,161) Foreign currency exchange rate changes...................... (3,196) 431 -------- -------- Fair value of plan assets at end of year.................... $160,209 $137,436 -------- -------- Funded status............................................... $ 49,951 $ 33,178 Unrecognized transitional asset............................. (1,451) (1,973) Unrecognized prior service cost............................. 2,222 2,571 Unrecognized actuarial gain................................. (38,835) (24,435) -------- -------- Prepaid pension cost recorded in the consolidated balance sheet..................................................... $ 11,887 $ 9,341 ======== ========
The components of net pension benefit are as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Service cost................................................ $ 5,118 $ 4,891 $ 3,656 Interest cost............................................... 6,554 6,767 6,568 Expected return on plan assets.............................. (11,985) (11,129) (9,510) Amortization of prior service cost.......................... 297 304 285 Amortization of actuarial loss.............................. (812) (2,007) (1,447) Amortization of transition asset............................ (481) (493) (493) -------- -------- ------- Net pension benefit......................................... $ (1,309) $ (1,667) $ (941) ======== ======== =======
The weighted average discount rate used in determining actuarial values for the U.K. pension plan was 6.5% in 1999 and 1998, the increase in future compensation levels was 5.0% in 1999 and 1998, and the expected weighted average long-term rate of return on plan assets was 9.0% in 1999 and 1998. NOTE-M RELATED PARTY TRANSACTIONS Prior to December 1995, the Company had a loan program whereby the Company would directly lend money to certain officers and staff for a term of 15 years to purchase a residence under notes bearing interest at an annual rate equal to 1 to 2 percentage points below the prime rate. Outstanding direct loans amounted to $0.1 million at December 31, 1999 and 1998. In December 1995, the majority of the loans under this program were refinanced and replaced by a bank loan program providing comparable loan terms and interest rates. All repayment obligations under this bank loan program are guaranteed by the Company. This program is available to employees at the Chief Executive Officer's discretion. For loans 43 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-M RELATED PARTY TRANSACTIONS (CONTINUED) under this program exceeding $0.4 million, the approval of either the Compensation Committee or Executive Committee of the Board of Directors is required. All loans are repayable when an employee leaves the Company. The amount of guarantees outstanding was $4.8 million at December 31, 1999. In December 1999, the Company loaned a total of $1.6 million to two employees on an unsecured, short-term basis bearing interest at approximately the prime rate. As of February 11, 2000, $1.5 million of these loans had been repaid. See Note N for additional related party disclosure. NOTE-N COMMITMENTS AND CONTINGENCIES COMMITMENTS The capital expenditures relating to the construction of the York Property are currently estimated to be in the range of $151.0 million. As of February 24, 2000, the Company had financial commitments in relation to this project of approximately $22.8 million. During the first quarter of 2000, the Compensation Committee of the Board of Directors approved a special grant of 3 million stock options under the terms of the 1997 Stock Option Plan in addition to the normal annual grant (See Note K), approved a cash award pool of up to $7 million and considered a number of other incentives, for the retention of certain key employees. The cash awards will be paid only upon the fulfillment of full-time employment through a future date to be determined which should be no earlier than December 1, 2001. LEGAL ACTIONS The Company, in the normal course of business, is a defendant in various legal actions. In May 1997, the Antitrust Division of the United States Department of Justice began an investigation of certain art dealers and major auction houses, including the Company and its principal competitor, Christie's. Among other matters, the investigation has reviewed whether Sotheby's and Christie's had any agreement regarding the amounts charged for commissions in connection with auctions. The Company has recently met with the Department of Justice in order to discuss a prompt and appropriate resolution of this investigation. The European Commission has also recently commenced an inquiry, and the Australian Competition Commission an investigation, regarding commissions charged by the Company and Christie's for auction services. A number of private civil complaints, styled as class action complaints, have also been filed against the Company alleging violation of federal and state antitrust laws based upon alleged agreements between Christie's and the Company regarding commission pricing. In addition, several shareholder class action complaints have been filed against the Company and certain of its directors and officers, alleging failure to disclose the alleged agreements and their impact on the Company's financial condition and results of operations. And, a number of shareholder derivative suits have been filed against the directors of the Company based on allegations related to the foregoing lawsuits and investigations. Although the outcome of the investigation by the Department of Justice, other governmental inquiries and investigations and these various lawsuits cannot presently be determined, any loss resulting from these matters could well have a material impact on the Company's financial condition and/or results of operations. The amount of any such loss is not currently estimatable. LENDING AND OTHER CONTINGENCIES The Company enters into legal binding arrangements to lend, on a collateralized basis, to potential consignors and other individuals who have collections of fine art or other objects. Unfunded commitments to extend additional credit were approximately $20.0 million and $84.0 million at December 31, 1999 and 1998, respectively. 44 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-N COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company has a bank loan guarantee program available to certain employees at the Chief Executive Officer's discretion whereby the employee borrows directly from a bank on a demand note basis and pays an annual interest rate equal to the prime rate. All of the repayment obligations of the employee are guaranteed by the Company and repayable when an employee leaves the Company. These obligations totaled $0.6 million at December 31, 1999. On certain occasions, the Company will guarantee to the consignor a minimum price in connection with the sale of property at auction. The Company must perform under its guarantee only in the event that the property sells for less than the minimum price or the property does not sell and, therefore, the Company must pay the difference between the sale price at auction and the amount of the guarantee. At December 31, 1999, the Company had no outstanding guarantees. At February 24, 2000, the Company had outstanding guarantees totaling approximately $6.8 million, which covers auction property having a mid-estimate sales price of approximately $8.4 million. Under certain guarantees, the Company participates in a share of the proceeds if the property under guarantee sells above a minimum price. In addition, the Company is obligated under the terms of certain guarantees to fund a portion of the guarantee prior to the auction. In the opinion of management, the commitments and contingencies described above and in Note J currently are not expected to have a material adverse effect on the Company's financial statements, with the possible exception of the investigation by the Department of Justice, other governmental investigations and inquiries, and related civil lawsuits, as any loss resulting from these matters could well have a material impact on the Company's financial condition and/or results of operations. NOTE-O NON-RECURRING CHARGES In 1998, the Company recorded a non-recurring charge of $15.2 million relating to the construction of the York Property, as defined in Note G. Approximately $14.1 million of this amount is a non-cash charge resulting from the impairment of existing leasehold improvements and related furniture and fixtures. The remaining amount of approximately $1.1 million is a provision resulting from the cost of future rental obligations on rental space in New York City that will be abandoned as part of the Company's plan to consolidate many of its operations in New York City. As of December 31, 1999 and 1998, the Company has recorded in other liabilities in the Consolidated Balance Sheet, approximately $1.1 million related to these future obligations, which will be paid out starting approximately October, 2000 through September, 2003. In early 1997, a television program aired in the U.K. and a related book was published both of which contain certain allegations of improper or illegal conduct by current and former employees of the Company. In response to these allegations, the Board of Directors in February 1997 established a committee of independent directors to review the issues raised by the book and related matters. The Independent Review Committee retained outside independent counsel in the U.S. and the U.K. to assist and advise the Committee in its review. The Company's management also conducted its own internal review. Both reviews were completed in 1997. In 1997, the Company incurred $11.7 million of non-recurring charges that consisted primarily of legal and other professional fees associated with the Board of Directors' Independent Review Committee. The Company does not expect to incur any additional material expenses in relation to this matter. These charges were paid in full as of December 31, 1999. 45 SOTHEBY'S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE-P ACQUISITIONS In January 1999, the Company's Real Estate segment (Note C) acquired Teton Shadows Realty, Inc., a real estate brokerage firm in Jackson Hole, Wyoming. This acquisition has been accounted for as a purchase and did not have a material effect on the Company's financial statements, thus pro-forma results of operations have not been included herein. In June, 1998, the Company's Real Estate segment acquired Christopher Webster Real Estate of Sante Fe, Inc., a real estate brokerage firm in Sante Fe, New Mexico. In October, 1998, the Company's Auction segment acquired Davis and Co., a wine auctioneer in Chicago, Illinois. Both of these acquisitions have been accounted for as a purchase. These acquisitions did not have a material effect on the Company's financial statements, thus pro-forma results of operations have not been included herein. In March 1997, the Company acquired Braverman, Newbold and Brennan, a real estate brokerage firm in Southampton, New York. In July 1997, the Company acquired Leslie Hindman Auctioneers, an auction house in Chicago, IL. Both of these acquisitions have been accounted for as a purchase. These acquisitions did not have a material effect on the Company's financial statements, thus pro-forma results of operations have not been included herein. NOTE-Q QUARTERLY RESULTS (UNAUDITED)
FIRST SECOND THIRD FOURTH --------- --------- --------- ----------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1999 Auction sales.......................................... $235,673 $799,647 $129,492 $1,093,940 Auction and related revenues........................... $ 51,665 $131,694 $ 32,677 $ 174,065 Other revenues......................................... 11,537 14,315 12,598 14,034 -------- -------- -------- ---------- Total revenues......................................... 63,202 146,009 45,275 188,099 -------- -------- -------- ---------- Operating income (loss) before non-recurring charges... (14,611) 50,999 (37,953) 55,738 Operating income (loss) after non-recurring charges.... (14,611) 50,999 (37,953) 55,738 Net income (loss)...................................... $ (9,526) $ 31,697 $(23,757) $ 34,440 Basic earnings (loss) per share........................ $ (0.17) $ 0.55 $ (0.41) $ 0.59 Diluted earnings (loss) per share...................... $ (0.17) $ 0.53 $ (0.41) $ 0.57 -------- -------- -------- ----------
FIRST SECOND THIRD FOURTH --------- --------- --------- --------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1998 Auction sales............................................ $251,805 $715,770 $157,691 $814,447 Auction and related revenues............................. $ 55,266 $129,916 $ 34,478 $147,544 Other revenues........................................... 13,057 16,900 16,810 33,081 -------- -------- -------- -------- Total revenues........................................... 68,323 146,816 51,288 180,625 -------- -------- -------- -------- Operating income (loss) before non-recurring charges..... (7,769) 55,009 (15,167) 63,905 Operating income (loss) after non-recurring charges...... (7,769) 55,009 (30,367) 63,905 Net income (loss)........................................ $ (6,283) $ 33,562 $(20,792) $ 38,538 Basic earnings (loss) per share.......................... $ (0.11) $ 0.59 $ (0.37) $ 0.68 Diluted earnings (loss) per share........................ $ (0.11) $ 0.59 $ (0.37) $ 0.66 -------- -------- -------- --------
46 REPORT OF MANAGEMENT The Company's consolidated financial statements were prepared by management, which is responsible for their integrity and objectivity. The financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on management's best estimates and judgments. Management is further responsible for maintaining systems of internal control and related policies and procedures designed to provide reasonable assurance that assets are adequately safeguarded and that the accounting records reflect transactions executed in accordance with management's authorization. /s/ WILLIAM F. RUPRECHT /s/ WILLIAM S. SHERIDAN /s/ JOSEPH A. DOMONKOS - -------------------------- -------------------------- -------------------------- William F. Ruprecht William S. Sheridan Joseph A. Domonkos President and Senior Vice President and Senior Vice President, Chief Executive Officer Chief Financial Officer Controller and Chief Accounting Officer
AUDIT COMMITTEE CHAIRMAN'S LETTER The Audit Committee (the "Committee") of the Board of Directors consisted of four independent directors. Information as to these persons, as well as the scope of duties of the Committee, is provided in the Proxy Statement. During 1999, the Committee met four times and reviewed with Deloitte & Touche LLP, the Director of the Internal Audit Department and management the various audit activities and plans, together with the results of selected internal audits. The Committee also reviewed the reporting of consolidated financial results and the adequacy of internal controls. The Committee recommended the appointment of Deloitte & Touche LLP to the Board of Directors. The Director of the Internal Audit Department and Deloitte & Touche LLP met privately with the Committee on occasion to encourage confidential discussion as to any auditing matters. /s/ MICHAEL BLAKENHAM - ------------------------ Michael Blakenham Chairman, Audit Committee 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information required by this item is incorporated by reference to the Company's definitive proxy statement for the annual meeting of shareholders to be held in 2000 (the "Proxy Statement") under the captions "Election of Directors" and "Management-Executive Officers." In addition, A. Alfred Taubman and Diana D. Brooks presently serve as directors of the Company, but are not standing for reelection as directors at the Company's 2000 annual meeting. Mr. Taubman, age 75, served as Chairman of the Company from 1983 until his resignation in February 2000. He is Chairman of Taubman Centers, Inc., a company engaged in the regional retail shopping center business. Mr. Taubman also serves as a director of Hollinger International Inc., a publisher of newspapers. Mrs. Brooks, age 49, served as President and Chief Executive Officer of the Company from April 1994 until her resignation in February 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the material appearing in the Proxy Statement under the captions "Management-Compensation of Executive Officers" and "Compensation of Directors." Notwithstanding anything to the contrary herein, the Compensation Committee Report and the Performance Graph in the Proxy Statement are not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the table and related footnotes appearing in the Proxy Statement under the caption "Class A and Class B Common Stock Ownership of Directors, Executive Officers and 5% Shareholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the material appearing in the Proxy Statement under the captions "Certain Employment and Compensation Arrangements", "Certain Transactions" and "Compensation Committee Interlocks and Insider Participation." 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. 14(a)(1) The following consolidated financial statements of Sotheby's Holdings, Inc. and subsidiaries, are contained in Item 8: Consolidated Statements of Income-Years ended December 31, 1999, 1998 and 1997; Consolidated Balance Sheets-December 31, 1999, 1998 and 1997; Consolidated Statements of Cash Flows-Years ended December 31, 1999, 1998 and 1997; Consolidated Statement of Changes in Shareholders' Equity-Years ended December 31, 1999, 1998 and 1997; Notes to Consolidated Financial Statements-December 31, 1999. 14(a)(2) The following is a list of the consolidated financial statement schedules of Sotheby's Holdings, Inc. and subsidiaries and the Independent Auditors' Report required by Item 14(d): Independent Auditors' Report on Financial Statement Schedule Schedule II-Valuation and Qualifying Accounts 14(a)(3) 1 Underwriting Agreement, dated as of February 2, 1999 among Sotheby's Holdings, Inc., Morgan Stanley and Co. Incorporated, Chase Securities Inc. and Merrill Lynch, Pierce, Fenner and Smith Incorporated, incorporated by reference to Exhibit 1 to the current report on Form 8-K, filed on February 10, 1999 with the Securities and Exchange Commission. 3(a) Amended and Restated Articles of Incorporation of Sotheby's Holdings, Inc., as amended, incorporated by reference to Exhibit 4(b) to Registration Statement No. 33-26008, SEC File No. 1-9750, on file at the Washington D.C. office of the Securities and Exchange Commission. 3(b) Restated By-Laws of Sotheby's Holdings, Inc., as amended, through February 24, 2000. 4(a) See Exhibits 3(a) and 3(b). 4(b) Indenture, dated as of February 5, 1999, between Sotheby's Holdings Inc. and The Chase Manhattan Bank as Trustee, incorporated by reference to Exhibit 4(a) to the current report on Form 8-K, filed on February 10, 1999 with the Securities and Exchange Commission. 4(c) Fixed Rate Note, dated February 5, 1999, made by Sotheby's Holdings, Inc. in favor of Cede & Co., incorporated by reference to Exhibit 4(b) to the current report on Form 8-K, filed on February 10, 1999 with the Securities and Exchange Commission. 10(a) Issuing and Paying Agency Agreement, dated February 15, 1989, between Sotheby's, Inc. and The Chase Manhattan Bank, N.A. relating to the issuance of short-term notes ("U.S. Notes") in the U.S. Commercial Paper market, incorporated by reference to Exhibit 10(g) to the 1988 Form 10-K, SEC File No. 1-9750, on file at the Washington, D.C. office of the Securities and Exchange Commission. 10(b) U.S. Commercial Paper Dealer Agreement, dated July 29, 1998, between Sotheby's, Inc., Sotheby's Holdings, Inc. and Chase Securities Inc. relating to the issuance of the U.S. Notes, incorporated by reference to Exhibit 10(a) to the Third Quarter Form 10-Q for 1998. 10(c) U.S. Commercial Paper Dealer Agreement, dated February 15, 1989, between Sotheby's, Inc. and Merrill Lynch Money Markets, Inc. relating to the issuance of the U.S. Notes, incorporated by reference to the Exhibit 10(i) of the 1988 Form 10-K, SEC File No. 1-9750, on file at the Washington, D.C. office of the Securities and Exchange Commission.
49 10(d) Amendment, dated July 13, 1998, to U.S. Commercial Paper Dealer Agreement, dated February 15, 1989, between Sotheby's, Inc., and Merrill Lynch Money Markets Inc. relating to the issuance of the U.S. Notes, incorporated by reference to Exhibit 10(b) to the Third Quarter Form 10-Q for 1998. 10(e) Lease, dated as of July 25, 1979, among The Benenson Capital Company, Lawrence A. Benenson, Raymond E. Benenson (collectively, "Benenson") to Sotheby Parke Bernet Inc., and amendments thereto, all relating to 1334 York Avenue, New York, New York (the "York Avenue Property"), incorporated by reference to Exhibit 10(g) to Registration Statement No. 33-17667, SEC File No. 1-9750, on file at the Washington D.C. office of the Securities and Exchange Commission ("Registration Statement No. 33-17667"). 10(f) Option Agreement with Form of Exchange Agreement, dated July 25, 1979, among Benenson and 089 Nosidam Corp. (as nominee of Sotheby Parke Bernet Inc.) assignments thereof and amendments thereto, all relating to the York Avenue Property, incorporated by reference to Exhibit 10(h) to Registration Statement No. 33-17667. 10(g) Exchange Agreement, dated October 27, 1986, among Benenson and York Avenue Development, Inc., and Letter, dated October 27, 1986, from Benenson to Sotheby's, Inc. and York Avenue Development, Inc., concerning zoning matters and security relating to the York Avenue Property, incorporated by reference to Exhibit 10(i) to Registration Statement No. 33-17667. 10(h) Guarantee, made November 6, 1986, by A. Alfred Taubman in favor of Benenson relating to the York Avenue Property (the "Taubman Guarantee"), incorporated by reference to Exhibit 10(j) to Registration Statement No. 33-17667. 10(i) Letter from Sotheby's, Inc. and York Avenue Development, Inc., dated October 27, 1986, agreeing to indemnify A. Alfred Taubman from all liabilities, damages, losses and judgments arising under the Taubman Guarantee, incorporated by reference to Exhibit 10(k) to Registration Statement No. 33-17667. 10(j) Memorandum of Option Agreement, dated January 31, 1981, among Benenson and 089 Nosidam Corp., relating to the York Avenue Property, incorporated by reference to Exhibit 10(hh) to Registration Statement No. 33-17667. 10(k) Letter Agreement, dated October 27, 1986, among Benenson and York Avenue Development, Inc. relating to the York Avenue Property, incorporated by reference to Exhibit 10(ii) to Registration Statement No. 33-17667. 10(l) Agreement of Sale and Purchase, dated as of September 9, 1999, between Benenson and York Avenue Development, Inc., for the York Property. 10(m) Assignment and Assumption of Agreement of Sale and Purchase, dated as of September 9, 1999, between York Avenue Development, Inc. and Sotheby's, Inc. 10(n) Guaranty, dated September 9, 1999, made by Sotheby's Holdings, Inc. in favor of Benenson. 10(o)* Sotheby's Inc. 1988 Benefit Equalization Plan, incorporated by reference to Exhibit 10(t) to Registration Statement No. 33-17667. 10(p)* Sotheby's Holdings, Inc. 1987 Stock Option Plan as amended and restated effective June 1, 1994 incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K"). 10(q)* Sotheby's Holdings, Inc. Performance Share Purchase Plan, incorporated by reference to Exhibit 10(a) to the Second Quarter Form 10-Q for 1996.
50 10(r)* Sotheby's Holdings, Inc. 1997 Stock Option Plan incorporated herein by reference to Exhibit 10(b) to the Second Quarter Form 10-Q for 1996. 10(s)* First Amendment to Sotheby's Holdings, Inc. 1997 Stock Option Plan, dated September 30, 1997, and effective as of December 12, 1997, incorporated by reference to Exhibit 10(o) of the 1997 Form 10-K. 10(t)* Second Amendment to Sotheby's Holdings, Inc. 1997 Stock Option Plan, dated October 29, 1998. 10(u)* Third Amendment to Sotheby's Holdings, Inc. 1997 Stock Option Plan, incorporated herein by reference to Exhibit 10(r) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K"). 10(v) Agreement of Partnership of Acquavella Modern Art, dated May 29, 1990, between Sotheby's Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated herein by reference to Exhibit 10(b) to the Form 8-K, filed on June 7, 1990, SEC, File No. 1-9750, on file at the Washington, D.C. office of the Securities and Exchange Commission. 10(w)* Amended and Restated Sotheby's Holdings, Inc. Director Stock Ownership Plan, incorporated herein by reference to Exhibit 10(v) to the 1996 Form 10-K. 10(x)* Sotheby's Holdings, Inc. 1998 Stock Compensation Plan for Non-Employee Directors, dated as of March 3, 1998, incorporated herein by reference to Exhibit 10(u) to the 1998 Form 10-K. 10(y) Amendment, dated as of April 19, 1991, between The Benenson Capital Company, Lawrence A. Benenson and Raymond E. Benenson and York Avenue Development, Inc. to Amendment to Option Agreement and to Related Agreements, incorporated herein by reference to Exhibit 10(kk) to the Company's Annual Report on Form 10-K, for the year ended December 31, 1991, SEC File No. 1-9750, on file at the Washington D.C. office of the Securities and Exchange Commission. 10(z) Amended and Restated Credit Agreement, dated as of March 10, 2000, among Sotheby's Holdings, Inc., Sotheby's Inc., Oatshare Limited, Sotheby's, the lenders named therein, and The Chase Manhattan Bank. (21) Subsidiaries of the Registrant (23) Consent of Deloitte & Touche LLP (24) Powers of Attorney (27) Financial Data Schedule (14)(b) Current Reports on Form 8-K: None. (14)(c) The list of exhibits filed with this report is set forth in response to Item 14(a)(3). The required exhibit index has been filed with the exhibits. (14)(d) The financial statement schedules of the Company listed in response to Item 14(a)(2) are filed pursuant to this Item 14(d).
- ------------------------ * A compensatory agreement or plan required to be filed pursuant to Item 14(c) of Form 10-K 51 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of SOTHEBY'S HOLDINGS, INC.: We have audited the consolidated financial statements of Sotheby's Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999 and have issued our report thereon dated February 24, 2000; such consolidated financial statements and report are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of Sotheby's Holdings, Inc. and subsidiaries listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP New York, New York February 24, 2000 52 SCHEDULE II SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ----------------------------------------------- ---------- ----------------------- ---------- ---------- DESCRIPTION BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT BEGINNING COST AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS PERIOD - ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Valuation reserve deducted in the balance sheet from the asset to which it applies: Accounts and notes receivable: 1999 Allowance for doubtful accounts........... $14,585 $3,476 $1,858 $8,834 $11,085 1998 Allowance for doubtful accounts........... $10,419 $6,598 $ 285 $2,717 $14,585 1997 Allowance for doubtful accounts........... $10,156 $1,227 $1,811 $2,775 $10,419 Inventory: 1999 Realizable value allowance................ $ 9,422 $1,337 $ 186 $1,805 $ 9,140 1998 Realizable value allowance................ $15,726 $1,653 $ 855 $8,812 $ 9,422 1997 Realizable value allowance................ $16,799 $1,540 $ 262 $2,875 $15,726
53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOTHEBY'S HOLDINGS, INC. By: /s/ WILLIAM F. RUPRECHT ----------------------------------------- William F. Ruprecht PRESIDENT AND CHIEF EXECUTIVE OFFICER DATE: March 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * - ----------------------- Chairman of the Board March 14, 2000 Michael I. Sovern * - ----------------------- Vice Chairman of the Board March 14, 2000 Max M. Fisher * - ----------------------- The Marquess Of Deputy Chairman of the Board March 14, 2000 Hartington /s/ WILLIAM F. RUPRECHT - ----------------------- President, Chief Executive Officer and Director March 14, 2000 William F. Ruprecht * - ----------------------- Executive Vice President and Director March 14, 2000 Robin Woodhead * - ----------------------- Executive Vice President and Director March 14, 2000 Deborah Zoullas * - ----------------------- Director March 14, 2000 Conrad Black * - ----------------------- Director March 14, 2000 Michael Blakenham
54
SIGNATURE TITLE DATE --------- ----- ---- * - ----------------------- Director March 14, 2000 Diana D. Brooks * - ----------------------- Director March 14, 2000 Walter J. P. Curley * - ----------------------- Director March 14, 2000 Henry R. Kravis * - ----------------------- Director March 14, 2000 Jeffrey H. Miro * - ----------------------- Sharon Percy Director March 14, 2000 Rockefeller * - ----------------------- Director March 14, 2000 A. Alfred Taubman /s/ WILLIAM S. SHERIDAN Senior Vice President and Chief Financial - ----------------------- Officer March 14, 2000 William S. Sheridan /s/ JOSEPH A. DOMONKOS Senior Vice President, Controller and Chief - ----------------------- Accounting Officer March 14, 2000 Joseph A. Domonkos /s/ WILLIAM S. SHERIDAN - ----------------------- March 14, 2000 *William S. Sheridan AS ATTORNEY-IN-FACT
55 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - --------------------- ----------- 1 Underwriting Agreement, dated as of February 2, 1999 among Sotheby's Holdings, Inc., Morgan Stanley and Co. Incorporated, Chase Securities Inc. and Merrill Lynch, Pierce, Fenner and Smith Incorporated, incorporated by reference to Exhibit 1 to the current report on Form 8-K, filed on February 10, 1999 with the Securities and Exchange Commission. 3(a) Amended and Restated Articles of Incorporation of Sotheby's Holdings, Inc., as amended, incorporated by reference to Exhibit 4(b) to Registration Statement No. 33-26008, SEC File No. 1-9750, on file at the Washington D.C. office of the Securities and Exchange Commission. 3(b) Restated By-Laws of Sotheby's Holdings, Inc., as amended, through February 24, 2000. 4(a) See Exhibits 3(a) and 3(b). 4(b) Indenture, dated as of February 5, 1999, between Sotheby's Holdings Inc. and The Chase Manhattan Bank as Trustee, incorporated by reference to Exhibit 4(a) to the current report on Form 8-K, filed on February 10, 1999 with the Securities and Exchange Commission. 4(c) Fixed Rate Note, dated February 5, 1999, made by Sotheby's Holdings, Inc. in favor of Cede & Co., incorporated by reference to Exhibit 4(b) to the current report on Form 8-K, filed on February 10, 1999 with the Securities and Exchange Commission. 10(a) Issuing and Paying Agency Agreement, dated February 15, 1989, between Sotheby's, Inc. and The Chase Manhattan Bank, N.A. relating to the issuance of short-term notes ("U.S. Notes") in the U.S. Commercial Paper market, incorporated by reference to Exhibit 10(g) to the 1988 Form 10-K, SEC File No. 1-9750, on file at the Washington, D.C. office of the Securities and Exchange Commission. 10(b) U.S. Commercial Paper Dealer Agreement, dated July 29, 1998, between Sotheby's, Inc., Sotheby's Holdings, Inc. and Chase Securities Inc. relating to the issuance of the U.S. Notes, incorporated by reference to Exhibit 10(a) to the Third Quarter Form 10-Q for 1998. 10(c) U.S. Commercial Paper Dealer Agreement, dated February 15, 1989, between Sotheby's, Inc. and Merrill Lynch Money Markets, Inc. relating to the issuance of the U.S. Notes, incorporated by reference to the Exhibit 10(i) of the 1988 Form 10-K, SEC File No. 1-9750, on file at the Washington, D.C. office of the Securities and Exchange Commission. 10(d) Amendment, dated July 13, 1998, to U.S. Commercial Paper Dealer Agreement, dated February 15, 1989, between Sotheby's, Inc., and Merrill Lynch Money Markets Inc. relating to the issuance of the U.S. Notes, incorporated by reference to Exhibit 10(b) to the Third Quarter Form 10-Q for 1998. 10(e) Lease, dated as of July 25, 1979, among The Benenson Capital Company, Lawrence A. Benenson, Raymond E. Benenson (collectively, "Benenson") to Sotheby Parke Bernet Inc., and amendments thereto, all relating to 1334 York Avenue, New York, New York (the "York Avenue Property"), incorporated by reference to Exhibit 10(g) to Registration Statement No. 33-17667, SEC File No. 1-9750, on file at the Washington D.C. office of the Securities and Exchange Commission ("Registration Statement No. 33-17667"). 10(f) Option Agreement with Form of Exchange Agreement, dated July 25, 1979, among Benenson and 089 Nosidam Corp. (as nominee of Sotheby Parke Bernet Inc.) assignments thereof and amendments thereto, all relating to the York Avenue Property, incorporated by reference to Exhibit 10(h) to Registration Statement No. 33-17667.
EXHIBIT NO. DESCRIPTION - --------------------- ----------- 10(g) Exchange Agreement, dated October 27, 1986, among Benenson and York Avenue Development, Inc., and Letter, dated October 27, 1986, from Benenson to Sotheby's, Inc. and York Avenue Development, Inc., concerning zoning matters and security relating to the York Avenue Property, incorporated by reference to Exhibit 10(i) to Registration Statement No. 33-17667. 10(h) Guarantee, made November 6, 1986, by A. Alfred Taubman in favor of Benenson relating to the York Avenue Property (the "Taubman Guarantee"), incorporated by reference to Exhibit 10(j) to Registration Statement No. 33-17667. 10(i) Letter from Sotheby's, Inc. and York Avenue Development, Inc., dated October 27, 1986, agreeing to indemnify A. Alfred Taubman from all liabilities, damages, losses and judgments arising under the Taubman Guarantee, incorporated by reference to Exhibit 10(k) to Registration Statement No. 33-17667. 10(j) Memorandum of Option Agreement, dated January 31, 1981, among Benenson and 089 Nosidam Corp., relating to the York Avenue Property, incorporated by reference to Exhibit 10(hh) to Registration Statement No. 33-17667. 10(k) Letter Agreement, dated October 27, 1986, among Benenson and York Avenue Development, Inc. relating to the York Avenue Property, incorporated by reference to Exhibit 10(ii) to Registration Statement No. 33-17667. 10(l) Agreement of Sale and Purchase, dated as of September 9, 1999, between Benenson and York Avenue Development, Inc., for the York Property. 10(m) Assignment and Assumption of Agreement of Sale and Purchase, dated as of September 9, 1999, between York Avenue Development, Inc. and Sotheby's, Inc. 10(n) Guaranty, dated September 9, 1999, made by Sotheby's Holdings, Inc. in favor of Benenson. 10(o)* Sotheby's Inc. 1988 Benefit Equalization Plan, incorporated by reference to Exhibit 10(t) to Registration Statement No. 33-17667. 10(p)* Sotheby's Holdings, Inc. 1987 Stock Option Plan as amended and restated effective June 1, 1994 incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K"). 10(q)* Sotheby's Holdings, Inc. Performance Share Purchase Plan, incorporated by reference to Exhibit 10(a) to the Second Quarter Form 10-Q for 1996. 10(r)* Sotheby's Holdings, Inc. 1997 Stock Option Plan incorporated herein by reference to Exhibit 10(b) to the Second Quarter Form 10-Q for 1996. 10(s)* First Amendment to Sotheby's Holdings, Inc. 1997 Stock Option Plan, dated September 30, 1997, and effective as of December 12, 1997, incorporated by reference to Exhibit 10(o) of the 1997 Form 10-K. 10(t)* Second Amendment to Sotheby's Holdings, Inc. 1997 Stock Option Plan, dated October 29, 1998. 10(u)* Third Amendment to Sotheby's Holdings, Inc. 1997 Stock Option Plan incorporated by herein by reference to Exhibit 10(r) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K"). 10(v) Agreement of Partnership of Acquavella Modern Art, dated May 29, 1990, between Sotheby's Nevada, Inc. and Acquavella Contemporary Art, Inc., incorporated herein by reference to Exhibit 10(b) to the Form 8-K, filed on June 7, 1990, SEC, File No. 1-9750, on file at the Washington, D.C. office of the Securities and Exchange Commission.
EXHIBIT NO. DESCRIPTION - --------------------- ----------- 10(w)* Amended and Restated Sotheby's Holdings, Inc. Director Stock Ownership Plan, incorporated herein by reference to Exhibit 10(u) to the 1998 Form 10-K. 10(x)* Sotheby's Holdings, Inc. 1998 Stock Compensation Plan for Non-Employee Directors, dated as of March 3, 1998 incorporated herein by reference to Exhibit 10(u) the 1998 Form 10-K. 10(y) Amendment, dated as of April 19, 1991, between The Benenson Capital Company, Lawrence A. Benenson and Raymond E. Benenson and York Avenue Development, Inc. to Amendment to Option Agreement and to Related Agreements, incorporated herein by reference to Exhibit 10(kk) to the Company's Annual Report on Form 10-K, for the year ended December 31, 1991, SEC File No. 1-9750, on file at the Washington D.C. office of the Securities and Exchange Commission. 10(z) Amended and Restated Credit Agreement, dated as of March 10, 2000, among Sotheby's Holdings, Inc., Sotheby's Inc., Oatshare Limited, Sotheby's, the lenders named therein, and The Chase Manhattan Bank. (21) Subsidiaries of the Registrant (23) Consent of Deloitte & Touche LLP (24) Powers of Attorney (27) Financial Data Schedule
- ------------------------ * A compensatory agreement or plan required to be filed pursuant to Item 14(c) of Form 10-K. EX-3.(B) 2 EXHIBIT 3.(B) Exhibit 3(b) AMENDED AND RESTATED BY-LAWS OF SOTHEBY'S HOLDINGS, INC. AS AMENDED THROUGH FEBRUARY 24, 2000 INDEX TO AMENDED AND RESTATED BY-LAWS OF SOTHEBY'S HOLDINGS, INC.
Page ---- ARTICLE I - MEETINGS OF SHAREHOLDERS Section 1.01 Place of Meetings.............................................................1 Section 1.02 Annual Meeting................................................................1 Section 1.03 Special Meetings of Business; Agent for Service of Process...................1 Section 1.04 Notice of Meetings............................................................2 Section 1.05 Waiver of Notice..............................................................2 Section 1.06 Inspectors of Election........................................................2 Section 1.07 Quorum and Adjournment........................................................3 Section 1.08 Vote of Shareholders..........................................................3 Section 1.09 Proxies.......................................................................3 Section 1.10 Consents......................................................................3 Section 1.11 Organization of Shareholders' Meetings........................................4 ARTICLE II - DETERMINATION OF VOTING, DIVIDEND, AND OTHER RIGHTS.........................................4 ARTICLE III - DIRECTORS Section 3.01 General Powers................................................................5 Section 3.02 Number, Qualifications, and Term of Office....................................5 Section 3.03 Place of Meetings.............................................................5 Section 3.04 Annual Meeting................................................................5 Section 3.05 Special Meetings..............................................................6 Section 3.06 Quorum and Manner of Action...................................................6 Section 3.07 Compensation..................................................................6 Section 3.08 Removal of Directors..........................................................6 Section 3.09 Resignations..................................................................7 Section 3.10 Vacancies.....................................................................7 Section 3.11 Organization of Board Meeting.................................................7 ARTICLE IV - ADVISORY COMMITTEE ii Section 4.01 Advisory Committee: Constitution and Powers..................................7 Section 4.02 Meetings of Advisory Committee................................................8 Section 4.03 Vacancies in Advisory Committee...............................................8 ARTICLE V - COMMITTEES OF THE BOARD .....................................................................8 ARTICLE VI - OFFICERS Section 6.01 Officers......................................................................8 Section 6.02 Term of Office and Resignation................................................9 Section 6.03 Removal of Elected Officers...................................................9 Section 6.04 Vacancies.....................................................................9 Section 6.05 Compensation..................................................................9 Section 6.06 The Chairman of the Board....................................................10 Section 6.07 The President................................................................10 Section 6.08 The Chief Operating Officer..................................................10 Section 6.09 The Vice President...........................................................10 Section 6.10 The Secretary................................................................10 Section 6.11 The Chief Financial Officer..................................................11 Section 6.12 The Treasurer................................................................11 ARTICLE VII - INDEMNIFICATION Section 7.01 Indemnification .............................................................11 Section 7.02 Advancement of Expenses......................................................12 Section 7.03 Indemnification: Insurance..................................................12 Section 7.04 Indemnification: Constituent Corporations...................................12 ARTICLE VIII - SHARE CERTIFICATES Section 8.01 Form; Signature..............................................................13 Section 8.02 Transfer Agents and Registrars...............................................13 Section 8.03 Transfers of Shares..........................................................13 Section 8.04 Registered Shareholders......................................................14 Section 8.05 Lost Certificates............................................................14 ARTICLE IX Section 9.01 Fiscal Year..................................................................14 Section 9.02 Signatures on Negotiable Instruments.........................................14 Section 9.03 Dividends....................................................................15 Section 9.04 Reserves.....................................................................15 Section 9.05 Seal.........................................................................15 Section 9.06 Corporation Offices..........................................................15 ARTICLE X - AMENDMENTS Section 10.01 Power to Amend...............................................................16 iii ARTICLE XI - ELECTION NOT TO BE GOVERNED BY CHAPTER 7B OF THE BUSINESS CORPORATION ACT............................................................16
iv AMENDED AND RESTATED BY-LAWS OF SOTHEBY'S HOLDINGS, INC. Article I MEETINGS OF SHAREHOLDERS SECTION 1.01. PLACE OF MEETINGS. Annual and special meetings of the shareholders shall be held at such place within or outside the State of Michigan as may be fixed from time to time by the board of directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 1.02. ANNUAL MEETING. The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on such date during the months of April, May, or June as the Chairman of the Board, the chief executive officer or the board of directors shall designate, and at such hour as may be named, in the notice of said meeting. If the election of directors shall not be held on the date so designated for any annual meeting or at any adjournment of such meeting, the board of directors shall cause the election to be held at a special meeting as soon thereafter as it conveniently may be held. SECTION 1.03. SPECIAL MEETINGS. A special meeting of the shareholders may be called at any time and for any purpose or purposes by the Chairman of the Board, the President, or pursuant to a resolution of the Board of Directors, or upon written request by a shareholder or shareholders holding of record at least twenty-five percent (25%) of the combined voting power of all outstanding shares (including the Class A Limited Voting Stock and Class B Common Stock) of the corporation. SECTION 1.04. NOTICE OF MEETINGS. A written notice of the place, date, and hour of each meeting, whether annual or special, and any adjournment thereof, shall be given personally or by mail to each shareholder of record entitled to vote thereat at least ten (10) but not more than sixty (60) days prior to the meeting unless a shorter time is provided by the Michigan Business Corporation Act and is fixed by the board of directors. The notice of any special meeting shall also state the purpose or purposes for which the meeting is called and by or at whose direction it is being issued. If, at any meeting, whether annual or special, action is proposed to be taken which would, if taken, entitle shareholders fulfilling requirements of law to receive payment for their shares, the notice of such meeting shall include a statement of that purpose and to that effect. If any notice, as provided in this Section 1.04 is mailed, it shall be directed to the shareholder in a postage prepaid envelope at his address as it appears on the corporation's record of shareholders. SECTION 1.05. WAIVER OF NOTICE. Notice of meeting need not be given to any shareholder who submits a waiver of notice, signed in person or by proxy, whether before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, shall constitute a waiver of notice by him except when the shareholder attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 1.06. INSPECTORS OF ELECTION. The board of directors, or any officer or officers duly authorized by the board of directors, in advance of any meeting of shareholders, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at the meeting may, and on the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the board of directors in advance of the meeting or at the meeting by the chairman of the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspectors shall make a report in writing of any facts or matters found or determined by them and execute a certificate with respect thereto. SECTION 1.07. QUORUM AND ADJOURNMENT. At all meetings of shareholders, except as otherwise provided by statute or the articles of incorporation, the holders of the number of shares possessing a majority of the voting power of all 2 shares entitled to vote thereat, present in person or by proxy, shall be necessary and sufficient to constitute a quorum for the transaction of business. The shareholders present in person or by proxy at any of such meetings at which a quorum is initially present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. By a vote of the majority of shareholders present, in person or by proxy, whether or not a quorum is present, the meeting may, from time to time, be adjourned, by resolution to another place and time, for a period not exceeding fourteen (14) days in any one case. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 1.08. VOTE OF SHAREHOLDERS. Each shareholder having the right to vote shall be entitled at every meeting of shareholders to (i) one (1) vote for every share of Class A Limited Voting Common Stock and (ii) ten (10) votes for every share of Class B Common Stock standing in his name on the record date of shareholders fixed by the board of directors pursuant to Article II of these by-laws. Whenever any corporate action is to be taken by vote at a meeting of the shareholders, it shall, except as otherwise required by statute or by the articles of incorporation, be authorized by a majority of the votes cast by such holders present in person or by proxy and entitled to vote, a quorum being present as provided in Section 1.07. SECTION 1.09. PROXIES. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorized another person or persons to act for him by proxy. A shareholder may authorize a valid proxy by executing a written instrument signed by such shareholder, or by causing his signature to be affixed to such writing by any reasonable means, including, but not limited to, by facsimile signature, or by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission (including, but not limited to, telephone, e-mail, the Internet or such other electronic means as the Board of Directors may determine from time to time) to the person or persons designated as the holder of the proxy, a proxy solicitation firm or a like authorized agent. Proxies by telegram, cablegram, or other electronic transmission must either set forth or be submitted with information (such as, by way of example and not of limitation, a passcode) from which it can be determined that the telegram, cablegram, or other electronic transmission was authorized by the shareholder. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original or writing or transmission. No proxy shall be valid after the expiration of one (1) year from the date thereof unless otherwise provided in the proxy. SECTION 1.10. CONSENTS. 3 Any action required or permitted by the Michigan Business Corporation Act to be taken at a meeting of shareholders may be taken without a meeting, without prior notice and without a vote, if all of the shareholders entitled to vote thereon consent thereto in writing; provided, however, if authorized by the articles of incorporation, any action required or permitted by the Michigan Business Corporation Act or by these by-laws to be taken at an annual or special meeting of shareholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent, as herein provided, shall be given to shareholders who have not consented in writing. SECTION 1.11. ORGANIZATION OF SHAREHOLDERS'MEETINGS. At every meeting of the shareholders, the Chairman of the Board or, in the Chairman's absence or at his direction, the President or, in his absence, a Vice-President, or, in the absence of the Chairman of the Board, the President and Vice-President, a chairman chosen by a majority in interest of the shareholders of the corporation present in person or by proxy and entitled to vote, shall act as chairman; and the Secretary, or in his absence any person appointed by the chairman, shall act as secretary. Article II DETERMINATION OF VOTING, DIVIDEND, AND OTHER RIGHTS For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or for the purpose of any other action, the board of directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than sixty (60) nor less than ten (10) days before the date of any such meeting, nor more than thirty (30) days prior to any other action. If a record date is so fixed, such shareholders and only such shareholders as shall be shareholders of record on that date so fixed shall be entitled to notice of, and to vote at, such meeting and any adjournment thereof, or to express such consent or dissent, or to receive payment of such dividend or such allotment of rights, or otherwise to be recognized as shareholders for the purpose of any other action, notwithstanding any transfer of any shares on the books of the corporation after any such record date so fixed. Article III 4 DIRECTORS SECTION 3.01. GENERAL POWERS. The business and all the powers of the corporation, and the stock, property, and affairs of the corporation, except as otherwise provided by the articles of incorporation, the by-laws, or by statute, shall be managed by the board of directors. SECTION 3.02. NUMBER, QUALIFICATIONS, AND TERM OF OFFICE. The number of directors shall be not more than fifteen (15) nor less than seven (7), but each such number may be decreased or increased by amendment of these by-laws by a vote of the shareholders of record holding the number of shares possessing a majority of the voting power entitled to vote. The board, at the time of the adoption of these restated by-laws, shall consist of eight (8) directors. Thereafter, within the limits above specified, the number of directors may be determined, between annual meetings of the shareholders, by resolution of the board of directors. Except as otherwise provided by statute, the articles of incorporation, or these by-laws, the directors, who need not be shareholders, shall be elected at the annual meeting of the shareholders and shall hold office for the period of one (1) year and until their successors shall be duly elected and qualified, or until death, resignation, or removal. SECTION 3.03. PLACE OF MEETINGS. Meetings of the board of directors, annual or special, shall be held at any place within or outside the State of Michigan as may from time to time be determined by the board of directors. SECTION 3.04. ANNUAL MEETING. The board of directors shall meet as soon as practicable after each annual election of directors for the purpose of organization, election of officers, and the transaction of other business, on the same day and at the same place at which the shareholders' meeting is held. Notice of such meeting need not be given. Such meeting may be held at such other time and place as shall be specified in a notice to be given as hereinafter provided for special meetings of the board of directors, or according to consent and waiver of notice thereof signed by all directors. SECTION 3.05. SPECIAL MEETINGS. Special meetings of the board of directors shall be held whenever called by any director. Notice of any special meeting, and any adjournment thereof, stating the place, date, hour, and purpose of the meeting, shall be mailed to each director, addressed to him at his residence or usual place of 5 business, or shall be sent to him at such place by telegraph, telecopier, cable, or radio, or be delivered personally or by telephone, not later than the fifth (5th) calendar day before the day on which the meeting is to be held. Notice of any meeting of the board of directors need not be given to any director who submits a signed waiver of notice before or after the meeting, or who attends the meeting without protesting, either prior to or at the commencement of such meeting, the lack of notice to him. Unless limited by statute, the articles of incorporation, these bylaws, or the terms of the notice thereof, any and all business may be transacted at any special meeting. SECTION 3.06. QUORUM AND MANNER OF ACTION. A majority of the directors in office at the time of any annual or special meeting of the board of directors, present in person, shall be necessary and sufficient to constitute a quorum for the transaction of business. The vote of a majority of the directors present at the time of such vote, if a quorum is present at the time of such vote, shall be the act of the board of directors, except as otherwise required by statute or the articles of incorporation. A majority of the directors present, whether or not a quorum is present, may by resolution, from time to time, adjourn any meeting to another place and time for a period not exceeding fourteen (14) days in any one case. If the directors shall severally and/or collectively consent in writing to any act taken or to be taken by the corporation, such action shall be valid corporate action as though it had been authorized at a meeting of the board of directors. SECTION 3.07. COMPENSATION. By resolution of the board of directors a fixed annual or other fee as well as a fixed sum and expenses may be allowed for attendance at each annual or special meeting of the board of directors; provided, however, that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. SECTION 3.08. REMOVAL OF DIRECTORS. By a vote of the number of shares possessing a majority of the voting power of all shares of stock outstanding and entitled to vote, one or more or all of the directors may be removed from office at any time for or without cause. SECTION 3.09. RESIGNATIONS. Any director may resign at any time by giving written notice to the board of directors, the Chairman of the Board, the President, or the Secretary of the corporation. Such resignation shall take effect at the time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.10. VACANCIES. Any newly created directorships and vacancies occurring on the board of directors by reason of death, resignation, retirement, disqualification, or removal shall be temporarily filled by a vote of a 6 majority of the directors then in office, even though less than a quorum. Any director elected by the board of directors to fill a vacancy temporarily shall hold office for the unexpired portion of the term of his predecessor subject to these by-laws. SECTION 3.11. ORGANIZATION OF BOARD MEETING. At each meeting of the board of directors, the Chairman or, in his absence or at the Chairman's direction, the President or, in his absence, a director chosen by a majority of the directors present shall act as chairman of the meeting. The Secretary or, in his absence, any person appointed by the chairman shall act as secretary of the meeting. Article IV ADVISORY COMMITTEE SECTION 4.01. ADVISORY COMMITTEE: CONSTITUTION AND POWERS. The board of directors, by resolution adopted by a majority of the entire board, may designate an advisory committee (to be known as the "Advisory Committee" or "Advisory Board"), the members of which need not be directors of the corporation but shall be prominent members of the art or business communities of the world. The advisory committee and its members shall serve at the pleasure of the board of directors and shall advise the board as to matters relating to conditions in the national and international art markets and shall recommend actions that the corporation may take in respect thereto. The compensation, if any, of the members of the advisory committee shall be fixed from time to time by the board of directors. The advisory committee, as such, shall have no rights, powers, duties, authority, or responsibilities in respect of the corporation or its shareholders but shall be entitled to all of the indemnifications to which a member of the board of directors is entitled. SECTION 4.02. MEETINGS OF ADVISORY COMMITTEE. Meetings of the advisory committee shall be held at least annually or more frequently, and at such time and place, as shall from time to time be determined by resolution of the advisory committee or its chairman, who shall be the Chairman of the Board. In case the day so determined shall be a legal holiday, such meeting shall be held on the next succeeding day, not a legal holiday, at the same hour. SECTION 4.03. VACANCIES IN ADVISORY COMMITTEE. Any newly created memberships and vacancies occurring in the advisory committee may be filled only by resolution adopted by a majority of the entire board of directors. 7 ARTICLE V COMMITTEES OF THE BOARD The corporation may have such committees of the board, consisting of two or more directors, as the board of directors shall, by resolution from time to time, determine, which shall have such powers and authority as designated by the board of directors. The operation of each such committee shall be as determined by the board of directors. Article VI OFFICERS SECTION 6.01. OFFICERS. The elected officers of the corporation shall be a Chairman of the Board (sometimes herein referred to as the "Chairman"), a President, one or more Vice-Presidents, a Secretary, a Chief Financial Officer and a Treasurer. The board of directors may also appoint one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers and agents as may from time to time appear to be necessary or advisable in the conduct of the affairs of the corporation. Any two or more offices, whether elective or appointive, may be held by the same person, except that an officer shall not execute, acknowledge or verify any instrument in more than one capacity if the instrument is required by law or the articles of incorporation or the by-laws to be executed, acknowledged or verified by two or more officers. SECTION 6.02. TERM OF OFFICE AND RESIGNATION. So far as practicable, all elected officers shall be elected at the first meeting of the board of directors following the annual meeting of shareholders in each year and, except as otherwise hereinafter provided, shall hold office until the first meeting of the board of directors following the next annual meeting of shareholders and until their respective successors shall have been elected or appointed and qualified. All other officers shall hold office at the pleasure of the board of 8 directors. Any elected or appointed officer may resign at any time by giving written notice to the board of directors, the Chairman, the President, or the Secretary of the corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 6.03. REMOVAL OF ELECTED OFFICERS. Any elected officer may be removed at any time, with or without cause, by vote at any meeting of the board of directors of a majority of the entire board of directors. SECTION 6.04. VACANCIES. If any vacancy shall occur in any office for any reason, the board of directors may elect or appoint a successor to fill such vacancy for the remainder of the term. SECTION 6.05. COMPENSATION. The compensation, if any, of all elected or appointed officers of the corporation shall be fixed by the board of directors or by a committee of the board of directors established for such purpose. SECTION 6.06. THE CHAIRMAN OF THE BOARD. The Chairman of the Board (sometimes herein the "Chairman") shall preside at all meetings of the shareholders and board of directors and shall appoint all standing and special committees as are deemed necessary in the conduct of the business. The Chairman of the Board shall exercise any and all powers and perform any and all duties which are required by the by-laws and which the board of directors may additionally confer upon him. The board of directors may also designate one or more Vice Chairman(men) of the board. SECTION 6.07. THE PRESIDENT. The President shall, if the board of directors shall so determine, be the chief executive officer and/or the chief operating officer and in the absence of the Chairman of the Board shall preside at all meetings of the board of directors. The President shall perform such other duties as are usually ascribed to that office, such as are directed by the Chairman, and such as are required by the by-laws or the resolutions of the board of directors. SECTION 6.08. THE CHIEF OPERATING OFFICER. 9 The Chief Operating Officer shall perform such duties as are usually ascribed to that office, as are directed by the Chairman of the Board or the President, and as are required by the by-laws or action of the board of directors. SECTION 6.09. THE VICE-PRESIDENT. The Vice-President, and such grades thereof (including, but not limited to, the grades of Executive Vice President and Senior Vice President) as shall be determined by the board of directors from time to time, or if there is more than one Vice-President, each Vice-President, shall have such powers and discharge such duties as may be assigned to him from time to time by the Chairman of the Board, the President, the Chief Operating Officer, any more senior grade of Vice-President and/or the board of directors. SECTION 6.10. THE SECRETARY. The Secretary shall attend all meetings of the board of directors and the shareholders and shall record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall, when requested, perform like duties for all committees of the board of directors. He shall attend to the giving of notice of all meetings of the shareholders, and special meetings of the board of directors and committees thereof; he shall have custody of the corporate seal, and, when authorized by the board of directors, shall have authority to affix the same to any instrument and, when so affixed, it shall be attested by his signature or by the signatures of the Treasurer or an Assistant Secretary or an Assistant Treasurer. He shall keep an account for all books, documents, papers, and records of the corporation, except those for which some other officer or agent is properly accountable. He shall have authority to sign stock certificates, and shall generally perform all the duties appertaining to the office of secretary of a corporation. In the absence of the Secretary, such person as shall be designated by the Chairman or the President shall perform his duties. SECTION 6.11. THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have the care and custody of all the funds of the corporation and shall deposit the same in such banks or other depositories as the board of directors, or any officer and agent jointly, duly authorized by the board of directors, shall, from time to time, direct or approve. He shall keep a full and accurate account of all monies received and paid on account of the corporation, and shall render a statement of his accounts whenever the board of directors shall require. He shall perform all other necessary acts and duties in connection with the administration of the financial affairs of the corporation, and shall generally perform all duties usually appertaining to the office of Chief Financial Officer of a corporation. When required by the board of directors, he shall give bonds for the faithful discharge of his duties in such sums and with such sureties as the board of directors shall approve. In the absence of the Chief Financial Officer, such person as shall be designated by the Chairman or the President shall 10 perform his duties. SECTION 6.12. TREASURER. The Treasurer shall perform such duties and have such powers and responsibilities as shall be assigned to him from time to time by the Chief Financial Officer, the Chairman, the President, and/or the board of directors. When required by the board of directors, he shall give bonds for the faithful discharge of his duties in such sums and with such sureties as the board of directors shall approve. In the absence of the Treasurer, such person as shall be designated by the Chief Financial Officer, the Chairman or the President shall perform his duties. Article VII INDEMNIFICATION SECTION 7.01. INDEMNIFICATION. Subject to and in accordance with the provisions of the corporation's articles of incorporation, the corporation has the power to (and shall if so provided in the corporation's articles of incorporation) indemnify any person (and the heirs, executors, and administrators of any such person) against any loss, cost, damage, fine, penalty, or expense (including attorneys' fees) suffered, incurred, assessed, or imposed by reason of the fact that such person is or was a director, officer, employee, or agent of the corporation or is or was serving, at the request of the corporation, as a director, officer, employee, agent, partner, or trustee of another corporation, partnership, joint venture, trust, or other enterprise. SECTION 7.02. ADVANCEMENT OF EXPENSES. Expenses incurred in defending or settling a civil or criminal action, suit, or proceeding to which any person described in Section 7.01 is or was a party, or is or was threatened to be made a party, may be paid by the corporation in advance in accordance with and subject to the provisions of the corporation's articles of incorporation. SECTION 7.03. INDEMNIFICATION: INSURANCE. The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the corporation or is liable as a director of the corporation, or is or was serving, at the request of the corporation, as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, regardless of whether the corporation would have power to indemnify him 11 against such liability under the provisions of this Article VII or under the applicable provisions of law. SECTION 7.04. INDEMNIFICATION: CONSTITUENT CORPORATIONS. For the purposes of this Article VII, references to the corporation include all constituent corporations absorbed in a consolidation or merger and the resulting or surviving corporation, so that a person who is or was a director or officer of such constituent corporation or is or was serving at the request of such constituent corporation as a director or officer of another corporation, partnership, joint venture, trust, or other enterprise shall (as shall his heirs, executors, and administrators) stand in the same position, under the provisions of this Article, with respect to the resulting or surviving corporation as he would if he had served the resulting or surviving corporation in the same capacity. Article VIII SHARE CERTIFICATES SECTION 8.01. FORM; SIGNATURE. The shares of the corporation shall be represented by certificates in such form or forms as shall be determined by the board of directors and shall be signed by the Chairman of the Board, President or a Vice-President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the corporation, and shall be sealed with the seal of the corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a Transfer Agent or registered by a Registrar other than the corporation or its employee. In case any officer who has signed or whose facsimile has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of issue. SECTION 8.02. TRANSFER AGENTS AND REGISTRARS. The board of directors may, in its discretion, appoint one or more banks or trust companies in the State of Michigan and in such other state or states or localities within or outside the United States as the board of directors may deem advisable, from time to time, to act as Transfer Agents and Registrars of the shares of the corporation; and upon such appointments being made, no certificate representing shares shall be valid until countersigned by one of such Transfer Agents and registered by one of such Registrars. SECTION 8.03. TRANSFERS OF SHARES. Transfers of shares shall be made on the books of the corporation only upon written request by the person named in the certificate, or by his attorney lawfully constituted in writing, and upon surrender and cancellation of a certificate or certificates for a like number of shares of the same class, with duly executed assignment and a power of transfer endorsed thereon or attached thereto, and with such proof of the authenticity of the signatures as the corporation or its agents may 12 reasonably require. Any such transfer shall be made without charge to the transferor OR transferee except for stock transfer taxes levied by any governmental authority having jurisdication over such transfer. To the extent that all shares represented by a certificate are not transferred, a certificate representing the balance of the shares shall be issued to the transferor without charge. SECTION 8.04. REGISTERED SHAREHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and other distributions, and to vote as such owner, and to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. SECTION 8.05. LOST CERTIFICATES. In case any certificate representing shares shall be lost, stolen, or destroyed, the board of directors, or any officer or officers duly authorized by the board of directors, may authorize, without charge, except as hereinafter provided, the issuance of a substitute certificate in place of the certificate so lost, stolen, or destroyed, and may cause or authorize such substitute certificate to be countersigned by the appropriate Transfer Agent and registered by the appropriate Registrar. In each such case the applicant for a substitute certificate shall furnish to the corporation and to such of its Transfer Agents and Registrars as may require the same, evidence to their satisfaction, in their discretion, of the loss, theft, or destruction of such certificate and of the ownership thereof, and also such security or indemnity, at such applicant's sole cost and expense, as may by them be required. Article IX MISCELLANEOUS SECTION 9.01. FISCAL YEAR. The board of directors from time to time shall determine the fiscal year of the corporation. SECTION 9.02. SIGNATURES ON NEGOTIABLE INSTRUMENTS. All bills, notes, checks, or other instruments for the payment of money shall be signed or countersigned by such officers or agents and in such manner as from time to time may be 13 prescribed by resolution of the board of directors, or may be prescribed by any officer or officers, or any officer and agent jointly, duly authorized by the board of directors. SECTION 9.03. DIVIDENDS. Except as otherwise provided in the articles of incorporation, dividends upon the shares of the corporation may be declared and paid as permitted by law in such amounts as the board of directors may determine at any annual or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock of the corporation, subject to the articles of incorporation. SECTION 9.04. RESERVES. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the board of directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the board of directors deems conducive to the interest of the corporation; and in its discretion, the board of directors may decrease or abolish any such reserve. SECTION 9.05. SEAL. The board of directors shall provide a corporate seal which shall consist of two concentric circles between which shall be the name of the corporation and in the center of which shall be inscribed "SEAL". SECTION 9.06. CORPORATION OFFICES. The registered office of the corporation shall be as set forth in the articles of incorporation. The corporation may also have offices in such places as the board of directors may from time to time appoint or the business of the corporation require. Such offices may be outside the State of Michigan. 14 Article X AMENDMENTS SECTION 10.01. POWER TO AMEND. Except as otherwise specifically provided in the articles of incorporation, these bylaws may be amended, repealed, or adopted by vote of the holders of the number of shares possessing a majority of the voting power of all shares at the time entitled to vote (determined without regard to the second paragraph of Section 2.A. of Article III of the articles of incorporation) or by majority of the entire board of directors. Except as otherwise specifically provided in the articles of incorporation, any by-law adopted by the board of directors may be amended or repealed by shareholders entitled to vote thereon as herein provided, and any by-law adopted by the shareholders may be amended or repealed by the board of directors, except as limited by statute and except when the shareholders have expressly provided otherwise with respect to any particular by-law. Article XI ELECTION NOT TO BE GOVERNED BY CHAPTER 7B OF THE BUSINESS CORPORATION ACT The Corporation shall not be governed by, or be subject to, any of the terms, provisions or restrictions set forth in Chapter 7B of the Michigan Business Corporation Act (the "Act"), being Act No. 58 of the Public Acts of 1988, Michigan Compiled Laws Sections 790 through 799. This Article XI is intended to provide, as permitted in Section 794 of the Act, that said Chapter 7B of the Act shall not apply to any "control share acquisition," as defined in Chapter 7B of the Act, of shares of the Corporation. Reference is made to Article X of the Third Amended and Restated Articles of Incorporation. Pursuant to said Article X, for so long as there shall be shares of Class B Common Stock issued and outstanding, this Article XI of the by-laws shall not be amended, rescinded or repealed unless such action to amend, rescind or repeal is approved by the affirmative vote of the holders of a majority in voting power of the then issued and outstanding shares of Class A and Class B Common Stock voting as a single class. As provided in Article X of the Third Amended and Restated Articles of Incorporation, at such time as there shall be no shares of Class B Common Stock issued and outstanding, this Article XI may be amended, rescinded or repealed in any manner provided in Article X of these by-laws. 15 EX-10.(L) 3 EXHIBIT 10(L) AGREEMENT OF SALE AND PURCHASE BETWEEN THE BENENSON CAPITAL COMPANY, LAWRENCE A. BENENSON AND RAYMOND E. BENENSON SELLER AND YORK AVENUE DEVELOPMENT, INC. PURCHASER DATE: SEPTEMBER 9, 1999 PREMISES: 1334 YORK AVENUE NEW YORK, NEW YORK TABLE OF CONTENTS
ARTICLE I INCLUSIONS IN SALE AND EXCLUSIONS FROM SALE............1 ARTICLE 2 PURCHASE PRICE.........................................2 ARTICLE 3 REPRESENTATIONS AND WARRANTIES.........................3 ARTICLE 4 STATE OF TITLE OF PROPERTY.............................4 ARTICLE 5 TITLE INSURANCE AND ABILITY OF SELLER TO CONVEY........5 ARTICLE 6 CLOSING COSTS..........................................6 ARTICLE 7 INTENTIONALLY OMITTED..................................6 ARTICLE 8 INTENTIONALLY OMITTED..................................6 ARTICLE 9 ACKNOWLEDGMENTS OF PURCHASER; CONDITION OF PROPERTY..................................7 ARTICLE 10 OPERATIONS PRIOR TO CLOSING............................8 ARTICLE 11 CASUALTY AND EMINENT DOMAIN............................8 ARTICLE 12 INTENTIONALLY OMITTED..................................9 ARTICLE 13 CLOSING ADJUSTMENTS....................................9 ARTICLE 14 CLOSING DOCUMENTS; OBLIGATIONS OF PURCHASER AND SELLER AT CLOSING..................................9 ARTICLE 15 VIOLATIONS............................................11 ARTICLE 16 SALES TAX.............................................11 ARTICLE 17 UNPAID TAXES; LIENS OR ENCUMBRANCES...................12 ARTICLE 18 THE CLOSING...........................................12 ARTICLE 18A NOTICES...............................................13 ARTICLE 19 DEFAULTS; GUARANTY....................................14 ARTICLE 20 CONDITIONS; SURVIVAL..................................15 ARTICLE 21 SUCCESSORS AND ASSIGNS................................16 ARTICLE 22 BROKERS...............................................16 ARTICLE 23 ESCROW........................................17 ARTICLE 24 MISCELLANEOUS.................................18
EXHIBITS Schedule A - Description of the Land Schedule B - Permitted Encumbrances Schedule C - FIRPTA Certificates Schedule D - Guaranty of Sotheby's, Inc. AGREEMENT OF SALE AND PURCHASE (this "AGREEMENT") is made and entered into as of September __, 1999, by and between THE BENENSON CAPITAL COMPANY, a New York general partnership, having an office at 708 Third Avenue, 28th Floor, New York, New York 10017, LAWRENCE A. BENENSON, residing at 866 United Nations Plaza, New York, New York 10312 and RAYMOND E. BENENSON, residing at 1122 Ruffner Road, Niskayuna, New York 12309 (collectively "SELLER"), and YORK AVENUE DEVELOPMENT, INC., a New York corporation, having an office at 1334 York Avenue, New York, New York 10021 ("PURCHASER"). W I T N E S S E T H : Seller hereby agrees to sell and convey to Purchaser, and Purchaser hereby agrees to purchase from Seller, upon the terms and conditions hereinafter set forth, the land and the buildings known as and located at 1334 York Avenue, New York, New York (the "PROPERTY"). NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, and subject to the terms, provisions and conditions hereof, Seller and Purchaser hereby covenant and agree as follows: ARTICLE I INCLUSIONS IN SALE AND EXCLUSIONS FROM SALE 1.1 The term "PROPERTY" shall mean the following: 1.1.1 The land described on SCHEDULE "A" annexed hereto (the "LAND"). 1.1.2 The building, structures and improvements, together with the tenements, hereditaments and appurtenances thereto belonging or in any way appertaining, now erected or situate on the Land (collectively, the "BUILDING"). 1.1.3 All of Seller's right, title and interest, if any, in and to the fixtures, equipment, machinery and personal property used in connection with the operation of the Property and owned by Seller and not being the property of Tenant (as hereinafter defined) or any other party. 1.1.4 All right, title and interest of Seller, if any, in and to any land lying in the bed of any street, road or avenue, opened or proposed, in front of or adjoining the Land, to the center line thereof, and any strips and gores adjacent to the Land, and all right, title and interest of Seller, if any, in and to any award made or to be made in lieu thereof and in and to any unpaid award for damage to the Land and Building by reason of change of grade of any street. 1 1.1.5 All of Seller's interest, as lessor, in the lease between Seller, as lessor, and Sotheby Park Bernet, Inc ("TENANT"), as lessee, dated as of July 25, 1979 as the same may have been assigned and amended from time to time to date (the "LEASE"). 1.1.6 All right, title and interest of Seller, in and to any easements, rights-of-way, interests, appurtenances and other rights of any kind relating to or pertaining to the Land. ARTICLE 2 PURCHASE PRICE 2.1 PURCHASE PRICE. The purchase price for the Property to be paid by Purchaser to Seller shall be the amount of ELEVEN MILLION THREE HUNDRED SIXTY EIGHT THOUSAND AND 00/100 ($11,368,000.00) DOLLARS (the "PURCHASE PRICE"). 2.2 PAYMENT OF PURCHASE PRICE. Purchaser agrees to pay the Purchase Price to Seller as follows: 2.2.1 DEPOSIT. ONE MILLION ONE HUNDRED THIRTY-SIX THOUSAND EIGHT HUNDRED AND 00/100 ($1,136,800.00) DOLLARS (the "DEPOSIT") paid simultaneously herewith by wire transfer of immediate clearance Federal Reserve Funds (as such term is hereinafter defined in Section 2.2.2) to, at Seller's direction, the escrow account of Goldfarb & Fleece or to Chicago Deferred Exchange Corporation. The proceeds of the Deposit, and all interest accrued thereon, shall be held in escrow and shall be payable in accordance with Article 23 hereof. 2.2.2 PAYMENT AT CLOSING. TEN MILLION TWO HUNDRED THIRTY-ONE THOUSAND TWO HUNDRED AND 00/100 ($10,231,200.00) DOLLARS (the "CASH BALANCE") shall be paid by Purchaser to Seller at the Closing. The Cash Balance shall be paid by wire transfer of immediate clearance " Federal Reserve Funds" (as such term is hereinafter defined) to such account and bank or other institution as Seller may, in writing, designate, provided that Seller may designate on not less than one (1) business day's prior notice that the Cash Balance be wire transferred to not more than three (3) designated recipients. As used herein, the term "FEDERAL RESERVE FUNDS" shall be deemed to mean the receipt by a bank or banks or other institution in the continental United States designated by Seller of U.S. dollars in form that does not require further clearance, and may be applied at the direction of Seller by such recipient bank or banks or other institution on the day of receipt of advice that such funds have been wire transferred. The description of the manner in which such funds are to be transmitted, and the number of designated recipients thereof, shall apply with respect to the Cash Balance as well as to any other funds to be paid to Seller hereunder, including, but not limited to, any funds to be paid to Seller as a result of the adjustments to be made pursuant to Article 13 hereof. 2 ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATIONS OF SELLER. Seller hereby represents and warrants to Purchaser that the following facts and conditions exist on the date hereof. 3.1.1 THE LEASE. The Property is leased to Tenant pursuant to the Lease, which is in full force and effect. 3.1.2 NO FOREIGN PERSON. Seller is not a "foreign person" as such term is defined in Section 1445 of the Internal Revenue Code of 1954, as amended (the "CODE"). 3.2 AUTHORITY AND BINDING EFFECT; NO BREACH OR PROHIBITION. Each party hereto represents to the other that each person or entity executing this Agreement by or on behalf of the representing party has the authority to act on its behalf, has been or will be duly authorized to act on its behalf, and that the performance of this Agreement will not be in violation of its by-laws, charter, operating, partnership or trust agreement, or any law, ordinance, rule, regulation or order of any governmental body having jurisdiction, or the provisions of any agreements to which it is a party or by the terms of which it is bound, and, at the Closing, each party shall furnish to the other party and to the "Title Company" (as such term is defined in Section 5.1 hereof), reasonably satisfactory evidence of such authority and approval. 3.3 PURCHASER'S KNOWLEDGE; DISCLOSURE. To the extent that Purchaser has, subsequent to the date hereof, actual knowledge of any default or any misrepresentation or incorrect warranty of Seller made in this Agreement, Purchaser shall promptly notify Seller of same. Reference is made to Section 20.1 hereof with respect to the effect of Purchaser's knowledge of any misrepresentation or incorrect warranty at or before the Closing. 3.4 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES. Purchaser acknowledges that, except as expressly provided herein, neither Seller nor anyone acting for or on behalf of Seller has made any representation, warranty, or promise to Purchaser concerning (a) the physical aspects and conditions of the Property or any portion of the Property, (b) the feasibility or desirability of the purchase of the Property; (c) the market status, projected income from or development expenses of the Property; (d) the Property's compliance or non-compliance with any requirements of laws, or (e) any other matter whatsoever with respect to the Property (except as contained herein), express or implied, including, by way of description but not limitation, those of fitness for a particular purpose, tenantability, habitability and use; and that all matters concerning the Property are to be independently verified by Purchaser. Purchaser acknowledges that, except as otherwise expressly provided in this Agreement, it is purchasing the Property in its physical condition as of the Closing Date. 3 3.5 RIGHT TO ADJOURN CLOSING. Seller shall have the right to adjourn the Closing for up to sixty (60) days, for the purpose of curing any default, misrepresentation or incorrect warranty. ARTICLE 4 STATE OF TITLE OF PROPERTY 4.1 PERMITTED ENCUMBRANCES. Purchaser shall accept title to the Property subject to the following (the "PERMITTED ENCUMBRANCES"): 4.1.1 The matters set forth in SCHEDULE B attached hereto and made a part hereof. 4.1.2 In addition to the restrictive covenants referred to in SCHEDULE B, such other covenants, restrictions, easements and agreements of record, if any, affecting the Property, or any part thereof. 4.1.3 Any mechanic's lien or other lien which is the obligation of the Tenant under the Lease to bond or remove of record. 4.1.4 Any exception to coverage by the Title Company, other than a Permitted Encumbrance, provided that the Title Company insures same against collection out of or enforcement against the Property. 4.1.5 Any easement or right of use created in favor of any public utility company for electricity, steam, gas, telephone, water or other service, and the right to install, use, maintain, repair and replace wires, cables, terminal boxes, lines, service connections, poles, mains, facilities and the like, upon, under and across the Property. 4.1.6 The printed exceptions contained in the form of title insurance policy then issued by the Title Company which shall insure Purchaser's title. 4.1.7 Possible lack of right to maintain vaults, fences retaining walls, chutes, cornices and other installations encroaching beyond the property line and possible variance between the record description and the tax map. 4.1.8 Any state of facts an accurate survey or personal inspection of the Property would disclose. 4.1.9 Liens, encumbrances or any other matters created or suffered by Tenant including, but not limited to, those which are the obligation of Tenant to pay, discharge, remove or comply with. 4 4.1.10 Anything or matter arising, directly or indirectly, out of, under or in connection with the Lease and which is the obligation or responsibility of Tenant. ARTICLE 5 TITLE INSURANCE AND ABILITY OF SELLER TO CONVEY 5.1 TITLE INSURANCE. Seller shall give and Purchaser shall accept a title search as Chicago Title Insurance Company (the "TITLE COMPANY") will be willing to insure subject only to the matters provided for in this Agreement. Purchaser agrees to make, promptly after the signing hereof, application for a title insurance report directly from the Title Company. Purchaser shall deliver to Seller's attorneys, Goldfarb & Fleece, 345 Park Avenue, New York, New York 10154, Attention: Emanuel Lubin, Esq., not more than twenty (20) days from the date hereof, a copy of the title report issued by Title Company together with a written notice by Purchaser of any objections to title which are not Permitted Encumbrances and which Purchaser is unwilling to waive. In the event Seller is required or desires to remove any objection, but is unable to do so prior to the Closing Date, Purchaser hereby grants to Seller a reasonable adjournment of the Closing Date during which time Seller may attempt to remedy same for a period up to one hundred twenty (120) days. 5.2 TITLE OBJECTIONS. (i) If there are any liens, charges, easements, agreements of record, encumbrances or other objections to title (collectively, "TITLE OBJECTIONS"), other than (x) the Permitted Encumbrances or (y) Title Objections which Purchaser has waived or agreed to take title subject to, which are not waived in accordance with the provisions of Section 5.1 which were caused by, resulted from or arose out of a grant by Seller to any person or entity of a mortgage or other security interest affecting the Property, or the performance of work on behalf of Seller upon all or any portion of the Property, then Seller shall remove such Title Objections. If Seller fails to remove any Title Objection(s) in accordance with the provisions of the immediately preceding sentence, Purchaser, nevertheless, may elect (at or prior to Closing) to consummate the transaction provided for herein subject to any such Title Objection(s) as may exist as of the Closing Date, with a credit allocated against the Cash Balance payable at the Closing equal to the sum necessary to remove such Title Objection(s), provided, however, if Purchaser makes such election, Purchaser shall not be entitled to any other credit, nor shall Seller bear any further liability, with respect to any such Title Objections(s). If Purchaser shall not so elect, Purchaser may terminate this Agreement and (a) Seller's sole liability thereafter shall be to cause the Deposit, together with any interest earned thereon while in escrow, to be refunded to Purchaser, and, upon the return of the Deposit and any such interest, this Agreement shall be terminated and the parties hereto shall be relieved of all further obligations and liability under this Agreement, other than with respect to the provisions of this Agreement which expressly survive a termination of this Agreement and (b) such termination shall not otherwise affect the Lease or the Option Agreement dated July 25, 1979 between Seller as Optioner and 089 Nosidam Corp., as Optionee, as the same may have been heretofore assigned and amended from time to time to date (the "OPTION AGREEMENT"). 5 (ii)....If, at the time of the conveyance of the Property, the Property is affected by or subject to the lien of unpaid franchise taxes or New York City Corporation Business Taxes of any corporation or trust in the chain of title, Purchaser shall take title subject thereto, provided that the Title Company will insure against collection of such taxes out of the Property without the payment of any additional premium therefor by Purchaser. 5.3 NO FURTHER ACTION. Except as expressly set forth in Sections 5.1 and 5.2 hereof, nothing contained in this Agreement shall be deemed to require Seller to take or bring any action or proceeding or any other steps to remove any Title Objections, or to expend any moneys therefor, nor shall Purchaser have any right of action against Seller, at law or in equity, for Seller's inability to convey title in accordance with the terms of this Agreement. However, Seller agrees to discharge any lien imposed on the Property during the time Seller has owned the Property, which may be discharged by a liquidated ascertainable sum of money and which is not a Permitted Encumbrance. ARTICLE 6 CLOSING COSTS 6.1 PURCHASER'S OBLIGATIONS. Purchaser shall pay the costs of examination of title and any owner's policy of title insurance to be issued insuring Purchaser's title to the Property, as well as all other title charges, survey fees, mortgage recording tax, if applicable, and any and all other costs or expenses incident to the recordation of the Deed (as hereinafter defined). 6.2 SELLER'S OBLIGATIONS. Seller shall pay the following amounts payable in connection with the delivery of the Deed: (i) the amount imposed pursuant to Article 31 of the New York State Tax Law; and (ii) the amount due in connection with the Real Property Transfer Tax imposed by Title 11 of Chapter 21 of the Administrative Code of the City of New York. ARTICLE 7 INTENTIONALLY OMITTED ARTICLE 8 INTENTIONALLY OMITTED 6 ARTICLE 9 ACKNOWLEDGMENTS OF PURCHASER; CONDITION OF PROPERTY 9.1 ANALYSIS AND EVALUATION OF THE PROPERTY. Purchaser acknowledges that Purchaser has made its own analysis and evaluation of the Property, the operation, the income potential, profits and expenses thereof, its condition and all other matters affecting or relating to the transaction underlying this Agreement as Purchaser deemed necessary, including, without limitation, the layout, the Lease, square footage, rents, income, expenses and operation of the Property. In entering into this Agreement, Purchaser has not been induced by, and has not relied upon any, representations, warranties, statements or covenants, express or implied, made by Seller or any agent, employee or other representative of Seller which are not expressly set forth in this Agreement. 9.2 NO EFFECT ON PURCHASER'S OBLIGATIONS. Purchaser further acknowledges that its covenants, agreements and obligations under this Agreement shall not be excused or modified by: (i) the business or financial condition of Tenant, (ii) the physical condition of the Building or personal property, or its fitness, merchantability or suitability for any use or purpose, (iii) rents, income or expenses of the Property, (iv) the compliance or non-compliance of the Property with any laws, codes, ordinances, rules or regulations of any Governmental Authority and any violations thereof existing or subsequently imposed, (v) the environmental condition of the Property or the Property's compliance or non-compliance with any laws, codes, ordinances, rules or regulations or any Governmental Authority relating to the presence, use, storage, handling or removal of any hazardous substances, (vi) the current or future use of the Property, including, but not limited to, the Property's use for commercial, retail, industrial or other purposes, (vii) the current or future real estate tax liability, assessment or valuation of the Property, (viii) the availability or nonavailability or any benefits conferred by Federal, state or municipal laws, whether for subsidiaries, special real estate treatment or other benefits of any kind, (ix) the availability or unavailability of any licenses, permits, approvals or certificates which may be required in connection with the operation of the Property, (x) the compliance or non-compliance of the Property, in its current zoning or a variance with respect to the Property's non-compliance, if any, with any zoning ordinances, except as herein specifically set forth, or (xi) the conformity of the use of the Property with any certificate of occupancy. 9.3 NO OTHER REPRESENTATIONS. Purchaser hereby expressly acknowledges that, except as expressly provided in Section 3.1, neither Seller nor anyone acting for or on behalf of Seller has made any representation, warranty, or promise to Purchaser concerning any of the foregoing, nor: (a) the physical aspect and condition of any portion of the Property; (b) the feasibility or desirability of the purchase of the Property; (c) the market status, projected income from or development expenses for the Property; or (d) any other matter whatsoever with respect to the Property (except as contained herein), express or implied, including by way of description, but not limitation, those of fitness for a particular purpose, tenantability, habitability and use, and that all matters concerning 7 the Property have been independently verified by Purchaser. Purchaser acknowledges and agrees to take the Property "as is", in its physical condition and state of repair as of the Closing Date. 9.4 OUTSIDE REPRESENTATIONS. Seller is not liable or bound in any manner by any verbal or written statements, representations, real estate "set-ups," offering memorandum or information pertaining to the Property or its physical condition, layout, the Lease, footage, rents, income, expenses, operation or any other matter or thing furnished by any agent, employee, servant, or any other person, unless specifically set forth in this Agreement. Purchaser hereby waives, to the extent permitted by law, any and all implied warranties. 9.5 ENVIRONMENTAL INVESTIGATION OF THE PROPERTY. Purchaser acknowledges that it has had an opportunity to conduct its own environmental investigation of the Property. Purchaser is aware of the environmental conditions affecting or related to the Property and Purchaser agrees to take the Property subject to such conditions. Purchaser agrees to assume all environmental costs and liabilities arising out of or in any way connected to the Property and the condition thereof. Purchaser agrees to indemnify Seller from any obligation to pay any such costs and liabilities and to indemnify and hold harmless Seller from and against any and all claims, demands, payments, losses, costs and expenses, including attorneys' fees, relating to any such investigation or condition as well as any such costs and liabilities. The provisions of this Section 9.5 shall survive the Closing. ARTICLE 10 OPERATIONS PRIOR TO CLOSING 10.1 CONTINUED OPERATION. Purchaser acknowledges that the Property is leased to Tenant pursuant to the Lease and, accordingly, Tenant, and not Seller, has control over and operates the Property. ARTICLE 11 CASUALTY AND EMINENT DOMAIN 11.1 CASUALTY. Restoration of any damage or destruction to the Property or any part thereof due to fire or other casualty shall not affect the Purchase Price or the Closing hereunder or any other rights or obligations of the parties under this Agreement. Provided Closing occurs, Seller agrees to deliver to Purchaser any proceeds of insurance actually received by Seller in connection with any such fire or casualty. 8 11.2 EMINENT DOMAIN. In the event of condemnation of the Property or any part thereof between the date hereof and the Closing Date, such condemnation shall not affect the Purchase Price or the Closing hereunder or any other rights or obligations of the parties under this Agreement, provided, however, so long as Closing occurs, Purchaser shall be entitled to any and all awards then or thereafter made in condemnation proceeding and Seller shall assign, or in the case of any award previously made, deliver to Purchaser at Closing, such award as may be made or all rights thereto. 11.3. SURVIVAL. This Article 11 shall survive the Closing and is intended to be an express provision to the contrary within the meaning of Section 5-1311 of the General Obligations Law. ARTICLE 12 INTENTIONALLY OMITTED ARTICLE 13 CLOSING ADJUSTMENTS 13.1 ADJUSTMENTS AND PRORATIONS. The following matters and items shall be apportioned or adjusted between the parties hereto at the closing of title to the Property pursuant to this Agreement (the "Closing"), as of 12:01. A.M. on the day of the Closing. 13.1.1 BASIC RENT. Basic Rent paid or payable by Tenant under the Lease shall be adjusted and prorated. 13.2. OTHER. Except as otherwise provided in this Agreement, the customs regarding title closings, as recommended by The Real Estate Board of New York, Inc., shall apply to all apportionments. ARTICLE 14 CLOSING DOCUMENTS; OBLIGATIONS OF PURCHASER AND SELLER AT CLOSING 9 14.1 SELLER'S OBLIGATION TO CLOSE. In the event of a default by Tenant under the Lease and the termination of the Lease as a result thereof prior to Closing, this Agreement shall immediately expire upon such termination of the Lease and, thereupon, the rights and privileges of Purchaser hereunder shall be null and void and Seller shall have no obligation of any kind or nature whatsoever to Purchaser hereunder except that, so long as (i) Purchaser is not otherwise in default of any of its obligations hereunder and (ii) Seller is not entitled to a refund of the Deposit and any interest thereon pursuant to any provision of this Agreement, the Deposit and any interest thereon shall be returned to Purchaser. Upon the return of the Deposit and any such interest, the parties hereto shall be relieved of all further obligations and liability under this Agreement other than with respect to provisions of this Agreement which expressly survive a termination of this Agreement including, but not limited to, the next succeeding sentence of this Section 14.1. At the request of Seller, Purchaser will execute and deliver to Seller a written statement, in recordable form, that this Agreement is null and void. 14.2 SELLER'S OBLIGATIONS AT CLOSING. On the Closing Date, Seller shall deliver or cause to be delivered to Purchaser the following: 14.2.1 A bargain and sale deed without covenant conveying title to the Property (which deed shall not contain the covenant required by Section 13 of the Lien Law) (the "Deed"). 14.2.2 A letter to Tenant advising Tenant of the change of ownership of the Property (the "Tenant Notice Letter"), and Purchaser agrees to deliver the Tenant Notice Letter to Tenant promptly after the Closing. 14.2.3 Evidence reasonably acceptable to the Title Company authorizing the consummation by Seller of the transaction contemplated by this Agreement, and the execution and delivery of documents on behalf of Seller. 14.2.4 The certificate with respect to FIRPTA compliance in the form of SCHEDULE C annexed hereto. 14.2.5 The New York City Department of Finance Real Property Transfer Tax Return (the "RPT Return") and the New York State Combined Real Estate Transfer Tax Return and Credit Line Mortgage Certificate (the "Form TP-584"). 14.2.6 A release of the Escrow Agent from its duties, if applicable, and direction to disburse the Deposit, together with interest thereon, to Seller. 14.2.7 Such other documents as may be reasonably and customarily required by the Title Company to consummate the transaction contemplated by this Agreement. 14.3 PURCHASER'S OBLIGATIONS AT CLOSING. Purchaser shall deliver or cause to be delivered to Seller on the Closing Date the following: 10 14.3.1 The Cash Balance. 14.3.2 Duplicate originals of the RPT Return, Form TP-584 and the Tenant Notice Letter. 14.3.3 Evidence reasonably acceptable to Seller and the Title Company authorizing the consummation by Purchaser of the transaction which is the subject of this Agreement, and the execution and delivery of documents on behalf of Purchaser. 14.3.4 A release of the Escrow Agent from its duties, if applicable, and direction to disburse the Deposit, together with interest thereon to, or as directed by, Seller. 14.3.5 Such other documents as may be reasonably and customarily required by the Title Company to consummate the transaction contemplated by this Agreement. ARTICLE 15 VIOLATIONS 15.1 Without limiting the generality of the provisions of this Article 15, Purchaser agrees to purchase the Property subject to any and all notes or notices of violations of law, ordinances, orders or requirements whatsoever noted in or issued by any federal, state, municipal or other governmental department, agency or bureau, or any other Governmental Authority having jurisdiction over the Property (individually, a "Violation", collectively, "Violations"), or any lien imposed in connection with any of the foregoing, or any condition or state of repair or disrepair or other matter or thing, whether or not noted, which, if noted, would result in a Violation being placed on the Property. Seller shall have no duty to remove or comply with or repair any condition, matter or thing, whether or not noted, which, if noted, would result in a Violation being placed on the Property. Seller shall have no duty to remove or comply with or repair any of the aforementioned Violations, liens or other conditions, and Purchaser shall accept the Property subject to all such Violations and liens, the existence of any conditions at the Property which would give rise to such Violations or liens, if any, and any governmental claims arising from the existence of such Violations and liens, in each case without any abatement of or credit against the Purchase Price. ARTICLE 16 SALES TAX 16.1 Although it is not anticipated by the parties that any sales tax shall be due and payable, Purchaser agrees that Purchaser shall pay any sales tax assessed in connection with the sale of the Property to Purchaser and save, defend, indemnify and hold Seller harmless from and against 11 any and all liability for any sales tax which may now or hereafter be imposed upon Seller or the Property with respect to the sale of any personal property. The parties hereto agree that no part of the Purchase Price is attributable to personal property. The provisions of this Section shall survive the Closing. ARTICLE 17 UNPAID TAXES; LIENS OR ENCUMBRANCES 17.1. Seller may use any portion of the Cash Balance to satisfy any liens or encumbrances which exist on the Closing Date which are not Permitted Encumbrances, provided that Seller delivers to Purchaser at Closing instruments in recordable form sufficient to satisfy such liens and encumbrances of record, together with the cost of recording or filing said instruments, or pay such sums or perform such acts as will enable the Title Company to insure Purchaser that such lien(s) will not be collected out of the Property, or deposit with Purchaser's attorneys reasonably sufficient funds to enable Purchaser's attorneys to obtain and record such instruments. 17.2. If Seller requests within a reasonable time prior to the Closing Date, Purchaser agrees to provide at the Closing separate certified checks or official cashier's checks, which in the aggregate equal the amount of the Cash Balance, in order to pay the amounts payable by Seller pursuant to Section 6.2 hereof. ARTICLE 18 THE CLOSING 18.1 THE CLOSING. The sale and purchase of the Property contemplated by the terms and conditions of this Agreement shall, subject to the provisions of this Agreement including, but not limited to, Section 14.1 hereof, be consummated at the Closing. 18.1.1 LOCATION AND DATE OF CLOSING. (a) The Closing shall occur on January 31, 2000 (the "Closing Date") and shall take place at the offices of Seller's attorneys, Goldfarb & Fleece, 345 Park Avenue, New York, New York at 10:00 A.M., on the Closing Date. (b) Seller shall have the right to extend the Closing Date to May 1, 2000 by notice given to Purchaser no later than January 21, 2000. (c) Provided Seller shall have extended the Closing Date pursuant to the provisions of subparagraph (b) hereof, Seller shall have the further right to again extend the Closing Date to July 31, 2000 by notice given to Purchaser no later than April 21, 2000. 12 (d) Notwithstanding the provisions of the preceding subparagraphs (a), (b), (c) and (d) hereof, Seller, shall have the right to accelerate the Closing Date to any date after the date which shall be thirty (30) days following the date of this Agreement by notice given to Purchaser at least fifteen (15) days prior to the date fixed in such notice. 18.1.2 DELIVERY OF DOCUMENTS. At the Closing, the closing documents referred to in Section 14.1 shall be delivered to Purchaser upon Seller's receipt of the payments provided for in Article 2, and the delivery of the documents referred to in Section 14.2. 18.2 BUSINESS DAY. For purposes of this Agreement, the term "Business Day" shall mean all days except Saturdays, Sundays, and all days observed by the Federal Government or New York State as legal holidays. ARTICLE 18A NOTICES 18.A.1 Except as otherwise provided in this Agreement, any and all notices, elections, demands, requests and responses permitted or required to be given pursuant to this Agreement shall be in writing, signed by the party giving the same or by its attorneys, and shall be deemed to have been duly given and effective upon being: (i) personally delivered with receipt for delivery; or (ii) deposited with a nationally recognized express overnight delivery service (e.g., Federal Express) for next Business Day delivery with receipt for delivery; or (iii) deposited in the United States mail, postage prepaid, certified with return receipt requested, to the other party at the address of such other party set forth below, or at such other address within the continental United States as may be designated by a notice of change of address and given in accordance herewith. The time period in which a response to any such notice, election, demand or request must be given shall commence on the date of receipt thereof. Personal delivery to a party or to any officer, partner, agent or employee of such party at said address shall be deemed given and received at the time delivered. Rejection or other refusal to accept, or inability to deliver because of changed address of which no notice has been received, shall also constitute receipt. Any such notice, election, demand, request or response shall be addressed to the respective parties as follows: (i) if to Seller, to The Benenson Capital Company, Lawrence A. Benenson and Raymond E. Benenson 708 Third Avenue, 28th Floor New York, New York10017 Attention: Richard Kessler with a copy by like manner to: 13 Goldfarb & Fleece 345 Park Avenue New York, New York 10154 Attention: Emanuel Lubin, Esq. (ii) if to Purchaser, to: York Avenue Development, Inc. 1334 York Avenue New York, New York 10021 Attention: Ms Karen S. Schuster with a copy by like manner to: Jones, Day, Reavis & Pogue 599 Lexington Avenue New York, New York 10022 Attention: Susanna S. Fodor, Esq. Any notice executed or received by Goldfarb & Fleece, Esqs., Attention: Emanuel Lubin, Esq., 345 Park Avenue, New York, New York 10154, Attorneys for Seller, or Jones, Day, Reavis & Pogue, Esqs., Attention: Susanna S. Fodor, Esq., Attorneys for Purchaser, shall have the same force and effect as though signed or received by the principal. ARTICLE 19 DEFAULTS; GUARANTY 19.1 PURCHASER'S DEFAULT. If Purchaser is in default after five (5) days written notice thereof from Seller of any of the terms or conditions of this Agreement on its part to be kept and performed or fails to accept title and pay the Cash Balance in accordance with this Agreement, (i) the Deposit, together with all interest accrued thereon, if any, shall be refunded to Seller, (ii) Seller may pursue against Purchaser an action or actions for specific performance and for such other relief, legal or equitable, as Seller deems appropriate, (iii) Purchaser shall be liable to Seller for any and all losses, costs, damages and expenses, including attorneys' fees, incurred by Seller and arising, directly or indirectly, out of, under or in connection with any such default or failure, and (iv) the Option Agreement shall thereupon be null and void and of no further force or effect, but such termination shall not otherwise affect the Lease. 19.2. GUARANTY. As a material inducement for Seller to enter into this Agreement, Purchaser will deliver to Seller, upon the execution hereof, a guaranty (the "Guaranty") of Sotheby's Holdings, Inc., a Michigan corporation (the "GUARANTOR") in the form annexed hereto as SCHEDULE D. 14 19.3 SELLER'S DEFAULT. Reference is hereby made to Sections 20.1 and 20.2 hereof for Purchaser's exclusive remedies in the event of a breach of representation or failure to perform any provision set forth in this Agreement on the part of Seller. If Seller shall default in the performance of its obligations hereunder, whether or not Purchaser shall have elected to accept title in accordance with the provisions of Section 5.2 hereof, then Purchaser's sole remedy shall be either to (i) terminate this Agreement and receive a refund of the Deposit together with any interest accrued thereon, together with the cost of title examination charged by the Title Company, without the issuance of a title insurance policy, or (ii) bring an action for specific performance of Seller's obligations under this Agreement, provided, however, that if Purchase shall not have commenced such action within a period of ninety (90) days following the date scheduled for Closing hereunder, Purchaser shall be deemed to have waived its right to proceed under this clause (ii) and shall be deemed instead to have elected the remedy provided for in clause (i) of this sentence. If Purchaser shall terminate this Agreement under subdivision (i) above, such termination shall not otherwise affect the Lease or the Option Agreement. ARTICLE 20 CONDITIONS; SURVIVAL 20.1 CONDITIONS. (a) If Purchaser has actual knowledge, or should have actual knowledge by inspection of the Property or of the public records at or before the Closing, that (i) any representation of Seller hereunder is untrue, as of the date represented, or (ii) Seller has failed to perform, observe or comply with any covenant, agreement or condition on Seller's part to be performed hereunder, Purchaser shall notify Seller of such within five (5) days after discovery by Purchaser. Purchaser's failure to so notify Seller shall be deemed to constitute Purchaser's waiver of same as a condition to Closing and otherwise. (b) In the event that (A) any of Seller's representations made in Section 3.1 are not true as of the date of this Agreement (and for the purposes hereof, a representation shall be untrue only if factually untrue and having a material and materially adverse business or legal impact on Purchaser), and (B) Purchaser has actual knowledge, or should have actual knowledge by inspection of the Property or of the public records at or before the Closing, that any of Seller's representations referred to in clause (A) of this sentence are untrue, then Purchaser's sole remedy shall be either to pursue the provisions of subdivision (i) or (ii) in Section 19.3 hereof. If Purchaser shall terminate this Agreement under subdivision (i) such termination shall not otherwise affect the Lease or the Option Agreement. 20.2 SURVIVAL. Except as specifically set forth to the contrary in this Agreement, none of the representations, warranties, covenants, indemnities, agreements, obligations or commitments made by Seller in this Agreement shall survive the Closing, the same being merged in the conveyance. 15 ARTICLE 21 SUCCESSORS AND ASSIGNS 21.1 ASSIGNMENT. Neither this Agreement nor any of the rights of Purchaser hereunder (nor the benefits of such rights) may be assigned, transferred or encumbered without Seller's prior written consent, which consent may be granted or denied in Seller's sole and absolute discretion, and any purported assignment, transfer or encumbrance without Seller's prior written consent shall be void. Notwithstanding the foregoing, Purchaser may assign this Agreement to any Affiliate of Purchaser as such term "Affiliate" is defined in Paragraph Third of the Option Agreement, provided that a duplicate original of such Assignment, executed and acknowledged by Purchaser and Assignee, which shall provide that Assignee shall agree to observe and perform all of the terms and provisions of this Agreement on the part of Purchaser to be observed and performed, shall be delivered to Seller, at least ten (10) business days prior to the Closing Date. ARTICLE 22 BROKERS 22.1 PURCHASER'S REPRESENTATION. Purchaser represents and warrants to Seller that it has not dealt with any broker, finder or consultant in connection with the transaction which is the subject of this Agreement. Purchaser further represents and warrants that in the event any claim is made against Seller for a broker's, finder's or consultant's commission or fee by anyone as a result of any acts or actions, claimed acts or actions of Purchaser or its representatives with respect to the within transaction, Purchaser, its heirs, successors and assigns do hereby agree to indemnify and hold Seller harmless from any and all loss, liability, cost, damage or expense with respect to such claims (including, without limitation, reasonable attorneys' fees and disbursements) without any charge or cost to Seller. This Section shall survive the Closing or earlier termination of this Agreement. 16 ARTICLE 23 ESCROW 23.1. DESIGNATION OF ESCROW AGENT. The parties hereto have mutually requested that Goldfarb & Fleece ("G&F"), to act as escrow agent (the "ESCROW AGENT") for the purpose of holding the Deposit in accordance with the terms of this Agreement. Purchaser recognizes that G&F represents Seller herein and, if it acts as Escrow Agent, has agreed to act as Escrow Agent as an accommodation to both parties hereto. Purchaser further acknowledges and agrees that in the event of any dispute between the parties to this Agreement, G&F shall be free to continue its representation of Seller with regard to these matters. 23.2. ESCROW OF DEPOSIT. The proceeds of the Deposit shall be held by the Escrow Agent until the Closing or sooner termination of this Agreement and Escrow Agent shall pay over the interest or income earned thereon, if any, to the party entitled to the ESCROW DEPOSIT (as hereinafter defined) and the party receiving such interest or income shall pay any income taxes due thereon. The proceeds of the Deposit are sometimes referred to herein as the "ESCROWED PROCEEDS" and the Escrowed Proceeds, together with any interest or income earned thereon, if any, are sometimes referred to herein as the "ESCROW DEPOSIT". In the event the Closing shall occur in accordance with the provisions of this Agreement, then, Seller and Purchaser shall deliver to Escrow Agent written instructions directing Escrow Agent to deliver the Escrow Deposit to Seller or an institution designated by Seller. If for any reason the Closing does not occur pursuant to the provisions of this Agreement and either party makes a written demand upon Escrow Agent, for payment of the Escrow Deposit, then Escrow Agent shall give written notice, in accordance with the provisions of this Agreement to the other party of such demand. If Escrow Agent does not receive a written objection from the other party to the proposed payment of the Escrow Deposit pursuant to the aforesaid demand within ten (10) days after the delivery of such notice by Escrow Agent, Escrow Agent is hereby authorized to make such payment in accordance with the aforesaid demand. If Escrow Agent receives written objection from the other party to the proposed payment of the Escrow Deposit pursuant to the aforesaid demand within such ten (10) day period or if for any other reason Escrow Agent in good faith shall elect not to make such payment, Escrow Agent shall continue to hold the Escrow Deposit until otherwise directed by written instructions from Seller and Purchaser or a final judgment or a court of competent jurisdiction. Escrow Agent, however, shall have the right at any time to deposit the Escrow Deposit with the clerk of any court of competent jurisdiction in the State of New York, and Escrow Agent shall give written notice of such deposit to Seller and Purchaser, and upon such deposit being made, Escrow Agent shall be discharged from all obligations and responsibilities hereunder. The parties acknowledge that Escrow Agent is acting solely as a stakeholder at their request and for their convenience, that Escrow Agent may act upon any writing believed by it in good faith to be genuine and to be signed and presented by the proper person and the Escrow Agent shall not be deemed to be the agent of either of the parties, and that Escrow Agent shall not be liable to either of the parties for any act or omission on its part unless taken or suffered in bad faith, in willful disregard of this contract or involving gross negligence. Escrow Agent shall have no duties or responsibilities except as set 17 forth herein. Escrow Agent shall not be bound by any modification of the Agreement unless the same is in writing and signed by Purchaser and Seller and if Escrow Agent's duties hereunder are affected, unless Escrow Agent shall have given prior written consent thereto. Seller and Purchaser shall jointly and severally indemnify and hold Escrow Agent harmless from and against all costs, claims and expenses, including reasonable attorneys' fees, incurred in connection with the performance of Escrow Agent's duties hereunder, except with respect to actions or omissions taken or suffered by Escrow Agent in bad faith, in willful disregard of this Agreement or involving gross negligence on the part of Escrow Agent. If the Escrow Deposit shall not earn any interest or income, or if no interest or income shall be paid thereon by reason of the withdrawal of proceeds, or part thereof, under the provisions of this Agreement or before interest shall be earned or credited, or during any period of reasonable delay in opening the account, Escrow Agent shall not be liable by reason thereof. ARTICLE 24 MISCELLANEOUS 24.1 TAX FREE EXCHANGE. Purchaser acknowledges that Seller or one or more of the parties comprising Seller may structure this transaction as a tax free exchange under IRC Section 1031 and agrees to execute such documents as such Seller may reasonably request in connection therewith. This provision shall survive Closing. 24.2 MERGER. This Agreement constitutes the entire understanding between the parties with respect to the transaction contemplated herein, and all prior or contemporaneous oral agreements, understandings, representations and statements are merged into this Agreement. Neither this Agreement nor any provisions hereof may be modified, amended, discharged or terminated except by an instrument in writing signed by the party against which the enforcement of such modification, amendment, discharge or termination is sought, and then only to the extent set forth in such instrument. Unless otherwise provided herein, no provision of this Agreement may be waived except by an instrument in writing signed by the party against which the enforcement of such waiver is sought. 24.3 HEADINGS. The Article, Section, Schedule and Exhibit headings used herein are for convenience only, and are not to be used in determining the meaning of this Agreement or any part hereof. 24.4 GOVERNING LAW. This Agreement and its interpretation and enforcement shall be governed by the laws of the State of New York without regard to conflict of law principles. 24.5 JURISDICTION. For the purposes of any suit, action or proceeding involving this Agreement, Seller and Purchaser hereby expressly submit to the jurisdiction of all federal and state courts sitting in the State of New York, and consent that any order, process, notice of motion or 18 other application to or by any such court, or a judge thereof, may be served within or without such court's jurisdiction by registered mail or by personal service, provided that a reasonable time for appearance is allowed, and Seller and Purchaser agree that such courts shall have the exclusive jurisdiction over any such suit, action or proceeding commenced by either or both of said parties. In furtherance of such agreement, Seller and Purchaser agree upon the request of the other party to discontinue (or agree to the discontinuance of) any such suit, action or proceeding pending in any other jurisdiction. 24.6 WAIVER OF VENUE AND INCONVENIENT FORUM CLAIMS. Seller and Purchaser hereby irrevocably waive any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any federal or state court sitting in the State of New York, and hereby further irrevocably waive any claim that any such suit, action or proceeding is brought in any inconvenient forum. 24.7 WAIVER OF JURY TRIAL. Each of the parties hereto waives, irrevocably and unconditionally, any and all right to trial by jury in any action brought on, under, or by virtue of, or relating in any way to this Agreement or the transactions contemplated hereby, or any of the documents executed in connection herewith, the Property, or any claims, defenses, rights of set-off or other actions pertaining hereto or to any of the foregoing. 24.8 SUCCESSORS AND ASSIGNS. This Agreement shall be binding on and inure to the benefit of the successors and permitted assigns of the parties hereto. 24.9 INVALID PROVISIONS. If any term or provision of this Agreement, or any part of any term or provision, or the application thereof to any person or circumstance shall to any extent be held invalid or unenforceable, the remainder of this Agreement or the application of such term or provision or remainder thereof to persons or circumstances other than those as to which it is held invalid and unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 24.10 SCHEDULES AND EXHIBITS. All Schedules and Exhibits which are annexed to this Agreement are a part of this Agreement and are incorporated herein by reference. 24.11 NO OTHER PARTIES. The provisions of this Agreement are for the sole benefit of the parties to this Agreement and their successors and permitted assigns, and shall not give rise to any rights by or on behalf of anyone other than such parties, and no party is intended to be a third party beneficiary hereof. No provisions of this Agreement, or of any of the documents and instruments executed in connection herewith, shall be construed as creating in any person or entity other than Purchaser and Seller and their permitted assigns any rights of any nature whatsoever. 24.12 INTERPRETATION. This Agreement shall be construed without regard to any presumption or other rule requiring construction against the party causing this Agreement to be drafted. 19 24.13 COUNTERPARTS; FAXED SIGNATURES. This Agreement may be executed in multiple counterparts, each of which shall, when executed, be deemed to be an original, and all of which when taken together shall constitute but one agreement. Each party may rely upon a faxed counterpart of this Agreement executed and delivered by the other party as if such counterpart were an original counterpart. 24.14 BINDING EFFECT. This Agreement shall not become a binding obligation upon Seller until the same has been fully executed by Purchaser and Seller, and until a fully executed original counterpart thereof has been delivered by Seller to Purchaser. 24.15 RECORDATION. Neither this Agreement, nor any other document related hereto, nor any memorandum thereof shall be recorded, and any such recording shall be void and of no force or effect. 24.16 LITIGATION FEES. In the event that any litigation arises under this Agreement, the prevailing party (which term shall mean the party which obtains substantially all of the relief sought by such party) shall be entitled to recover, as part of its judgment, reasonable attorneys' fees. 24.17 SINGULAR/PLURAL. The use of the singular shall be deemed to include the plural, and vice versa, whenever the context so requires. 24.18 SIGNATORIES OF SELLER. The individual executing this Agreement as a Trustee is acting solely in his capacity as trustee, and not in his individual capacity, and shall incur no personal liability on account of such execution. 20 IN WITNESS WHEREOF, the parties hereto have executed this Agreement of Sale and Purchase as of the date first above written. THE BENENSON CAPITAL COMPANY, a New York general partnership By: The Charles B. Benenson Family Trust, a partner By: /s/ Charles B. Benenson ------------------------------------------- Charles B. Benenson, Trustee /s/ Lawrence A. Benenson ------------------------------------------- Lawrence A. Benenson /s/ Raymond E. Benenson ------------------------------------------- Raymond E. Benenson , as Seller YORK AVENUE DEVELOPMENT, INC. By: /s/ William F. Ruprecht ------------------------------------------------ WILLIAM F. RUPRECHT, as Purchaser The undersigned, Escrow Agent, agrees to hold the proceeds of the Deposit in accordance with the provisions of Section 23.2. Goldfarb & Fleece By: /s/ Emmanuel Lubin ------------------------------------------- EMMANUEL LUBIN 21 SCHEDULE A ALL that certain plot, piece or parcel of land, situate, lying and being in the Borough of Manhattan, City, County and State of New York, bounded and described as follows: BEGINNING at the corner formed by the intersection of the easterly side of York Avenue (formerly Avenue A) and the southerly side of 72nd Street; running thence in a southerly direction along the easterly side of York Avenue 204 feet 4 inches to the corner formed by the intersection of the easterly side of York Avenue and the northerly side of 71st Street; running thence in an easterly direction along the northern side of 71st Street, 198 feet; thence in a northerly direction and parallel with York Avenue 204 feet 4 inches to the southerly side of 71st Street; and thence in a westerly direction along the southerly side of 72nd Street 198 feet to the point or place of BEGINNING. 22 SCHEDULE B 1. Consent by any former owner of the Property for the erection of any structure or structures on, under or above any street or streets on which the Property may abut. 2. Present and future zoning laws, ordinances, resolutions and regulations of the City of New York and all present and future ordinances, laws, regulations, requirements and orders of all departments, boards, bureaus, commissions, bodies and authorities of the federal, state or municipal governments now or hereafter having or acquiring jurisdiction of the Property and the use and improvement thereof. 3. Revocable nature of the right, if any, to maintain vaults, vault spaces, basement and subbasement spaces, areas, marquees or signs, beyond the building lines. 4. Violations of laws, ordinances, orders or requirements that might be disclosed by an examination and inspection or search of the Property by any federal, state or municipal department or authority having jurisdiction, as the same may exist on the Closing Date. 5. The condition and state of repair of the Property as the same may be on the Closing. 6. Restrictive covenants recorded in Liber 1199 of Conveyances, page 151. 7. The Lease as referenced in Memorandum of Lease dated as of July 25, 1979, recorded in Reel 490, Page 1477. 8. Any liens or encumbrances affecting Lessee's interest in the Lease. 9. Unpaid real estate taxes, assessments, water rates, sewer rents and charges, and governmental impositions, duties and charges of every kind or nature whatsoever, levied, assessed or imposed or a lien upon the Property. 10. Rights of subtenants and occupants under the Lease. 11. Section 4.1 of the Agreement of which this Schedule is a part. 12. The Option Agreement as referenced in Memorandum thereof recorded in Reel 556 Page 868. 13. Exchange Agreement between Seller and 089 Nosidam Corp. as the same may have been amended to date. 14. Exchange Agreements, between Seller and Purchaser and a Memorandum thereof recorded in Reel 1180, Page 1573 as the same may have been amended to date. SCHEDULE C CERTIFICATE OF NON-FOREIGN STATUS To inform _____________ _______________ ____________ ______ ___________ __________________________________________________________________ ("Transferee"), that withholding of tax under Section 1445 of the Internal Revenue Code of 1954, as amended ("Code") will not be required by, THE BENENSON CAPITAL COMPANY, a New York general partnership ("Transferor"), the undersigned hereby certifies the following on behalf of Transferor: 1. Transferor is not a foreign corporation, foreign partnership, foreign trust, estate or foreign person (as those terms are defined in the Code and the Income Tax Regulations promulgated thereunder); 2. Transferor's U.S. employer identification number is 13-6593262. Transferor understands that this certification may be disclosed to the Internal Revenue Service by Transferee and that any false statement contained herein could be punished by fine, imprisonment, or both. Under penalty of perjury I declare that I have examined this Certification and to the best of my knowledge and belief, it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of Transferor. THE BENENSON CAPITAL COMPANY, a New York general partnership By: The Charles B. Benenson Family Trust, a partner By:______________________________________ Charles B. Benenson, Trustee __________, 2000 SCHEDULE C-1 CERTIFICATE OF NON-FOREIGN STATUS To inform ___________________________________________________ ______________________________________________________________________________ ("Transferee"), that withholding of tax under Section 1445 of the Internal Revenue Code of 1954, as amended ("Code") will not be required by LAWRENCE A. BENENSON ("Transferor"), the undersigned hereby certifies the following on behalf of Transferor: 1. Transferor is not a foreign corporation, foreign partnership, foreign trust, estate or foreign person (as those terms are defined in the Code and the Income Tax Regulations promulgated thereunder); 2. Transferor's U.S. social security number is ###-##-####. Transferor understands that this certification may be disclosed to the Internal Revenue Service by Transferee and that any false statement contained herein could be punished by fine, imprisonment, or both. Under penalty of perjury I declare that I have examined this Certification and to the best of my knowledge and belief, it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of Transferor. ------------------------------------ Lawrence A. Benenson __________, 2000 SCHEDULE C-2 CERTIFICATE OF NON-FOREIGN STATUS To inform ___________________________________________________ ________________________________________________________________________________ ("Transferee"), that withholding of tax under Section 1445 of the Internal Revenue Code of 1954, as amended ("Code") will not be required by RAYMOND E. BENENSON("Transferor"), the undersigned hereby certifies the following on behalf of Transferor: 1. Transferor is not a foreign corporation, foreign partnership, foreign trust, estate or foreign person (as those terms are defined in the Code and the Income Tax Regulations promulgated thereunder); 2. Transferor's U.S. social security number is ###-##-####. Transferor understands that this certification may be disclosed to the Internal Revenue Service by Transferee and that any false statement contained herein could be punished by fine, imprisonment, or both. Under penalty of perjury I declare that I have examined this Certification and to the best of my knowledge and belief, it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of Transferor. ------------------------------------ Raymond E. Benenson __________, 2000 SCHEDULE C-3 SCHEDULE D GUARANTY KNOW ALL MEN BY THESE PRESENTS THAT WHEREAS: 1. The Benenson Capital Company, a New York general partnership, Lawrence A. Benenson and Raymond E. Benenson, (referred to collectively herein as "SELLER") having an office at 708 Third Avenue, New York, New York 10017, concurrently with the delivery of this instrument has entered into an Agreement of Sale and Purchase of even date herewith, with York Avenue Development, Inc. (referred to herein as "PURCHASER"), a New York corporation, having an office at 1334 York Avenue, New York, New York 10021, affecting premises known as and by the street number 1334 York Avenue in the Borough of Manhattan, City, County and State of New York, which aforesaid agreement is hereby incorporated in this instrument by reference (the aforesaid agreement is referred to herein as the "AGREEMENT" and the premises demised therein is referred to herein as the "PREMISES"); and 2. The undersigned, Sotheby's Holdings, Inc., a Michigan corporation (referred to herein as "GUARANTOR"), having an office at 1334 York Avenue, New York, New York 10021, is the indirect owner of all of the issued and outstanding stock of Purchaser; and 3. Guarantor acknowledges that Seller would not enter into the Agreement unless this Guaranty accompanied the execution and delivery of the Agreement. NOW, THEREFORE, in consideration of the execution and delivery of the Agreement by Seller and Purchaser, and of other good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged by Guarantor; FIRST: The undersigned Guarantor does hereby: 11 Covenant and agree with Seller that if Purchaser, its successors or assigns, shall default at any time in the payment of the Purchase Price or any part thereof or any other payments provided to be paid by Purchaser in the Agreement (collectively, the "Amounts"), or in the observance or performance of any of the terms, covenants or conditions of the Agreement on Purchaser's part to be observed or performed, and such defaults shall not be cured before the expiration of any applicable grace period, then Guarantor will, on not less than ten (10) days prior written notice, well and truly observe and perform said terms, covenants and conditions and pay to Seller the Amounts and any other charges payable by Purchaser under the Agreement, or any arrears thereof that may remain due to Seller, and all damages, including, but not limited to, any damages payable pursuant to the Agreement that may arise in consequence of Purchaser's insolvency or such default in the observance or performance of any of said terms, covenants or conditions; and 12 Covenant and agree with Seller that Guarantor may, at Seller's option, be joined in any action or proceeding commenced by Seller against Purchaser in connection with or based upon the Agreement or any term, covenant or condition thereof, and that recovery may be had against Guarantor in such action or proceeding or in any independent action or proceeding against Guarantor without Seller, or its assigns, first asserting, prosecuting or exhausting any remedy or claim against Purchaser, its successors or assigns; and 13 Covenant and agree with Seller that this Guaranty shall remain and continue in full force and effect notwithstanding any modifications or amendments of the Agreement; and 14 Covenant to indemnify and save Seller harmless of and from all cost, liability, damage and expense including, but not limited to, reasonable counsel fees, which may arise by reason of Purchaser's default under the Agreement and not cured before the expiration of any applicable grace period, or Purchaser's insolvency, or Guarantor's default hereunder; and 15 Covenant and agree with Seller that this Guaranty shall not be terminated, affected or impaired by reason of any action which Seller may take or fail to take against Purchaser or by reason of any waiver of, or failure to enforce, any of the rights or remedies reserved to Seller in the Agreement, or otherwise, provided, however, that Guarantor shall be entitled to the same defenses that may legally be asserted by Purchaser; and 2 16 Waive notice of the acceptance of this Guaranty and of any and all defaults by Purchaser in the payment of the Amounts, and of any and all defaults by Purchaser in the observance or performance of any of the terms, covenants or conditions of the Agreement on Purchaser's part to be observed or performed, and of any and all notices or demands which may be given by Seller to Purchaser, whether or not required to be given to Purchaser under the terms of the Agreement; and 17 Acknowledge that this Guaranty is a guarantee of payment and not of collection in respect to any obligations which may accrue to Seller from Purchaser under the provisions of the Agreement; and 18 Covenant to and agree with Seller that the validity hereunder shall in no way be terminated, affected or otherwise impaired by reason of any assignment or transfer of Purchaser's interest in the Agreement; and 19 Covenant to and agree with Seller that no failure to exercise and no delay in exercising, on the part of Seller, of any right, power or privilege under this Guaranty or at law shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other power or right. The rights and remedies provided in this Guaranty are cumulative and not exclusive of any rights or remedies provided by law. SECOND: The provisions of this Guaranty shall be binding upon said Guarantor, its successors and assigns and shall inure to the benefit of Seller, its successors and assigns, and shall not be deemed waived or modified unless specifically set forth in writing, executed by Seller and delivered to Guarantor. THIRD: Guarantor agrees that any bills, statements, notices, demands, requests or other communications given or required to be given to Guarantor under this Guaranty at Seller's election, shall be addressed to Guarantor at the above address, by certified mail, return receipt optional. FOURTH: The officer executing this Guaranty on behalf of the undersigned Guarantor represents to Seller that said officer has been duly authorized by the undersigned 3 Guarantor to execute and deliver this Guaranty on behalf of the undersigned Guarantor and that execution and delivery of this Guaranty is a proper and authorized act of the undersigned Guarantor and does not violate the Articles of Incorporation or the By-Laws of the undersigned Guarantor or the Laws of the State of New York. IN WITNESS WHEREOF, the undersigned Guarantor has signed and sealed this Guaranty this day of September, 1999. Sotheby's Holdings, Inc. By: ------------------------ 4 CERTIFICATE OF ACKNOWLEDGMENT STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the _____ day of _______________, in the year ___ before me, the undersigned, a Notary Public in and said State, personally appeared ____________________________________, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity (ies), and that by his/her/their signature (s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. -------------------------- Notary Public RE: PROPERTY: 1334 YORK AVENUE, NEW YORK CITY Sotheby's, Inc., Lessee ("Lessee") under the Lease ("Lease") described in Section 1.1.5 of the Agreement of Sale and Purchase dated __________, 1999 between THE BENENSON CAPITAL COMPANY, LAWRENCE A. BENENSON and RAYMOND E. BENENSON, as Seller, and YORK AVENUE DEVELOPMENT, INC., as Purchaser, does hereby waive Lessee's First Refusal Option on Sale contained in Section 57 of the Lease with reference to the sale and conveyance to Lessee of the fee of the property covered by said Lease. Dated: September __, 1999 SOTHEBY'S, INC. By: /s/ William F. Ruprecht ----------------------------------------- WILLIAM F. RUPRECHT EX-10.(M) 4 EXHIBIT 10(M) Exhibit 10(m) ASSIGNMENT AND ASSUMPTION OF AGREEMENT OF SALE AND PURCHASE THIS ASSIGNMENT AND ASSUMPTION OF AGREEMENT OF SALE AND PURCHASE made as of this 9th day of September, 1999 between YORK AVENUE DEVELOPMENT, INC., a New York Corporation, with an office at 1334 York Avenue, New York, New York 10021 (the "Assignor") and SOTHEBY'S, INC., a New York corporation, with offices at 1334 York Avenue, New York, New York 10021 (the "Assignee"). W I T N E S S E T H: WHEREAS, Assignor, as purchaser, entered into an Agreement of Sale and Purchase dated as of September 9, 1999 with The Benenson Capital Company, Lawrence A. Benenson and Raymond E. Benenson, as sellers, relating to the purchase of the property at 1334 York Avenue, New York, New York (the "Agreement"); NOW, THEREFORE, in consideration of the sum of One ($1.00) Dollar and other good and valuable consideration paid by Assignee to Assignor, the receipt and sufficiency whereof is hereby acknowledged by Assignor does hereby sell, assign and transfer unto Assignee all of Assignor's right, title and interest in and to the Agreement, including without limitation, all of the Assignor's right, title and interest in and to any down payment deposited with Seller's attorney in escrow in accordance with the Agreement. Assignee hereby accepts the assignment and assumes all the terms, covenants and conditions of the Agreement on Assignor's part to be performed. TO HAVE AND TO HOLD unto Assignee, its successors and assigns forever, subject to the terms of the Agreement. IN WITNESS WHEREOF, the undersigned have executed this Assignment and Assumption of Agreement of Sale and Purchase as of the date set forth above. ASSIGNOR: YORK AVENUE DEVELOPMENT, INC. By: /s/ William F. Ruprecht --------------------------- Name: William F. Ruprecht Title: ASSIGNEE: SOTHEBY'S, INC. By: /s/ William F. Ruprecht --------------------------- Name: William F. Ruprecht Title: EX-10.(N) 5 EXHIBIT 10(N) Exhibit 10(n) GUARANTY KNOW ALL MEN BY THESE PRESENTS THAT WHEREAS: 1. The Benenson Capital Company, a New York general partnership, Lawrence A. Benenson and Raymond E. Benenson, (referred to collectively herein as "SELLER") having an office at 708 Third Avenue, New York, New York 10017, concurrently with the delivery of this instrument has entered into an Agreement of Sale and Purchase of even date herewith, with York Avenue Development, Inc. (referred to herein as "PURCHASER"), a New York corporation, having an office at 1334 York Avenue, New York, New York 10021, affecting premises known as and by the street number 1334 York Avenue in the Borough of Manhattan, City, County and State of New York, which aforesaid agreement is hereby incorporated in this instrument by reference (the aforesaid agreement is referred to herein as the "AGREEMENT" and the premises demised therein is referred to herein as the "PREMISES"); and 2. The undersigned, Sotheby's Holdings, Inc., a Michigan corporation (referred to herein as "GUARANTOR"), having an office at 1334 York Avenue, New York, New York 10021, is the indirect owner of all of the issued and outstanding stock of Purchaser; and 3. Guarantor acknowledges that Seller would not enter into the Agreement unless this Guaranty accompanied the execution and delivery of the Agreement. NOW, THEREFORE, in consideration of the execution and delivery of the Agreement by Seller and Purchaser, and of other good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged by Guarantor; FIRST: The undersigned Guarantor does hereby: 11 Covenant and agree with Seller that if Purchaser, its successors or assigns, shall default at any time in the payment of the Purchase Price or any part thereof or any other payments provided to be paid by Purchaser in the Agreement (collectively, the "Amounts"), or in the observance or performance of any of the terms, covenants or conditions of the Agreement on Purchaser's part to be observed or performed, and such defaults shall not be cured before the expiration of any applicable grace period, then Guarantor will, on not less than ten (10) days prior written notice, well and truly observe and perform said terms, covenants and conditions and pay to Seller the Amounts and any other charges payable by Purchaser under the Agreement, or any arrears thereof that may remain due to Seller, and all damages, including, but not limited to, any damages payable pursuant to the Agreement that may arise in consequence of Purchaser's insolvency or such default in the observance or performance of any of said terms, covenants or conditions; and 12 Covenant and agree with Seller that Guarantor may, at Seller's option, be joined in any action or proceeding commenced by Seller against Purchaser in connection with or based upon the Agreement or any term, covenant or condition thereof, and that recovery may be had against Guarantor in such action or proceeding or in any independent action or proceeding against Guarantor without Seller, or its assigns, first asserting, prosecuting or exhausting any remedy or claim against Purchaser, its successors or assigns; and 13 Covenant and agree with Seller that this Guaranty shall remain and continue in full force and effect notwithstanding any modifications or amendments of the Agreement; and 14 Covenant to indemnify and save Seller harmless of and from all cost, liability, damage and expense including, but not limited to, reasonable counsel fees, which may arise by reason of Purchaser's default under the Agreement and not cured before the expiration of any applicable grace period, or Purchaser's insolvency, or Guarantor's default hereunder; and 15 Covenant and agree with Seller that this Guaranty shall not be terminated, affected or impaired by reason of any action which Seller may take or fail to take against Purchaser or by reason of any waiver of, or failure to enforce, any of the rights or remedies reserved to Seller in the Agreement, or otherwise, provided, however, that Guarantor shall be entitled to the same defenses that may legally be asserted by Purchaser; and 16 Waive notice of the acceptance of this Guaranty and of any and all defaults by Purchaser in the payment of the Amounts, and of any and all defaults by Purchaser in the observance or performance of any of the terms, covenants or conditions of the Agreement on Purchaser's part to be observed or performed, and of any and all notices or demands which may be given by Seller to Purchaser, whether or not required to be given to Purchaser under the terms of the Agreement; and 2 17 Acknowledge that this Guaranty is a guarantee of payment and not of collection in respect to any obligations which may accrue to Seller from Purchaser under the provisions of the Agreement; and 18 Covenant to and agree with Seller that the validity hereunder shall in no way be terminated, affected or otherwise impaired by reason of any assignment or transfer of Purchaser's interest in the Agreement; and 19 Covenant to and agree with Seller that no failure to exercise and no delay in exercising, on the part of Seller, of any right, power or privilege under this Guaranty or at law shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other power or right. The rights and remedies provided in this Guaranty are cumulative and not exclusive of any rights or remedies provided by law. SECOND: The provisions of this Guaranty shall be binding upon said Guarantor, its successors and assigns and shall inure to the benefit of Seller, its successors and assigns, and shall not be deemed waived or modified unless specifically set forth in writing, executed by Seller and delivered to Guarantor. THIRD: Guarantor agrees that any bills, statements, notices, demands, requests or other communications given or required to be given to Guarantor under this Guaranty at Seller's election, shall be addressed to Guarantor at the above address, by certified mail, return receipt optional. FOURTH: The officer executing this Guaranty on behalf of the undersigned Guarantor represents to Seller that said officer has been duly authorized by the undersigned Guarantor to execute and deliver this Guaranty on behalf of the undersigned Guarantor and that execution and delivery of this Guaranty is a proper and authorized act of the undersigned Guarantor and does not violate the Articles of Incorporation or the By-Laws of the undersigned Guarantor or the Laws of the State of New York. IN WITNESS WHEREOF, the undersigned Guarantor has signed and sealed this Guaranty this 9th day of September, 1999. 3 Sotheby's Holdings, Inc. By: /s/ William S. Sheridan ------------------------- William S. Sheridan 4 CERTIFICATE OF ACKNOWLEDGMENT STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the _____ day of _______________, in the year ___ before me, the undersigned, a Notary Public in and said State, personally appeared ____________________________________, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity (ies), and that by his/her/their signature (s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. Notary Public EX-10.(Z) 6 EXHIBIT 10(Z) EXHIBIT 10(z) ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT Dated as of March 10, 2000, Among SOTHEBY'S HOLDINGS, INC., SOTHEBY'S, INC., OATSHARE LIMITED, SOTHEBY'S, THE LENDERS NAMED HEREIN and THE CHASE MANHATTAN BANK as Administrative Agent, Collateral Agent and Issuing Bank ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms.............................................................................1 SECTION 1.02. Terms Generally..........................................................................16 ARTICLE II THE CREDITS SECTION 2.01. Commitments..............................................................................17 SECTION 2.02. Loans....................................................................................18 SECTION 2.03. Letters of Credit........................................................................19 SECTION 2.04. Standby Borrowing Procedure..............................................................23 SECTION 2.05. Refinancings.............................................................................23 SECTION 2.06. Fees.....................................................................................24 SECTION 2.07. Repayment of Loans.......................................................................25 SECTION 2.08. Interest on Loans........................................................................25 SECTION 2.09. Default Interest.........................................................................25 SECTION 2.10. Alternate Rate of Interest...............................................................26 SECTION 2.11. Termination and Reduction of Commitments.................................................26 SECTION 2.12. Prepayment...............................................................................26 SECTION 2.13. Reserve Requirements; Change in Circumstances............................................27 SECTION 2.14. Change in Legality.......................................................................28 SECTION 2.15. Indemnity................................................................................29 SECTION 2.16. Pro Rata Treatment.......................................................................30 SECTION 2.17. Sharing of Setoffs.......................................................................30 SECTION 2.18. Payments.................................................................................31 SECTION 2.19. Taxes....................................................................................31 SECTION 2.20. Assignment of Commitments Under Certain Circumstances...............................................................33 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01. Corporate Existence and Good Standing....................................................33 SECTION 3.02. Corporate Power, Authorization and Compliance with the Law.................................................................34 SECTION 3.03. Financial Information; Absence of Material Adverse Change...............................................................34 SECTION 3.04. Employee Benefit Plans...................................................................34 SECTION 3.05. Environmental Matters....................................................................35 SECTION 3.06. Litigation...............................................................................35 SECTION 3.07. Taxes....................................................................................35 SECTION 3.08. Subsidiaries.............................................................................35 SECTION 3.09. Investment Company Act...................................................................35 SECTION 3.10. No Material Misstatements................................................................35 SECTION 3.11. Federal Reserve Regulations..............................................................35 SECTION 3.12. Title to Properties......................................................................36 SECTION 3.13. Use of Proceeds..........................................................................36 SECTION 3.14. Security Documents.......................................................................36
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ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. Each Borrowing Date......................................................................37 SECTION 4.02. Initial Borrowing Date...................................................................37 ARTICLE V AFFIRMATIVE COVENANTS SECTION 5.01. Financial Statements.....................................................................38 SECTION 5.02. Payment of Obligations...................................................................39 SECTION 5.03. Maintain Property and Insurance..........................................................39 SECTION 5.04. Maintain Existence.......................................................................39 SECTION 5.05. Compliance with Laws.....................................................................40 SECTION 5.06. Inspection...............................................................................40 SECTION 5.07. ERISA....................................................................................40 SECTION 5.08. Collateral and Borrowing Base Evaluations................................................40 SECTION 5.09. Further Assurances.......................................................................40 SECTION 5.10. Art Loans................................................................................41 SECTION 5.11. York Avenue Property.....................................................................41 ARTICLE VI NEGATIVE COVENANTS SECTION 6.01. Liens....................................................................................42 SECTION 6.02. Subsidiary Indebtedness..................................................................43 SECTION 6.03. Consolidations, Mergers, and Sales of Assets.............................................43 SECTION 6.04. Lines of Business........................................................................44 SECTION 6.05. Transactions with Affiliates.............................................................44 SECTION 6.06. Restrictions on Dividends................................................................44 SECTION 6.07. Consolidated Leverage Ratio..............................................................44 SECTION 6.08. Adjusted Consolidated Net Worth..........................................................44 SECTION 6.09. Consolidated Coverage Ratio..............................................................44 SECTION 6.10. Restricted Payments; Certain Payments in Respect of Indebtedness......................................................44 SECTION 6.11. Art Loans................................................................................44 ARTICLE VII EVENTS OF DEFAULT.......................................................................................45 ARTICLE VIII THE AGENTS..............................................................................................48 ARTICLE IX GUARANTEE SECTION 9.01. Guarantee................................................................................50 SECTION 9.02. Obligations Unconditional................................................................50 SECTION 9.03. Reinstatement............................................................................51 SECTION 9.04. Subrogation..............................................................................51 SECTION 9.05. Remedies.................................................................................51 SECTION 9.06. Continuing Guarantee.....................................................................51
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ARTICLE X MISCELLANEOUS SECTION 10.01. Notices.................................................................................51 SECTION 10.02. Survival of Agreement...................................................................52 SECTION 10.03. Binding Effect..........................................................................52 SECTION 10.04. Successors and Assigns..................................................................52 SECTION 10.05. Expenses; Indemnity.....................................................................55 SECTION 10.06. Right of Setoff.........................................................................56 SECTION 10.07. Applicable Law..........................................................................56 SECTION 10.08. Waivers; Amendment......................................................................56 SECTION 10.09. Interest Rate Limitation................................................................56 SECTION 10.10. Entire Agreement........................................................................57 SECTION 10.11. Waiver of Jury Trial....................................................................57 SECTION 10.12. Severability............................................................................57 SECTION 10.13. Judgment Currency.......................................................................57 SECTION 10.14. Counterparts............................................................................58 SECTION 10.15. Headings................................................................................58 SECTION 10.16. Jurisdiction; Consent to Service of Process.............................................58 SECTION 10.17. Confidentiality.........................................................................59 SECTION 10.18. Release of Liens and Guarantees.........................................................59 Exhibit A-5 Form of Standby Borrowing Request Exhibit B Administrative Questionnaire Exhibit C Form of Assignment and Acceptance Exhibit D-1 Form of Opinion of Weil, Gotshal & Manges LLP Exhibit D-2 Form of Opinion of Freshfields Exhibit E Form of Perfection Certificate Exhibit F Form of Subsidiary Guarantee Agreement Schedule 1.01A Other Obligations Schedule 1.01B Specified Assets Schedule 2.01 Commitments Schedule 3.08 Subsidiaries Schedule 6.01 Liens
AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") dated as of March 10, 2000, among SOTHEBY'S HOLDINGS, INC., a Michigan corporation ("Holdings"), SOTHEBY'S, INC., a New York corporation, OATSHARE LIMITED, a company registered in England, and SOTHEBY'S, a company registered in England (each referred to individually as a "Borrower" and collectively as the "Borrowers"); the lenders listed in Schedule 2.01 hereto or subsequently becoming parties hereto as provided herein (the "Lenders"); and THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent (in such capacity, the "Administrative Agent") and as collateral agent (in such capacity, the "Collateral Agent") for the Lenders and as the issuing bank (in such capacity, the "Issuing Bank"). WHEREAS the parties hereto have previously entered into a Credit Agreement dated as of August 3, 1994 (the "Original Credit Agreement"); WHEREAS the Original Credit Agreement was amended and restated by the Amendment and Restatement dated as of July 11, 1996 (the "Existing Agreement"); WHEREAS the Borrowers have requested the Lenders and the Agent to amend and restate the Existing Agreement in the form of this Amended and Restated Credit Agreement and, upon the terms set forth herein, to extend credit to enable the Borrowers to borrow on a revolving credit basis on and after the date hereof and at any time and from time to time prior to the Maturity Date (as herein defined) a principal amount not in excess of $300,000,000 or an equivalent amount in Sterling at any time outstanding, subject to the Borrowing Base referred to herein. The proceeds of such borrowings are to be used for general corporate purposes including, without limitation, refinancing commercial paper or other borrowings and providing funds for capital expenditures and working capital. The Lenders are willing to enter into this Amended and Restated Credit Agreement and to extend such credit to the Borrowers on the terms and subject to the conditions herein set forth. Accordingly, the parties hereto agree as follows: ARTICLE I. DEFINITIONS SECTION 1.01. DEFINED TERMS. As used in this Agreement, the following terms shall have the meanings specified below: "ABR BORROWING" shall mean a Borrowing comprised of ABR Loans. "ABR LOAN" shall mean any Standby Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "ADJUSTED CONSOLIDATED NET WORTH" shall mean at any date Consolidated Net Worth at such date minus, to the extent not reflected in Consolidated Net Worth and without duplication, the aggregate amount of (a) all payments made by Holdings and the Subsidiaries in respect of 2 Litigation Liabilities, (b) all accounting reserves established by Holdings and the Subsidiaries in respect of anticipated Litigation Liabilities, (c) all amounts escrowed or otherwise segregated from the general assets of Holdings and the Subsidiaries to provide for Litigation Liabilities and (d) all amounts that Holdings and the Subsidiaries have become obligated to pay, but have not yet paid, pursuant to fines, judgments, settlements or agreements entered into in respect of Litigation Liabilities. "ADMINISTRATIVE FEES" shall have the meaning assigned to such term in Section 2.06(b). "ADMINISTRATIVE QUESTIONNAIRE" shall mean an Administrative Questionnaire in the form of Exhibit B hereto. "AFFILIATE" shall mean, as to any person, another person (other than a subsidiary of such first person) that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with such first person. "AGENTS" shall mean the Administrative Agent and the Collateral Agent. "ALTERNATE BASE RATE" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, "PRIME RATE" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as effective. "FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. "ALTERNATIVE CURRENCY" shall mean Sterling. "ALTERNATIVE CURRENCY BORROWING" shall mean a Borrowing comprised of Alternative Currency Loans. "ALTERNATIVE CURRENCY EQUIVALENT" shall mean, with respect to an amount of Dollars on any date in relation to the Alternative Currency, the amount of the Alternative Currency that may be purchased with such amount of Dollars at the Spot Exchange Rate with respect to Dollars on such date. 3 "ALTERNATIVE CURRENCY LOAN" shall mean any Loan denominated in the Alternative Currency. "APPLICABLE MARGIN" shall mean on any date, with respect to ABR Loans and Eurocurrency Loans, the applicable spreads set forth below based upon the ratings of S&P and Moody's applicable on such date to the senior, unsecured, non-credit enhanced long-term debt for borrowed money of Holdings (the "Index Debt"):
ABR EUROCURRENCY SPREAD LOAN SPREAD ------ ----------- CATEGORY 1 BBB/Baa2 0 1.00% - - CATEGORY 2 BBB-/Baa3 .50% 1.50% CATEGORY 3 BBB-/Baa3 1.00% 2.00%
PROVIDED, HOWEVER, that for the first six months following the date hereof, the Applicable Margins with respect to ABR Loans and Eurocurrency Loans shall not be less than those corresponding to Category 2 in the table above. For purposes of determining the Applicable Margin, (a) if S&P or Moody's shall not have in effect a rating for Index Debt because of an action (or failure to take action) on the part of Holdings or any Subsidiary, then such rating agency will be deemed to have established a rating for Index Debt in Category 3, (b) if the ratings established or deemed to have been established by S&P and Moody's shall fall within different Categories, the Applicable Margin shall be determined by reference to the ratings in the inferior (or numerically higher) Category; and (c) if any rating established or deemed to have been established by S&P or Moody's shall be changed (other than as a result of a change in the rating system of either S&P or Moody's), such change shall be effective as of the date on which such change is first announced by the rating agency making such change. Each change in the Applicable Margin shall apply to all Loans that are outstanding at any time during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If (a) the rating system of S&P or Moody's shall change, (b) any such rating agency shall cease to be in the business of rating corporate debt obligations or (c) any such rating agency shall otherwise cease to have in effect a rating for Index Debt (other than because of an action (or failure to take action) on the part of Holdings or any Subsidiary) then the Borrowers and the Lenders shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system or the non- availability of ratings from such rating agency, and pending any such amendment the Applicable Margin shall be determined by reference to the ratings in effect immediately prior to such change or cessation. "APPLICABLE PERCENTAGE" shall mean, with respect to any Lender at any time, the percentage of the Total Commitment represented by such Lender's Commitment at such time. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. 4 "ART LOANS" shall mean loans made by the Lending Subsidiaries to customers of Holdings and the Subsidiaries, to finance the purchase or carrying of, or in anticipation of the potential sale of, or secured by, works of art. "ASSIGNED DOLLAR VALUE" shall mean, in respect of any Borrowing, Letter of Credit or LC Disbursement denominated in the Alternative Currency, the Dollar Equivalent thereof determined based upon the applicable Spot Exchange Rate as of the Denomination Date for such Borrowing, Letter of Credit or LC Disbursement. "ASSIGNMENT AND ACCEPTANCE AGREEMENT" shall mean an assignment and acceptance agreement entered into by a Lender and an assignee, and accepted by the Administrative Agent and, where required, the Borrowers, in the form of Exhibit C or such other form as shall be approved by the Administrative Agent. "BOARD" shall mean the Board of Governors of the Federal Reserve System of the United States. "BORROWERS" shall mean Sotheby's Holdings, Inc., Sotheby's, Inc., Oatshare Limited and Sotheby's. "BORROWING" shall mean a group of Loans of a single Type made by the Lenders. "BORROWING BASE" shall mean, at any time, an amount equal to the sum of (a) the aggregate outstanding principal amount of all Art Loans that are (i) owned by Lending Subsidiaries that are Domestic Subsidiaries and (ii) subject to perfected, first priority pledges or security interests in favor of the Collateral Agent created under the Security Documents to secure the Obligations, as contemplated by the definition of "Collateral and Guarantee Requirement", (b) the lesser of (i) the aggregate outstanding principal amount of Borrowings of Oatshare Limited and Sotheby's and (ii) the aggregate outstanding principal amount of all Art Loans that are (A) owned by Sotheby's Financial Services Ltd. and (B) subject to perfected, first priority pledges or security interests in favor of the Collateral Agent created under the Security Documents to secure the Obligations of Oatshare Limited and Sotheby's, as contemplated by the definition of "Collateral and Guarantee Requirement", and (c) an amount equal to 15% of Consolidated Net Tangible Assets, it being understood that this clause (c) will be determined by reference to the most recent Borrowing Base Certificate. "BORROWING BASE CERTIFICATE" shall mean a certificate in a form approved by the Administrative Agent, together with all attachments contemplated thereby. "BORROWING REQUEST" shall mean a request by a Borrower for a Loan. "BUSINESS DAY" shall mean any day (other than a day which is a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City; PROVIDED, HOWEVER, that, when used in connection with a Eurocurrency Loan, the term "BUSINESS DAY" shall also exclude any day on which banks are not open for dealings in deposits in Dollars or Sterling, as the case may be, in the London interbank market. "CAPITAL LEASE OBLIGATIONS" of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal 5 property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. A "CHANGE IN CONTROL" shall be deemed to have occurred if (a) A. Alfred Taubman shall sell, transfer or otherwise dispose of shares of capital stock of Holdings and, following such sale, transfer or other disposition shall not beneficially own, directly or indirectly, shares of capital stock of Holdings representing more than 50% of the aggregate ordinary voting power represented by all the issued and outstanding capital stock of Holdings, unless the Lenders shall have been notified, at least 20 days prior to such sale, transfer or other disposition, of the identity of the intended transferee and the Required Lenders have delivered to Holdings a notice of their approval of such transferee; or (b) a majority of the seats (other than vacant seats) on the Board of Directors shall be occupied by persons other than Continuing Directors. "CLOSING DATE" shall mean the date of this Agreement. "CODE" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "COLLATERAL" shall mean any and all "Collateral", as defined in any applicable Security Document. "COLLATERAL AND GUARANTEE REQUIREMENT" shall mean, at any time, that the following requirements shall be satisfied at and as of such time: (i) a Subsidiary Guarantee Agreement (or a supplement thereto) shall have been executed by each Domestic Subsidiary existing at such time, other than any Borrower, shall have been delivered to the Collateral Agent and shall be in full force and effect; (ii) one or more Pledge Agreements (or supplements thereto) shall have been duly executed and delivered by Holdings, each Domestic Subsidiary existing at such time and Sotheby's Financial Services Ltd. and there shall have been duly and validly pledged to the Collateral Agent thereunder, for the ratable benefit of the holders of the Obligations (and the holders of the Senior Notes, to the extent required under the Senior Note Indenture after giving effect to baskets and exceptions provided for therein in a manner satisfactory to the Collateral Agent) (A) all the outstanding Equity Interests (other than Equity Interests in any Foreign Subsidiary) owned directly by Holdings or any Domestic Subsidiary, (B) 65% of the outstanding voting Equity Interests, and 100% of the outstanding non-voting Equity Interests (or, in each case, such lesser percentages as shall be owned by Holdings and the Domestic Subsidiaries) in each Foreign Subsidiary owned in whole or in part directly by Holdings or any Domestic Subsidiary, (C) all Art Loans and other Indebtedness owed to Holdings or any Domestic Subsidiary and (D) solely as security for the Obligations of Oatshare Limited and Sotheby's, all Art Loans 6 and other Indebtedness owed to Sotheby's Financial Services Ltd.; and all steps required under applicable law or reasonably requested by the Collateral Agent to ensure that the Pledge Agreements create valid, first priority, perfected Liens on all the Collateral subject thereto shall have been taken to the satisfaction of the Collateral Agent, it being understood that to the extent effective under applicable law, perfection on the Art Loans will be accomplished by means of filings under the Uniform Commercial Code or other applicable statutes, PROVIDED that if the Collateral Agent shall deliver to Holdings a notice stating that the Collateral Agent believes (x) that the financial condition of Holdings and the Subsidiaries has deteriorated and (y) that the interests of the Lenders would be more effectively protected if the Collateral Agent possessed the instruments evidencing the Art Loans, Holdings will cause each Lending Subsidiary promptly to deliver such instruments to the Collateral Agent, accompanied by undated instruments of transfer satisfactory to the Collateral Agent and executed in blank by the appropriate Lending Subsidiary; (iii) the Security Agreement (or supplements thereto) (and, with respect to any trademark, a Trademark Security Agreement) shall have been duly executed and delivered by Holdings and each Domestic Subsidiary existing at such time and there shall have been subjected to security interests in favor of the Collateral Agent thereunder, for the ratable benefit of the holders of the Obligations (and the holders of the Senior Notes, to the extent required under the Senior Note Indenture after giving effect to baskets and exceptions provided for therein in a manner satisfactory to the Collateral Agent), all the tangible and intangible assets of Holdings and each Domestic Subsidiary (including all Art Loans and other Indebtedness owed to Holdings or any Domestic Subsidiary) in which security interests can be created under the Uniform Commercial Code as in effect in the State of New York or other applicable law, and all documents and instruments, including UCC financing statements, required by law or reasonably requested by the Collateral Agent to be filed, registered or recorded to create and perfect the Liens intended to be created by the Security Agreement and the Trademark Security Agreement shall have been filed, registered or recorded (or arrangements satisfactory to the Collateral Agent for such filing, registration or recording shall have been made); (iv) the Collateral Agent shall have received (A) counterparts of a Mortgage with respect to each Mortgaged Property, duly executed and delivered by the record owner of such Mortgaged Property, (B) at the reasonable request of the Collateral Agent or the Required Lenders, in the case of each Mortgaged Property with a book or fair market value in excess of $1,000,000, a policy or policies of title insurance issued by a nationally recognized title insurance company insuring the Lien of each such Mortgage as a valid first Lien on the Mortgaged Property described therein, free of any other Liens except as expressly permitted by Section 6.01, together with endorsements, coinsurance and reinsurance, and (C) such surveys, abstracts, legal opinions and other documents as the Collateral Agent or the Required Lenders may reasonably request with respect to any such Mortgage or Mortgaged Property; 7 (v) the Indemnity, Subrogation and Contribution Agreement (or a supplement thereto) shall have been executed by Holdings and each Domestic Subsidiary party to the Guarantee Agreement or any Security Document, shall have been delivered to the Collateral Agent and shall be in full force and effect; and (vi) each Borrower shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of all Security Documents to which it is a party, the performance of its obligations thereunder and the creation by it of the Liens provided for therein. The foregoing definition shall not require the creation or perfection of pledges of or security interests in (a) the Specified Assets or (b) particular assets of Holdings and the Subsidiaries if and for so long as, in the judgment of the Administrative Agent with respect to this clause (b), the cost or effort to create or perfect such pledges or security interests in such assets, or the effort to do so, shall be excessive in view of the benefits to be obtained by the Lenders therefrom. The Administrative Agent may grant extensions of time for the perfection of security interests in or the obtaining of title insurance with respect to particular assets (including extensions beyond the Initial Borrowing Date for the perfection of security interests in assets of Holdings and the Subsidiaries on such date) where it determines that perfection cannot be accomplished without undue effort or expense by the time or times at which it would otherwise be required by this Agreement or the Security Documents. "COMMITMENT" shall mean, with respect to each Lender, the commitment of such Lender hereunder as set forth in Schedule 2.01 hereto, as such Lender's Commitment may be permanently terminated or reduced from time to time pursuant to Section 2.11. "COMMITMENT FEE PERCENTAGE" shall mean, on any date, the applicable percentage set forth below based upon the ratings of S&P and Moody's applicable on such date to the Index Debt:
COMMITMENT FEE PERCENTAGE ---------- CATEGORY 1 BBB/Baa2 .250% CATEGORY 2 BBB-/Baa3 .375% CATEGORY 3 BBB-/Baa3 .500%
PROVIDED, HOWEVER, that for the first six months following the date hereof, the Commitment Fee Percentage shall not be less than the percentage corresponding to Category 2 in the table above. For purposes of the foregoing, (a) if S&P or Moody's shall not have in effect a rating for Index Debt because of an action (or failure to take action) on the part of Holdings or any Subsidiary, then such rating agency will be deemed to have established a rating for Index Debt in Category 3; 8 (b) if the ratings established or deemed to have been established by S&P and Moody's shall fall within different Categories, the Commitment Fee Percentage shall be determined by reference to the rating in the inferior (or numerically higher) Category; and (c) if any rating established or deemed to have been established by S&P or Moody's shall be changed (other than as a result of a change in the rating system of S&P or Moody's), such change shall be effective as of the date on which such change is first announced by the rating agency making such change. Each change in the Commitment Fee Percentage shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If (a) the rating system of S&P or Moody's shall change, (b) any such rating agency shall cease to be in the business of rating corporate debt obligations or (c) any such rating agency shall otherwise cease to have in effect a rating for Index Debt (other than because of an action (or failure to take action) on the part of Holdings or any Subsidiary) then the Borrowers and the Lenders shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system or the non-availability of ratings from such rating agency, and pending any such amendment the Commitment Fee Percentage shall be determined by reference to the ratings in effect immediately prior to such change or cessation. "CONSOLIDATED COVERAGE RATIO" shall mean with respect to Holdings and its consolidated subsidiaries for any period, the ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Interest Expense for such period. "CONSOLIDATED EBITDA" with respect to Holdings and its consolidated subsidiaries for any period shall mean the sum of (a) Consolidated Net Income for such period, (b) Consolidated Interest Expense for such period, (c) all Federal, state, local and foreign income taxes deducted in determining such Consolidated Net Income and (d) depreciation, amortization and other non-cash charges deducted in determining such Consolidated Net Income. "CONSOLIDATED INTEREST EXPENSE" shall mean with respect to Holdings and its consolidated subsidiaries for any period, the consolidated gross interest expense of Holdings and its consolidated subsidiaries for such period, determined on a consolidated basis in accordance with GAAP consistently applied. "CONSOLIDATED LEVERAGE RATIO" shall mean, as to Holdings and its consolidated subsidiaries, the ratio of (a) the consolidated Indebtedness of Holdings and its consolidated subsidiaries to (b) the sum of the consolidated Indebtedness of Holdings and its consolidated subsidiaries and Consolidated Net Worth. "CONSOLIDATED NET INCOME" shall mean, for Holdings and its consolidated subsidiaries for any period, the aggregate net income (or net deficit) of such persons determined on a consolidated basis for such period, in accordance with GAAP on a basis consistent with that used in preparing the Financial Statements referred to in Section 3.03; PROVIDED, HOWEVER, that in computing "Consolidated Net Income", any extraordinary gains and losses and any non-recurring losses relating to the Litigation Liabilities shall be excluded. "CONSOLIDATED NET TANGIBLE ASSETS" shall mean the aggregate amount of assets (less applicable reserves and other properly deductible 9 items) after deducting therefrom (a) all current liabilities, and (b) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set forth on the books and records of Holdings and its consolidated subsidiaries and computed in accordance with GAAP. "CONSOLIDATED NET WORTH" shall mean at any date shareholders' equity, as shown on a consolidated balance sheet of Holdings and its Subsidiaries prepared in accordance with GAAP at such date. "CONSTRUCTION AND IMPROVEMENT AMOUNT" shall mean, at any time, the aggregate amount then or theretofore expended by Sotheby's, Inc. on the purchase price, cost of construction and cost of substantial improvements to the York Avenue Property. "CONTINUING DIRECTOR" shall mean any Director of Holdings that shall have been a Director on the Closing Date or shall have been nominated or appointed by a majority of the then Continuing Directors. "CONTROL" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms "CONTROLLING" and "CONTROLLED" shall have meanings correlative thereto. "DEFAULT" shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "DENOMINATION DATE" shall mean (a) in relation to any Alternative Currency Borrowing, the date that is three Business Days before the date such Borrowing is made, (b) in relation to any Letter of Credit denominated in the Alternate Currency, the most recent date that is (i) the date three Business Days before the date of issuance or renewal of such Letter of Credit (the "INITIAL VALUATION DATE") or (ii) a date corresponding to the Initial Valuation Date in the third, sixth or ninth month following the month in which the Initial Valuation Date shall have occurred and (c) in relation to any LC Disbursement, the Denomination Date applicable to the Letter of Credit under which such LC Disbursement shall have been made. "DESIGNATED DATE" shall mean, at any time, the date of the most recent borrowing hereunder (other than a Tranche B Borrowing) (a) prior to which the aggregate principal amount of the Loans outstanding hereunder (other than Tranche B Loans) and LC Exposures shall not have exceeded 15% of Consolidated Net Tangible Assets as of such date and (b) after which the aggregate principal amount of the Loans outstanding hereunder (other than Tranche B Loans) and LC Exposures shall have exceeded 15% of Consolidated Net Tangible Assets as of such date. "DOLLAR EQUIVALENT" shall mean, with respect to an amount of the Alternative Currency on any date, (A) for any Loan, the amount of Dollars that may be purchased with such amount of such Alternative Currency at the Spot Exchange Rate with respect to the Alternative Currency on such date and (B) for any Letter of Credit, the Dollar equivalent of the face amount of such Letter of Credit determined at the most recent of (i) the exchange rate at the date such Letter of Credit was issued and (ii) the exchange rate at the three month anniversary of such date. "DOLLARS" or "$" shall mean lawful money of the United States of America. 10 "DOMESTIC SUBSIDIARIES" shall mean all Subsidiaries incorporated or organized under the laws of the United States of America, any State thereof or the District of Columbia. "EQUITY INTERESTS" shall mean any shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a person, and any warrants, options or other rights to acquire any such equity ownership interests. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. "ERISA AFFILIATE" shall mean any trade or business (whether or not incorporated) that together with the Borrowers is treated as a single employer under Section 414 of the Code. "EUROCURRENCY BORROWING" shall mean a Borrowing comprised of Eurocurrency Loans. "EUROCURRENCY LOAN" shall mean any Eurocurrency Standby Loan. "EUROCURRENCY STANDBY BORROWING" shall mean a Standby Borrowing comprised of Eurocurrency Standby Loans. "EUROCURRENCY STANDBY LOAN" shall mean any Standby Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "EVENT OF DEFAULT" shall have the meaning assigned to such term in Article VII. "FEES" shall mean the Administrative Fees and the Commitment Fee. "FINANCIAL OFFICER" of any corporation shall mean the Chief Financial Officer, principal accounting officer, Treasurer or Controller of such corporation. "FOREIGN SUBSIDIARIES" shall mean all Subsidiaries other than Domestic Subsidiaries. "GAAP" shall mean United States generally accepted accounting principles, applied on a basis consistent with the financial statements referred to in Section 3.03. "GOVERNMENTAL AUTHORITY" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "GUARANTEE" of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as 11 to enable the primary obligor to pay such Indebtedness; PROVIDED, HOWEVER, that the term Guarantee shall not include endorsements for collection or deposit, or guarantees in the ordinary course of business including, without limitation, guarantees by the Borrowers to consignors of minimum prices in connection with sales of property. "GUARANTOR" shall mean the Borrowers in their capacity as guarantors under Section 9.01 except that Oatshare Limited and Sotheby's will not be Guarantors in respect of any obligations of Holdings and Sotheby's, Inc. "INDEBTEDNESS" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person upon which interest charges are customarily paid, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations of such person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances; PROVIDED, HOWEVER, that Indebtedness shall not include trade accounts payable in the ordinary course of business (whether or not any such trade accounts have terms providing a discount if paid within a certain time or an interest factor if not paid within a certain time), and for purposes of determining compliance with the financial covenants contained in Sections 6.02, 6.07 and 6.09, Indebtedness will not include the items referred to in (i) and (j) above. The Indebtedness of any person shall include the Indebtedness of any partnership in which such person is a general partner to the extent that the Indebtedness of such partnership is attributed to such person in accordance with GAAP. "INDEMNITY, SUBROGATION AND CONTRIBUTION AGREEMENT" shall mean an Indemnity, Subrogation and Contribution Agreement in form and substance satisfactory to Holdings and the Collateral Agent. "INDEX DEBT" shall have the meaning given such term in the definition of "Applicable Margin". "INITIAL BORROWING DATE" shall mean the date of the first borrowing hereunder after the date of this Agreement. "INTEREST PAYMENT DATE" shall mean, with respect to any Loan, the last day of each Interest Period applicable thereto and, in the case of a Eurocurrency Loan with an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date for such Loan had successive Interest Periods of three months' duration or 90 days duration, as the case may be, been applicable to such Loan and, in addition, the date of any refinancing of such Loan with a Loan of a different Type. 12 "INTEREST PERIOD" shall mean (a) as to any Eurocurrency Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the applicable Borrower may elect and (b) as to any ABR Borrowing, a period commencing on the date of such Loan and ending on the earlier of the next succeeding March 31, June 30, September 30 and December 31 or the date on which such Loan is repaid or prepaid; PROVIDED, HOWEVER, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of Eurocurrency Loans only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "ISSUING BANK" means The Chase Manhattan Bank, in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.03(i). The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such affiliate with respect to Letters of Credit issued by such affiliate. "LC DISBURSEMENT" means a payment made by the Issuing Bank pursuant to a Letter of Credit. "LC EXPOSURE" means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit denominated in Dollars at such time plus (b) the aggregate amount of all LC Disbursements denominated in Dollars that have not yet been reimbursed by or on behalf of the applicable Borrowers at such time plus (c) the sum of the Assigned Dollar Values of the undrawn amounts of all outstanding Letters of Credit denominated in the Alternative Currency at such time plus (d) the sum of the Assigned Dollar Values of all LC Disbursements denominated in the Alternative Currency that have not yet been reimbursed by or on behalf of the applicable Borrowers at such time. The LC Exposure of any Revolving Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time. "LENDING SUBSIDIARIES" shall mean Sotheby's Financial Services, Inc., Sotheby's Financial Services California, Inc., Oberon Inc., Theta Inc., Sotheby's Ventures LLC, Sotheby's Financial Services Limited and Sotheby's Aktiengesellschaft. "LETTER OF CREDIT" means any letter of credit issued pursuant to this Agreement. "LIBO RATE" shall mean, with respect to any Eurocurrency Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the rate at which deposits in the currency in which such Borrowing is denominated approximately equal in principal amount to the Loan of the Administrative Agent, in its capacity as a Lender (or, if the Administrative Agent is not a Lender in respect of such Borrowing, then the Loan of the Lender in respect of such Borrowing with the greatest Loan amount), included in such Eurocurrency Borrowing, and for a maturity comparable to such Interest Period are offered to the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, on the date that is two Business Days prior to the commencement of such Interest Period. 13 "LIEN" shall mean with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "LITIGATION LIABILITIES" shall mean liabilities (whether actual or asserted), claims, judgments, settlements and expenses resulting from (a) the antitrust investigation by the United States Department of Justice disclosed prior to the date hereof or related antitrust investigations by other Governmental Authorities, (b) antitrust litigation, whether commenced by Governmental Authorities or other persons, arising out of the matters that are the subject of any such investigation, (c) related shareholder derivative lawsuits and claims and (d) related securities lawsuits and claims. "LOAN" shall mean any Standby Loan. "LOAN DOCUMENTS" shall mean this Agreement, including all Exhibits and Schedules, and the Security Documents. "MARGIN STOCK" shall have the meaning given such term under Regulation U. "MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" shall mean a materially adverse change in, or a materially adverse effect on, the business, assets, operations or financial condition of Holdings and its Subsidiaries taken as a whole (other than any such change or effect resulting from the Litigation Liabilities to the extent no Default shall have resulted therefrom under Section 6.08 or any other provision of this Agreement). "MATERIAL SUBSIDIARY" shall mean at any time (a) each Subsidiary that is a Borrower and (b) any other Subsidiary that either (i) has a Subsidiary Net Worth at such time in excess of 2.5% of Consolidated Net Worth at such time or (ii) has consolidated assets in excess of 5% of the consolidated assets of Holdings and its consolidated subsidiaries at such time. "MATURITY DATE" shall mean July 11, 2001. "MOODY'S" shall mean Moody's Investors Service, Inc. "MORTGAGE" shall mean one or more mortgages or deeds of trust in form and substance satisfactory to Holdings and the Collateral Agent. "MORTGAGED PROPERTY" shall mean each parcel of real property owned by Holdings or any Domestic Subsidiary on the date hereof or at any time hereafter and the improvements thereto. "MULTIEMPLOYER PLAN" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which the Borrowers or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code Section 414) is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "OBLIGATIONS" shall mean (a) the due and punctual payment by 14 the Borrowers of the principal of and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, and (ii) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of Holdings and the Subsidiaries to the Lenders under this Agreement and the other Loan Documents, (b) the due and punctual payment and performance of all covenants, agreements, obligations and liabilities of the Borrowers, monetary or otherwise, under or pursuant to this Agreement and the other Loan Documents and (c) the due and punctual payment of all monetary obligations of Holdings and the Subsidiaries referred to in Schedule 1.01A hereto. "OBLIGATION CURRENCY" shall have the meaning assigned to such term in Section 10.13. "OTHER TAXES" shall have the meaning assigned to such term in Section 2.19(b). "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "PERFECTION CERTIFICATE" shall mean a perfection certificate in form and substance satisfactory to Holdings and the Collateral Agent, substantially in the form of Exhibit E hereto. "PERSON" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership, government (or any agency or political subdivision thereof) or other entity. "PLAN" shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code which is maintained for current or former employees, or any beneficiary thereof, of the Borrowers or any ERISA Affiliate. "PLEDGE AGREEMENTS" shall mean one or more pledge agreements in form and substance satisfactory to Holdings and the Collateral Agent. "REGISTER" shall have the meaning given such term in Section 10.04(d). "REGULATION D" shall mean Regulation D of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "REGULATION U" shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "REGULATION X" shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "REPORTABLE EVENT" shall mean any reportable event as defined in Section 4043(b) of ERISA or the regulations issued thereunder with respect to a Plan (other than a Plan maintained by an 15 ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code Section 414). "REQUIRED LENDERS" shall mean, at any time, Lenders having Commitments representing at least 51% of the Total Commitment or, after the Commitments shall have been terminated or for purposes of acceleration pursuant to paragraph (a) of Article VII, Lenders holding Loans and participations in LC Disbursements representing at least 51% of the aggregate principal amount of the Loans and LC Disbursements outstanding. For purposes of determining the Required Lenders, any Loans or LC Disbursements denominated in the Alternative Currency shall be translated into Dollars at the Spot Exchange Rate in effect on the applicable Denomination Date. "RESPONSIBLE OFFICER" of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "RESTRICTED PAYMENT" shall mean any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in Holdings or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancelation or termination of any Equity Interests in Holdings or any Subsidiary. "S&P" shall mean Standard and Poor's Ratings Group, a division of McGraw-Hill, Inc. "SCHEDULED INDEBTEDNESS" shall mean all Indebtedness incurred under the Existing Facility or listed on Schedule B. "SECURITY AGREEMENT" shall mean a Security Agreement in form and substance satisfactory to Holdings and the Collateral Agent. "SECURITY DOCUMENTS" shall mean the Security Agreement, the Pledge Agreements, the Trademark Security Agreement, the Mortgages and each other security agreement or other instrument or document executed and delivered pursuant to Section 5.09. "SENIOR NOTES" shall mean Holdings' 6-7/8% Notes due 2009 in an aggregate principal amount outstanding on the date hereof of $100,000,000. "SENIOR NOTE INDENTURE" shall mean the Indenture dated as of February 5, 1999, governing the Senior Notes, as amended, supplemented or otherwise modified from time to time. "SPECIFIED ASSETS" shall mean those assets listed on Schedule 1.01B. "SPOT EXCHANGE RATE" shall mean, on any day, (a) with respect to the Alternative Currency in relation to Dollars, the spot rate at which Dollars are offered on such day by The Chase Manhattan Bank in London for the Alternative Currency at approximately 11:00 a.m. (London time), and (b) with respect to Dollars in relation to the Alternative Currency, the spot rate at which the Alternative Currency is offered on such day by The Chase Manhattan Bank in London for Dollars at approximately 11:00 a.m. (London time). For purposes of determining the Spot Exchange Rate in connection with an Alternative Currency Borrowing, such Spot Exchange Rate shall be determined as of the Denomination Date for such Borrowing with respect to transactions in the Alternative 16 Currency that will settle on the date of such Borrowing. Each determination of a Spot Exchange Rate will be made by the Administrative Agent and will be conclusive absent manifest error. "STANDBY BORROWING" shall mean a borrowing consisting of simultaneous Standby Loans from each of the Lenders. "STANDBY BORROWING REQUEST" shall mean a request made pursuant to Section 2.04 in the form of Exhibit A-5. "STANDBY LOAN" shall mean a revolving loan made by a Lender pursuant to Section 2.04. Each Standby Loan shall be a Eurocurrency Standby Loan or an ABR Loan. "STANDBY LOAN EXPOSURE" shall mean, with respect to any Lender at any time, the sum of (a) the aggregate principal amount at such time of all outstanding Standby Loans of such Lender denominated in Dollars, plus (b) the Assigned Dollar Value at such time of the aggregate principal amount at such time of all outstanding Standby Loans of such Lender that are Alternative Currency Loans. "STATUTORY RESERVE RATE" shall mean, with respect to any currency, a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve, liquid asset or similar percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by any Governmental Authority of the United States or of the jurisdiction of such currency to which banks in such jurisdiction are subject for any category of deposits or liabilities customarily used to fund loans in such currency or by reference to which interest rates applicable to Loans in such currency are determined. Eurocurrency Loans shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under Regulation D or any other applicable law, rule or regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "STERLING" shall mean lawful money of the United Kingdom. "Subsidiary" shall mean, with respect to any person (herein referred to as the "parent"), any corporation, partnership, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, Controlled or held, or (b) which is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "SUBSIDIARY" shall mean any subsidiary of Holdings. "SUBSIDIARY GUARANTEE AGREEMENT" shall mean a guarantee agreement substantially in the form of Exhibit F hereto. "SUBSIDIARY NET WORTH" shall mean, as to any Subsidiary at any date, shareholder's equity of such Subsidiary and its consolidated subsidiaries at such date determined in accordance with GAAP. "TAXES" shall have the meaning assigned to such term in Section 2.19(a). "TOTAL COMMITMENT" shall mean, at any time, the aggregate 17 amount of the Commitments, as in effect at such time. "TRADEMARK SECURITY AGREEMENT" shall mean a Trademark Security Agreement in form and substance satisfactory to Holdings and the Collateral Agent. "TRANCHE A COMMITMENT" shall mean, with respect to each Lender at any time, a portion of such Lender's Commitment equal to such Lender's Applicable Percentage of an amount equal to 15% of Consolidated Net Tangible Assets as of the Designated Date. "TRANCHE A BORROWING" shall mean a Borrowing consisting of Tranche A Loans. "TRANCHE A LOAN" shall mean a Loan made pursuant to the Tranche A Commitment of any Lender. "TRANCHE B BORROWING" shall mean a Borrowing consisting of Tranche B Loans. "TRANCHE B LOAN" shall mean a Loan made pursuant to the requirements of Section 5.11. "TRANCHE B/C COMMITMENT" shall mean, with respect to each Lender at any time, a portion of such Lender's Commitment equal to the aggregate amount of such Lender's Commitment minus such Lender's Tranche A Commitment at such time. "TRANCHE C BORROWING" shall mean a Borrowing consisting of Tranche C Loans. "TRANCHE C LOAN" shall mean a Loan, other than a Tranche B Loan, made pursuant to the Tranche B/C Commitment of any Lender. "TRANSFEREE" shall have the meaning assigned to such term in Section 2.19(a). "TYPE", when used in respect of any Loan or Borrowing, shall refer to the rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined and the currency in which such Loan or the Loans comprising such Borrowings are denominated. For purposes hereof, the term "rate" shall include the LIBO Rate and the Alternate Base Rate, and the term "currency" shall include Dollars and the Alternative Currency. "WITHDRAWAL LIABILITY" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. "YORK AVENUE PROPERTY" shall mean the land, building and improvements located at 1334 York Avenue, New York, New York. "YORK AVENUE PURCHASE AGREEMENT" shall mean the Agreement of Sale and Purchase dated September 9, 1999, between The Benenson Capital Company, Lawrence A. Benenson and Raymond E. Benenson and York Avenue Development, Inc., and assigned by York Avenue Development, Inc., to Sotheby's, Inc. 18 SECTION 1.02. TERMS GENERALLY. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; PROVIDED, HOWEVER, that if the Borrowers notify the Administrative Agent that the Borrowers wish to amend any covenant in Article VI or any related definition to eliminate the effect of any change in GAAP occurring after the date of this Agreement on the operation of such covenant (or if the Administrative Agent notifies the Borrowers that the Required Lenders wish to amend Article VI or any related definition for such purpose), then the Borrowers' compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrowers and the Required Lenders. The phrase "the date of this Agreement" or "the date hereof", or words of similar effect, when used herein, shall mean the date of this Amended and Restated Credit Agreement. ARTICLE II. THE CREDITS SECTION 2.01. COMMITMENTS. (a) Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Standby Loans to the Borrowers, at any time and from time to time on and after the date hereof and until the earlier of the Maturity Date and the termination of the Commitment of such Lender in accordance with the terms hereof, in Dollars or the Alternative Currency (as specified in the Standby Borrowing Requests with respect thereto), in an aggregate principal amount at any time outstanding that will not result in such Lender's Standby Loan Exposure exceeding such Lender's Commitment, subject, however, to the conditions that (i) at no time shall the aggregate Standby Loan Exposures and LC Exposures of all the Lenders exceed the Total Commitment; (ii) at no time shall the aggregate Standby Loan Exposures and LC Exposures of all the Lenders exceed the Borrowing Base then in effect; and (iii) at all times the outstanding aggregate principal amount of all Standby Loans made by each Lender shall equal such Lender's Applicable Percentage of the outstanding aggregate principal amount of all Standby Loans. Each Standby Borrowing (other than a Tranche B Borrowing) shall be made pursuant to the Lenders' Tranche A Commitments to the extent of the amount of such Tranche A Commitments that shall remain unused and available at the time of such Borrowing, and each Tranche B Borrowing and any amount of any other Standby Borrowing in excess of the Tranche A Commitments available at the time of such Borrowing shall be made pursuant to the Lenders' Tranche B/C Commitments. Each Lender's Commitment is set forth opposite its name in Schedule 2.01. The Commitments may be terminated or reduced from time to time pursuant to Section 2.11. Within the foregoing limits, the Borrowers may borrow, pay or prepay and reborrow hereunder, on and after the date hereof and prior to the Maturity Date, subject to the terms, conditions and limitations set forth herein. (b) For purposes of paragraph (a) above, if the Dollar Equivalent of an outstanding Borrowing denominated in the Alternative Currency, determined by the Administrative Agent based upon the 19 applicable Spot Exchange Rate as of the date that is three Business Days before the end of the Interest Period with respect to such Borrowing, does not exceed by more than 5% the Assigned Dollar Value of such Borrowing, and if the entire amount of such Borrowing is to be refinanced with a new Borrowing of equivalent amount in the same currency and by the same Borrower, then such Borrowing shall continue to have the same Assigned Dollar Value as in effect prior to such refinancing. The Administrative Agent shall determine the applicable Spot Exchange Rate as of the date three Business Days before the end of an Interest Period with respect to a Borrowing denominated in the Alternative Currency and shall promptly notify the Borrower and the Lenders whether the Dollar Equivalent of such Borrowing exceeds by more than 5% the Assigned Dollar Value thereof. SECTION 2.02. LOANS. (a) Each Standby Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Commitments (and their respective Tranche A Commitments or Tranche B/C Commitments, as the case may be); PROVIDED, HOWEVER, that the failure of any Lender to make any Standby Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). The Standby Loans comprising any Borrowing shall be in (i) an aggregate principal amount or Assigned Dollar Value which is not less than $10,000,000 (or the Alternative Currency Equivalent of such amount in the case of an Alternative Currency Borrowing) and, except in the case of Alternative Currency Borrowing, an integral multiple of $1,000,000 or (ii) an aggregate principal amount equal to the remaining balance of the available Commitments (or the Alternative Currency Equivalent thereof in the case of an Alternative Currency Borrowing). (b) Each Standby Borrowing shall be comprised entirely of Eurocurrency Standby Loans or ABR Loans, as the Borrowers may request pursuant to Section 2.03 or 2.04, as applicable. Each Lender may at its option make any Eurocurrency Loan by causing any domestic or foreign branch or affiliate of such Lender to make such Loan; PROVIDED that any exercise of such option shall not affect the obligation of the applicable Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; PROVIDED, HOWEVER, that none of the Borrowers shall be entitled to request any Borrowing which, if made, would result in an aggregate of more than twenty separate Standby Borrowings being outstanding hereunder at any one time. For purposes of the foregoing, Borrowings having different Interest Periods or denominated in different currencies, regardless of whether they commence on the same date, shall be considered separate Borrowings. (c) Subject to Section 2.05, each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer to such account as the Administrative Agent may designate in federal funds (in the case of any Loan denominated in Dollars) or such other immediately available funds as may then be customary for the settlement of international transactions in Sterling not later than 12:00 (noon), New York City time, in the case of fundings to an account in New York City, or 11:00 a.m., local time, in the case of fundings to an account in another jurisdiction, and the Administrative Agent shall by 1:00 p.m., New York City time, in the case of fundings to an account in New York City, or 12:00 (noon), local time, in the case of fundings to an account in another jurisdiction, credit the amounts so received to an account designated by the applicable Borrower in the applicable Borrowing Request, which account must be in the country of the currency of the Loan (it being understood that the funding may be for the credit 20 of an account outside such country) or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. Standby Loans shall be made by the Lenders pro rata in accordance with Section 2.16. Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with this paragraph (c) and the Administrative Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount in the required currency. If the Administrative Agent shall have so made funds available then to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the applicable Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon in such currency, for each day from the date such amount is made available to the applicable Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, a rate determined by the Administrative Agent to represent its cost of overnight or short-term funds in the relevant currency (which determination shall be conclusive absent manifest error). If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (d) Notwithstanding any other provision of this Agreement, no Borrower shall be entitled to request any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. SECTION 2.03. LETTERS OF CREDIT. (a) GENERAL. Subject to the terms and conditions set forth herein, any Borrower may request the issuance of Letters of Credit denominated in dollars or in the Alternative Currency for its own account, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time after the date hereof and until the earlier of the Maturity Date and the termination of the Commitments in accordance with the terms hereof. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the applicable Borrower to, or entered into by the applicable Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. Letters of Credit will be issued solely to support obligations owed to persons that are Lenders as of the respective date of issuance of such Letters of Credit. (b) NOTICE OF ISSUANCE, AMENDMENT, RENEWAL, EXTENSION; CERTAIN CONDITIONS. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the applicable Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, 21 renewal or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Issuing Bank, the applicable Borrower also shall submit a letter of credit application on the Issuing Bank's standard form in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $50,000,000; (ii) the sum of the LC Exposure and the Standby Loan Exposure shall not exceed the Total Commitment; and (iii) the sum of the LC Exposure and the Standby Loan Exposure shall not exceed the Borrowing Base then in effect. (c) EXPIRATION DATE. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Maturity Date. (d) PARTICIPATIONS. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the applicable Borrower on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the applicable Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (e) REIMBURSEMENT. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the applicable Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 12:00 noon, New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 12:00 noon, New York City time, on (i) the Business Day that the applicable Borrower receives such notice, if such notice is received prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the Business Day immediately following the day that the applicable Borrower receives such notice, if such notice is not received prior to such time on the day of receipt. If the applicable Borrower fails to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the applicable Borrower in respect thereof and such Lender's Applicable 22 Percentage thereof. Promptly following receipt of such notice, each Lender shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the applicable Borrower, in the same manner as provided in Section 2.02(c) with respect to Loans made by such Lender (and Section 2.02(c) shall apply, MUTATIS MUTANDIS, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Lenders. Promptly following receipt by the Administrative Agent of any payment from the applicable Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing Bank as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement shall not constitute a Loan and shall not relieve the applicable Borrower of its obligation to reimburse such LC Disbursement. (f) OBLIGATIONS ABSOLUTE. The applicable Borrower's obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their affiliates, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; PROVIDED that the foregoing shall not be construed to excuse the Issuing Bank from liability to the applicable Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by such Borrower to the extent permitted by applicable law) suffered by such Borrower that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or wilful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. 23 (g) DISBURSEMENT PROCEDURES. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the applicable Borrower by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; PROVIDED that any failure to give or delay in giving such notice shall not relieve the applicable Borrower of its obligation to reimburse the Issuing Bank and the Lenders with respect to any such LC Disbursement. (h) INTERIM INTEREST. If the Issuing Bank shall make any LC Disbursement, then, unless the applicable Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the applicable Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Loans; PROVIDED that, if the applicable Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.09 shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment. (i) REPLACEMENT OF THE ISSUING BANK. The Issuing Bank may be replaced at any time by written agreement among Holdings, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the applicable Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.06. From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. (j) CASH COLLATERALIZATION. If any Event of Default shall occur and be continuing, on the Business Day that the applicable Borrower receives notice from the Administrative Agent or the Required Lenders demanding the deposit of cash collateral pursuant to this paragraph, the applicable Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon; PROVIDED that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (l) or (m) of Article VII. Each such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrowers under this Agreement. The Administrative Agent shall have exclusive dominion and control, 24 including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the applicable Borrower's risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the applicable Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Revolving Lenders with LC Exposure representing a majority in amount of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If any Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to such Borrower within three Business Days after all Events of Default have been cured or waived. SECTION 2.04. STANDBY BORROWING PROCEDURE. In order to request a Standby Borrowing, the applicable Borrower shall give telephonic notice to the Administrative Agent (confirmed by hand delivery or telecopy of a duly completed Standby Borrowing Request in the form of Exhibit A-5), (a) in the case of a Eurocurrency Standby Borrowing, not later than 11:00 noon, London time, three Business Days before a proposed borrowing and (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the Business Day of a proposed borrowing. Such notice shall be irrevocable and shall in each case specify (i) whether the Borrowing then being requested is to be a Eurocurrency Borrowing or an ABR Borrowing; (ii) the date of such Borrowing (which shall be a Business Day), (iii) the aggregate principal amount of such Borrowing, (iv) the currency of such Borrowing (which, in the case of an ABR Borrowing, shall be Dollars) and (v) if such Borrowing is to be a Eurocurrency Borrowing, the Interest Period with respect thereto. If no election as to the currency of Borrowing is specified in any Standby Borrowing Request, then the applicable Borrower shall be deemed to have requested a Borrowing in Dollars. If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing if denominated in Dollars or a Eurocurrency Borrowing if denominated in the Alternative Currency. If no Interest Period with respect to any Eurocurrency Borrowing is specified, then the applicable Borrower shall be deemed to have selected an Interest Period of one month's duration. If the applicable Borrower shall not have given notice in accordance with this Section 2.04 of its election to refinance a Standby Borrowing prior to the end of the Interest Period in effect for such Borrowing (or, if such Borrowing is a Eurocurrency Borrowing, the third Business Day prior to the end of such Interest Period), then such Borrower shall (unless such Borrowing is repaid at the end of such Interest Period) be deemed to have given notice of an election to refinance such Borrowing with an ABR Borrowing if denominated in Dollars or a Eurocurrency Borrowing in the same currency and with an Interest Period of one month if denominated in the Alternative Currency. The Administrative Agent shall promptly advise the Lenders of any notice given pursuant to this Section 2.04 (and the contents thereof), of each Lender's portion of the requested Borrowing and, in the case of an Alternative Currency Borrowing, of the Dollar Equivalent of the Alternative Currency amount specified in the applicable Borrowing Request and the Spot Exchange Rate utilized to determine such Dollar Equivalent. Subject to Section 2.01(b), if the Dollar Equivalent of a Lender's portion of any such Borrowing would exceed such Lender's remaining available Commitment, such availability to be determined by the Administrative Agent, then such Lender's portion 25 of such Borrowing shall be reduced to the Alternative Currency Equivalent of such Lender's remaining available Commitment. SECTION 2.05. REFINANCINGS. Each Borrower may refinance all or any part of any Standby Borrowing with a Standby Borrowing of the same or a different Type made pursuant to Section 2.04, subject to the conditions and limitations set forth herein and elsewhere in this Agreement. Any Borrowing or part thereof in a particular currency so refinanced shall be deemed to be repaid in accordance with Section 2.07 with the proceeds of a new Borrowing hereunder and the proceeds of the new Borrowing under the same currency, to the extent they do not exceed the principal amount of the Borrowing being refinanced, shall not be paid by the Lenders to the Administrative Agent or by the Administrative Agent to the applicable Borrower pursuant to Section 2.02(c); PROVIDED, HOWEVER, that in the case of any refinancing of a Borrowing with another Borrowing in the same currency, (i) if the principal amount extended by a Lender in a refinancing is greater than the principal amount extended by such Lender in the Borrowing being refinanced, then such Lender shall pay such difference to the Administrative Agent for distribution to the Lenders described in (ii) below, (ii) if the principal amount extended by a Lender in the Borrowing being refinanced is greater than the principal amount being extended by such Lender in the refinancing, the Administrative Agent shall return the difference to such Lender out of amounts received pursuant to (i) above, and (iii) to the extent any Lender fails to pay the Administrative Agent amounts due from it pursuant to (i) above, any Loan or portion thereof being refinanced with such amounts shall not be deemed repaid in accordance with Section 2.07 and shall be payable by the applicable Borrower. SECTION 2.06. FEES. (a) Holdings agrees to pay to each Lender, through the Administrative Agent, on each March 31, June 30, September 30 and December 31 and on the Maturity Date, a commitment fee (a "Commitment Fee") equal to the Commitment Fee Percentage of the daily average unused amount of the Commitment of such Lender (whether or not the conditions set forth in Section 4.01 shall have been satisfied), during the preceding quarter (or shorter period commencing with the date hereof or ending with the Maturity Date or any date on which the Commitment of such Lender shall be terminated). All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. The Commitment Fee due to each Lender shall commence to accrue on the date of this Agreement and shall cease to accrue on the earlier of the Maturity Date and the date on which the Commitment of such Lender shall have been terminated and the Loans of such Lender shall have been repaid. (b) Holdings agrees to pay the Administrative Agent, for its own account, such fees, and at such times, as have been separately agreed upon. (c) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as applicable, among the Lenders (and, if applicable, to the Issuing Bank with respect to Fees owed to it). Once paid, none of the Fees shall be refundable except in the case of errors. (d) Holdings agrees to pay (i) to the Administrative Agent for the account of each Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at the Applicable Margin used to determine interest on Eurocurrency Loans, on the average daily amount of such Lender's LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the date hereof to but excluding the later of the date on which such Lender's Commitment terminates and the date on 26 which such Lender ceases to have any LC Exposure, and (ii) to the Issuing Bank a fronting fee, which shall accrue at the rate or rates per annum separately agreed upon between Holdings and the Issuing Bank on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the date hereof to but excluding the later of the date of termination of the Revolving Commitments and the date on which there ceases to be any LC Exposure, as well as the Issuing Bank's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued through and including the last day of March, June, September and December of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date; PROVIDED that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.07. REPAYMENT OF LOANS. (a) The outstanding principal balance of each Loan made by each Lender to each Borrower shall be payable on the last day of the Interest Period applicable to such Loan and on the Maturity Date. Each Loan shall bear interest from the date of the Borrowing of which such Loan is a part on the outstanding principal balance thereof as set forth in Section 2.08. (b) Each Lender shall, and is hereby authorized by the Borrowers to, maintain, in accordance with its usual practice, records evidencing the indebtedness of each Borrower to such Lender hereunder from time to time, including the date, amount, currency and Type of and the Interest Period applicable to each Loan made by such Lender from time to time and the amounts of principal and interest paid to such Lender from time to time in respect of each such Loan. (c) The entries made in the records maintained pursuant to paragraph (b) of this Section 2.07 and in the Register maintained by the Administrative Agent pursuant to Section 10.04(d) shall be prima facie evidence of the existence and amounts of the obligations of each Borrower to which such entries relate; PROVIDED, HOWEVER, that the failure of any Lender or the Administrative Agent to maintain or to make any entry in such records or the Register, as applicable, or any error therein shall not in any manner affect the obligation of any Borrower to repay any Loans in accordance with the terms of this Agreement. SECTION 2.08. INTEREST ON LOANS. (a) Subject to the provisions of Section 2.09, the Eurocurrency Standby Loans comprising each Eurocurrency Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days), at a rate per annum equal to (i) the LIBO Rate for the Interest Period in effect for the Borrowing of which such Loan is part plus the Applicable Margin from time to time in effect multiplied by (ii) the Statutory Reserve Rate. (b) Subject to the provisions of Section 2.09, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as applicable, when determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin from time to time in 27 effect. (c) Interest on each Loan shall be payable in arrears on each Interest Payment Date applicable to such Loan except as otherwise provided in this Agreement. The applicable LIBO Rate or Alternate Base Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.09. DEFAULT INTEREST. If any Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, whether by scheduled maturity, notice of prepayment, acceleration or otherwise, such Borrower shall on demand from time to time from the Administrative Agent pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the Alternate Base Rate plus 2% per annum (or, in the case of the principal of any Loan, if higher, the rate of interest otherwise applicable, or most recently applicable, to such Loan hereunder plus 2% per annum). SECTION 2.10. ALTERNATE RATE OF INTEREST. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurocurrency Borrowing of any Type the Administrative Agent shall have determined that Dollar deposits or deposits in the Alternative Currency in which such Borrowing is to be denominated in the principal amounts of the Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such deposits are being offered will not adequately and fairly reflect the cost to any Lender of making or maintaining its Eurocurrency Loan during such Interest Period, or that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telecopy notice of such determination to the applicable Borrower and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the applicable Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, any request by a Borrower for a Eurocurrency Standby Borrowing of the affected Type or in the affected currency shall be deemed to be a request for an ABR Borrowing denominated in Dollars. Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error. SECTION 2.11. TERMINATION AND REDUCTION OF COMMITMENTS. (a) The Commitments shall be automatically terminated at the Administrative Agent's close of business in New York City on the Maturity Date. (b) Upon at least three Business Days' prior irrevocable written or telecopy notice to the Administrative Agent, Holdings (on behalf of all the Borrowers) may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Total Commitment; PROVIDED, HOWEVER, that (i) each partial reduction of the Total Commitment shall be in an integral multiple of $1,000,000 and in a minimum principal amount of $5,000,000 or if less, the remaining total Commitment and (ii) no such termination or reduction shall be made which would reduce the Total Commitment to an amount less than the aggregate outstanding principal amount of the Standby Loans. (c) Each reduction in the Total Commitment hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. Holdings shall pay to the Administrative Agent for the 28 account of the Lenders, on the date of each termination or reduction, the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to but not including the date of such termination or reduction. (d) Each reduction in the Total Commitment hereunder shall reduce the Lenders' Tranche B/C Commitments to the extent of the amount of such Tranche B/C Commitments that shall remain in effect at the time of such reduction, and thereafter shall reduce the Lenders' Tranche A Commitments. SECTION 2.12. PREPAYMENT. (a) Each Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon giving written or telecopy notice (or telephone notice promptly confirmed by written or telecopy notice) to the Administrative Agent: (i) in the case of Eurocurrency Loans no later than 12:00 noon, New York City time, three Business Days prior to prepayment and (ii) in the case of ABR Loans, no later than 11:00 a.m., New York City time, on the Business Day of the prepayment; PROVIDED, HOWEVER, that each partial prepayment shall be in an amount which is an integral multiple of $1,000,000 and not less than $5,000,000. (b) On the date of any termination or reduction of the Commitments pursuant to Section 2.11, the Borrowers shall pay or prepay so much of the Standby Borrowings as shall be necessary in order that the aggregate outstanding principal amount of all Loans will not exceed the Total Commitment after giving effect to such termination or reduction. (c) In the event and on each occasion that the sum of the aggregate outstanding principal amount of all Loans exceeds the Borrowing Base, the Borrowers shall prepay Borrowings in an aggregate amount equal to such excess. (d) Each notice of prepayment under this Section 2.12 shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the applicable Borrower to prepay such Borrowing (or portion thereof) by the amount stated therein on the date stated therein. All prepayments under this Section 2.12 shall be subject to Section 2.15 but otherwise without premium or penalty. (e) Each prepayment under this Section shall be applied first against the Lenders' Tranche C Loans to the extent of the amount of such Tranche C Loans that shall be outstanding at the time of such prepayment, second against the Lenders' Tranche A Loans to the extent of the amount of such Tranche A Loans that shall be outstanding at the time of such prepayment and thereafter against the Lenders' Tranche B Loans. SECTION 2.13. RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES. (a) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender (or any lending office of any Lender) or the Issuing Bank of the principal of or interest on any Eurocurrency Loan made by such Lender or any Letter of Credit or participation therein, or any Fees or other amounts payable hereunder (other than changes in respect of taxes imposed on the overall net income or capital stock of such Lender by the jurisdiction in which such Lender has its principal office or by any political subdivision or taxing authority therein), or shall impose, modify or deem applicable 29 any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender (or any lending office of such Lender) or the Issuing Bank, or shall impose on such Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or any Eurocurrency Loan made by such Lender or any Letter of Credit or participation therein, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurocurrency Loan or to increase the cost to such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then Holdings shall (or shall cause the Borrowers to) pay to such Lender or the Issuing Bank upon demand such additional amount or amounts as will compensate such Lender or the Issuing Bank for such additional costs incurred or reduction suffered. (b) If any Lender or the Issuing Bank shall have determined that any change after the date hereof in the applicability of any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basel Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date hereof of any other law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender's or the Issuing Bank's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans or Letters of Credit or participations therein made by such Lender or the Issuing Bank pursuant hereto to a level below that which such Lender, the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's and the Issuing Bank's policies and the policies of such Lender's and the Issuing Bank's holding company with respect to capital adequacy) by an amount deemed by such Lender or the Issuing Bank to be material, then from time to time Holdings shall (or shall cause the responsible Borrower to) pay to such Lender or the Issuing Bank such additional amount or amounts as will compensate such Lender, the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth such amount or amounts as shall be necessary to compensate such Lender or the Issuing Bank as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to Holdings and shall be conclusive absent manifest error. Holdings shall (or shall cause the responsible Borrower to) pay each Lender or the Issuing Bank the amount shown as due on any such certificate delivered by it within 10 days after the receipt of the same. (d) Except as provided below in this paragraph (d), failure on the part of any Lender or the Issuing Bank to demand compensation for 30 any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand compensation with respect to such period or any other period. The protection of this Section shall be available to each Lender and the Issuing Bank regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition which shall have occurred or been imposed. Neither the Issuing Bank nor any Lender shall be entitled to compensation under this Section 2.13 for any costs incurred or reductions suffered with respect to any date unless it shall have notified Holdings that it will demand compensation for such costs or reductions not more than 90 days after the later of (i) such date and (ii) the date on which it shall have become aware of such costs or reductions. SECTION 2.14. CHANGE IN LEGALITY. (a) Notwithstanding any other provision herein, if, after the date hereof, (i) any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurocurrency Loan or Alternative Currency Loan or to give effect to its obligations as contemplated hereby with respect to any Eurocurrency Loan or Alternative Currency Loan, or (ii) there shall have occurred any change in national or international financial, political or economic conditions (including the imposition of or any change in exchange controls) or currency exchange rates which would make it impracticable for any Lender to make Loans denominated in the Alternative Currency or to any Borrower, then, by written notice to the Borrowers and to the Administrative Agent, such Lender may: (i) declare that Eurocurrency Loans or Alternative Currency Loans (in the affected currency or to the affected Borrower), as the case may be, will not thereafter (for the duration of such unlawfulness or impracticability) be made by such Lender hereunder, whereupon any request by a Borrower for a Eurocurrency Standby Borrowing or Alternative Currency Borrowing (in the affected currency or to the affected Borrower), as the case may be, shall, as to such Lender only, be deemed a request for an ABR Loan or a Loan denominated in Dollars, as the case may be, unless such declaration shall be subsequently withdrawn (or, if a Loan to the requesting Borrower cannot be made for the reasons specified above, such request shall be deemed to have been withdrawn); and (ii) require that all outstanding Eurocurrency Loans or Alternative Currency Loans (in the affected currency or to the affected Borrower), as the case may be, made by it be converted to ABR Loans or Loans denominated in Dollars, as the case may be, in which event all such Eurocurrency Loans or Alternative Currency Loans (in the affected currency or to the affected Borrower) shall be automatically converted to ABR Loans or Loans denominated in Dollars, as the case may be, as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal which would otherwise have been applied to repay the Eurocurrency Loans or Alternative Currency Loans, as the case may be, that would have been made by such Lender or the converted Eurocurrency Loans or Alternative Currency Loans, as the case may be, of such Lender shall instead be applied to repay the ABR Loans or Loans denominated in Dollars, as the case may be, made by such Lender in lieu of, or resulting from the conversion of, such Eurocurrency Loans or Loans denominated in Dollars, as the case may be. 31 (b) For purposes of this Section 2.14, a notice to the Borrowers by any Lender shall be effective as to each Loan, if lawful, on the last day of the Interest Period currently applicable to such Loan; in all other cases such notice shall be effective on the date of receipt by the Borrowers. SECTION 2.15. INDEMNITY. The Borrowers agree to indemnify each Lender against any actual loss or expense which such Lender may sustain or incur as a consequence of (a) any failure by such Borrower to fulfill on the date of any borrowing hereunder the applicable conditions set forth in Article IV, (b) any failure by such Borrower to borrow or to refinance or continue any Loan hereunder after irrevocable notice of such borrowing, refinancing or continuation has been given or deemed given pursuant to Section 2.04, (c) any payment, prepayment, conversion or transfer of a Eurocurrency Loan required by any other provision of this Agreement or otherwise made or deemed made on a date other than the last day of the Interest Period applicable thereto, (d) any default in payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise) or (e) the occurrence of any other Event of Default, including, in each such case, any actual loss or reasonable expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Loan or any part thereof as a Eurocurrency Loan. Such loss or reasonable expense shall include an amount equal to the excess, if any, as reasonably determined by such Lender, of (i) its cost of obtaining the funds for the Loan being paid, prepaid, converted, transferred or not borrowed (assumed to be the LIBO Rate) for the period from the date of such payment, prepayment, conversion, transfer or failure to borrow to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan which would have commenced on the date of such failure) over (ii) the amount of interest (as reasonably determined by such Lender) that would be realized by such Lender in reemploying the funds so paid, prepaid, converted, transferred or not borrowed for such period or Interest Period, as the case may be. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrowers and shall be conclusive absent manifest error. SECTION 2.16. PRO RATA TREATMENT. Except as required under Section 2.14, each Standby Borrowing, each payment or prepayment of principal of any Standby Borrowing, each payment of interest on the Standby Loans, each payment of the Commitment Fees, each payment constituting reimbursement of an LC Disbursement, each reduction of the Commitments and each refinancing of any Borrowing with a Standby Borrowing of any Type, shall be allocated pro rata among the Lenders in accordance with their respective Commitments (and their respective Tranche A Commitments or Tranche B Commitments, as the case may by) or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Standby Loans. Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing to the next higher or lower whole Dollar (or comparable unit of the Alternative Currency) amount. SECTION 2.17. SHARING OF SETOFFS. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against any Borrower, or pursuant to a secured claim under 32 Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Standby Loan or Standby Loans or reimbursement obligations in respect of any LC Disbursement as a result of which the unpaid principal portion of its Standby Loans or LC Disbursements shall be proportionately less than the unpaid principal portion of the Standby Loans or LC Disbursements of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Standby Loans and LC Disbursements of such other Lender, so that the aggregate unpaid principal amount of the Standby Loans and LC Disbursements and participations in the Standby Loans and LC Disbursements held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Standby Loans and LC Disbursements then outstanding as the principal amount of its Standby Loans and LC Disbursements prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Standby Loans and LC Disbursements outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; PROVIDED, HOWEVER, that, if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.17 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrowers expressly consent to the foregoing arrangements and agree that any Lender holding a participation in a Standby Loan or LC Disbursement deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by such Borrower to such Lender by reason thereof as fully as if such Lender had made a Standby Loan or LC Disbursement directly to such Borrower in the amount of such participation. SECTION 2.18. PAYMENTS. (a) Each Borrower shall make each payment (including principal of or interest on any Borrowing, reimbursements of LC Disbursements or any Fees or other amounts) hereunder and under each other Loan Document not later than 12:00 noon, local time at the place of payment, on the date when due in immediately available funds. Each such payment shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York. Each such payment (other than principal of and interest on Alternative Currency Loans, which shall be made in the Alternative Currency) shall be made in Dollars and each Alternative Currency payment should be made at the offices of the Administrative Agent at 125 London Wall, London, England EC2Y5AJ, or any other account that the Administrative Agent may designate. (b) Whenever any payment (including principal of or interest on any Borrowing, reimbursements of LC Disbursements or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.19. TAXES. (a) Each Borrower covenants and agrees that, whether or not any Loans are made by the Lenders or Letters of Credit are issued by the Issuing Bank hereunder: (i) all payments on account of the principal of and interest on the Loans, and all other amounts payable by each Borrower hereunder, to or for the account of the Lenders including, without 33 limitation, amounts payable under clause (ii) of this Section 2.19(a), shall be made without any setoff or counterclaim and free and clear of, and without reduction by reason of, all present and future income, stamp, documentary, registration, excise, property and other taxes and levies, deductions, charges, compulsory loans and withholdings whatsoever (other than income or franchise taxes imposed on the overall net income or capital stock of the Agent, the Issuing Bank or any Lender, including any transferee or assignee thereof ("Transferee"), by the taxing authority of the jurisdiction in which the Agent or such Lender, as applicable, has its principal lending office or under the laws of which the Agent, the Issuing Bank or such Lender, as applicable, is organized) and all interest, penalties or similar amounts with respect thereto, now or hereafter imposed, assessed, levied or collected by any country or any political subdivision or taxing authority thereof or therein or by any federation or association of or with which any country may be a member or associated or by any jurisdiction from which any payment hereunder is made or any taxing authority thereof or therein, on or in respect of this Agreement, the recording, registration, notarization or other formalization of any thereof, the enforcement thereof or the introduction thereof in any judicial proceedings, or on or in respect of any payments of principal, interest, premiums, charges, fees or other amounts made on, under or in respect of any thereof (hereinafter called "Taxes"), all of which will be paid by the appropriate Borrower, for its own account, prior to the date on which penalties attach thereto; (ii) the Borrowers shall indemnify the Agent, the Issuing Bank and Lenders against, and reimburse the Agent, the Issuing Bank and Lenders (or Transferees) on demand for, any Taxes and any loss, liability, claim or expense arising therefrom or with respect thereto including interest, penalties and reasonable legal fees and disbursements, which the Agent or the Issuing Bank may incur, whether or not such Taxes were correctly or legally asserted by the relevant taxing authority. A certificate as to the amount of such Tax, loss, liability, claim or expense prepared by the Agent or the Issuing Bank, absent manifest error, shall be final, conclusive and binding for all purposes. Such indemnification shall be made within 30 days after the date the Agent or the Issuing Bank makes a written demand therefor; (iii) in the event that a Borrower is required by applicable law, decree or regulation to deduct or withhold Taxes from any amounts payable on, under or in respect to this Agreement, such Borrower shall pay to the Agent, the Issuing Bank or the applicable Lenders, as the case may be, such additional amount(s) as may be required, after the deduction or withholding of Taxes (including any deduction or withholding of Taxes with respect to such additional amounts), to enable the Agent, the Issuing Bank or such Lender to receive from such Borrower an amount equal to the amount stated to be payable by such Borrower to the Agent, the Issuing Bank or such Lender under this Agreement; (iv) each Borrower shall furnish to the Agent the official tax receipts in respect of each payment of Taxes required under this Section 2.19(a) within 30 days after the date such payment is due pursuant to applicable law, and each Borrower shall promptly furnish to the Bank, at the Agent's request, any other information, documents and receipts that the Agent may, from time to time, reasonably require to establish to its reasonable satisfaction that full and timely payment has been made of all Taxes required to be paid under this Section 2.19(a); 34 (v) in the event that the payments by a Borrower become exempt from or not subject to Taxes, such Borrower will, upon the reasonable request of the Agent, furnish to the Agent either a certificate from each appropriate taxing authority or an opinion of counsel reasonably acceptable to the Agent, in either case stating that payments hereunder are exempt from or not subject to taxes; and (vi) if a Lender (or Transferee), the Issuing Bank or the Agent shall become aware that it is entitled to receive a refund in respect of Taxes as to which it has been indemnified by the Borrower, or with respect to which the Borrower has paid additional amounts, pursuant to this Section 2.19, it shall promptly notify the Borrower of the availability of such refund and shall, within 30 days after receipt of a request by the Borrower make a claim to the relevant taxing authority or other Governmental Authority for such refund at the Borrower's expense. If any Lender (or Transferee), the Issuing Bank or the Agent receives a refund (including pursuant to a claim for refund made pursuant to the preceding sentence) in respect of any Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.19, it shall promptly repay such refund (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.19 with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses of such Lender (or Transferee), the Issuing Bank or the Agent to the Borrower, PROVIDED that the Borrower, upon the request of such Lender (or Transferee) or the Agent, agrees to return such refund (plus penalties, interest or other charges) to such Lender (or Transferee), the Issuing Bank or the Agent in the event such Lender (or Transferee), the Issuing Bank or the Agent is required to repay such refund to the relevant taxing authority or other Governmental Authority. (vii) Any Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which a Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to Holdings (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by Holdings as will permit such payments to be made without withholding or at a reduced rate, provided that such Lender has received written notice from the Borrower advising it of the availability of such exemption or reduction and supplying all applicable documentation. (b) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations of each Borrower pursuant to this Section 2.19 shall survive the payment in full of the principal of and interest on the Loans. SECTION 2.20. ASSIGNMENT OF COMMITMENTS UNDER CERTAIN CIRCUMSTANCES. (a) Any Lender (or Transferee) claiming any additional amounts payable pursuant to Section 2.13 or Section 2.19 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by a Borrower or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts which may thereafter accrue and would not, in the judgment of such Lender (or Transferee), be otherwise 35 disadvantageous to such Lender (or Transferee). (b) In the event that any Lender shall have delivered a notice or certificate pursuant to Section 2.13 or 2.14, or a Borrower shall be required to make additional payments to any Lender under Section 2.19, Holdings shall have the right, at its own expense, upon notice to such Lender and the Administrative Agent, to require such Lender to transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 10.04) all its interests, rights and obligations under this Agreement to another financial institution approved by the Administrative Agent (which approval shall not be unreasonably withheld) which shall assume such obligations; PROVIDED that (i) no such assignment shall conflict with any law, rule or regulation or order of any Governmental Authority and (ii) the assignee shall pay to the affected Lender in immediately available funds on the date of such assignment the principal of and interest accrued to the date of payment on the Loans made by it hereunder and a Borrower shall pay to the affected Lender in immediately available funds on such date all other amounts accrued for its account or owed to it hereunder. ARTICLE III. REPRESENTATIONS AND WARRANTIES Holdings and each Borrower represents and warrants that: SECTION 3.01. CORPORATE EXISTENCE AND GOOD STANDING. Holdings and each of its Material Subsidiaries: (a) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals, necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify or to be in good standing could reasonably be expected to (either individually or in the aggregate) result in a Material Adverse Effect. SECTION 3.02. CORPORATE POWER, AUTHORIZATION AND COMPLIANCE WITH THE LAW. (a) The execution, delivery and performance by the Borrowers of this Agreement and by Holdings and the Subsidiaries of the other Loan Documents to which they are to be party are within their respective corporate powers, have been duly authorized by all necessary corporate action and will not violate any provision of law of or their articles of incorporation, by-laws or memoranda or articles of association, or result in the breach of or constitute a default under or require any consent under any indenture or other material agreement or instrument to which Holdings or any Subsidiary is a party or by which Holdings or any Subsidiary or its respective properties may be bound or affected, or cause any of its properties to become subject to any Lien; this Agreement constitutes the legal, valid and binding obligation of each Borrower, and each other Loan Document constitutes the legal, valid and binding obligation of Holdings and each Subsidiary (to the extent Holdings or such Subsidiary is party thereto) enforceable against such person in accordance with its terms. (b) The conduct by Holdings and its Subsidiaries of their respective businesses as they are presently operated does not violate any material provision of law or material rule or regulation of any Governmental Authority in a manner which, when taken together with all other such violations, could reasonably be expected to result in a 36 Materially Adverse Effect; and Holdings and its Subsidiaries have obtained all material consents and approvals of Governmental Authorities required to conduct their respective businesses as they are presently operated, except to the extent that failure to obtain any such consents or approvals could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.03. FINANCIAL INFORMATION; ABSENCE OF MATERIAL ADVERSE CHANGE. (a) The audited consolidated financial statements of Holdings and its Subsidiaries for the fiscal year ended December 31, 1998, certified by independent public accountants selected by Holdings, fairly present the financial condition of Holdings and its Subsidiaries at the date of such statements and the results of their respective operations for the fiscal year ended on said date, all in conformity with generally accepted accounting principles consistently applied. (b) The consolidating balance sheets by geographic region of Holdings and its Subsidiaries as of December 31, 1998, were prepared by management of Holdings in good faith. (c) Since December 31, 1998, there has occurred no Material Adverse Change (other than any change resulting from the Litigation Liabilities to the extent no Default shall have resulted therefrom under Section 6.08 or any other provision of this Agreement). SECTION 3.04. EMPLOYEE BENEFIT PLANS. Each of the Borrowers and its ERISA Affiliates are in compliance in all material respects with the applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder. No Reportable Event has occurred in respect of any Plan of any Borrower or any ERISA Affiliate. The present value of all benefit liabilities of all underfunded Plans (based on those assumptions used to fund each such Plan) did not, as of the last annual valuation dates applicable thereto, exceed by more than $5,000,000 the value of the assets of all such underfunded Plans. Neither the Borrowers nor any ERISA Affiliate have incurred any Withdrawal Liability that materially adversely affects the financial condition of any Borrower and its ERISA Affiliates taken as a whole. Neither the Borrowers nor any ERISA Affiliate have received any notification that any Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, where such reorganization or termination has resulted or can reasonably be expected to result in an increase in the contributions required to be made to such Plan that would materially and adversely affect the financial condition of any Borrower and its ERISA Affiliates taken as a whole. SECTION 3.05. ENVIRONMENTAL MATTERS. The Borrowers are aware of no events, conditions or circumstances involving environmental pollution or contamination or employee health or safety that could reasonably be expected to result in a Material Adverse Change. SECTION 3.06. LITIGATION. There are no suits, investigations or proceedings pending or, to the best of its knowledge, threatened, against or affecting Holdings or the Subsidiaries which call into question the validity of this Agreement or could reasonably be expected to result in a Material Adverse Effect (other than suits, investigations or proceedings referred to in the definition of "Litigation Liabilities" to the extent no Default shall have resulted therefrom under Section 6.08 or any other provision of this Agreement). SECTION 3.07. TAXES. Holdings and its Subsidiaries have filed all Federal and other material tax returns required to be filed 37 and paid all Federal and other material taxes due or assessed indicated thereon, including interest and penalties, except for taxes which are being contested in good faith and by applicable proceedings, and for which Holdings and its Subsidiaries have made adequate reserves on the books of Holdings and its Subsidiaries. SECTION 3.08. SUBSIDIARIES. Schedule 3.08, as the same shall be updated by Holdings from time to time by means of one or more notices delivered to the Administrative Agent, correctly sets forth the name of each Subsidiary of Holdings, its jurisdiction of incorporation and the percentage of each class of issued and outstanding capital stock owned by Holdings and any Subsidiary, respectively, if any; the corporations listed on Schedule 3.08 are the only Subsidiaries of Holdings as of the date of this Agreement. SECTION 3.09. INVESTMENT COMPANY ACT. Neither Holdings nor any of its Subsidiaries is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. SECTION 3.10. NO MATERIAL MISSTATEMENTS. No information, report, financial statement, exhibit or schedule furnished by or on behalf of any Borrower to the Administrative Agent or any Lender in connection with this Agreement or included herein or delivered pursuant hereto contained or contains any material misstatement of fact or omitted or omits any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, or are made, not misleading. SECTION 3.11. FEDERAL RESERVE REGULATIONS. (a) Neither Holdings, nor any of its Subsidiaries is engaged principally, or as one if its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (b) No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose, or (ii) for any purpose which entails a violation of, or which is inconsistent with, the provisions of the Regulations of the Board, including Regulation U or X. SECTION 3.12. TITLE TO PROPERTIES. Holdings and its Subsidiaries have good title in fee simple to, or valid and subsisting leasehold interests in, all their respective material real properties, and good title to all their respective material other properties, reflected on the financial statements of Holdings and its Subsidiaries referred to in Section 3.03 above, except for property disposed of in the ordinary course of business, and none of such properties or documents of title relating to such properties are subject to any Lien, except Liens for taxes not yet due and Liens which will not materially interfere with the occupation, use and enjoyment of Holdings and its Subsidiaries of such properties and assets in the normal course of business of Holdings and its Subsidiaries taken as a whole. SECTION 3.13. USE OF PROCEEDS. The Borrowers will use the proceeds of the Loans only for the purposes specified in the preamble to this Agreement. SECTION 3.14. SECURITY DOCUMENTS. (a) The Pledge Agreement will, when executed and delivered, be effective to create in favor of the Collateral Agent a legal, valid and enforceable security interest in 38 the Collateral (as defined therein), and when the Collateral is delivered to the Collateral Agent or the appropriate filings are made under the Uniform Commercial Code the Pledge Agreement will constitute a perfected first priority Lien on and security interest in all right, title and interest of each pledgor thereunder in and to such Collateral. (b) The Security Agreement will, when executed and delivered, be effective to create in favor of the Collateral Agent a legal, valid and enforceable security interest in the Collateral (as defined therein), and when financing statements in appropriate form are filed in the offices specified in the Perfection Certificate or other comparable actions are taken in foreign jurisdictions, the Security Agreement will constitute a perfected first priority Lien on and security interest in all right, title and interest of each grantor thereunder in and to such Collateral to the extent it can be perfected by such filing or such other actions, subject only to Liens existing on the date hereof and expressly permitted by Section 6.01. (c) When the Trademark Security Agreement is filed in the United States Patent and Trademark Office and the United States Copyright Office, the Trademark Security Agreement will constitute a perfected Lien on and security interest in all right, title and interest of the grantors thereunder in the Intellectual Property (as defined in the Security Agreement) that is registered in the United States. (d) The Mortgages will, when executed and delivered, be effective to create in favor of the Collateral Agent, legal, valid and enforceable Liens on all right, title and interest of the grantors thereunder in and to the Mortgaged Properties and the proceeds thereof, and when the Mortgages are filed in the offices specified in the Perfection Certificate, the Mortgages will constitute perfected first priority Liens on and security interests in all right, title and interest of such grantors in and to the Mortgaged Properties and the proceeds thereof, subject only to Liens existing on the date hereof and expressly permitted by Section 6.01. ARTICLE IV. CONDITIONS OF LENDING The obligations of the Lenders to make Loans hereunder and of the Issuing Bank to issue Letters of Credit are subject to the satisfaction of the following conditions: SECTION 4.01. EACH BORROWING DATE. On the date of each Borrowing, including each Borrowing in which Loans are refinanced with new Loans as contemplated by Section 2.05, or on the date of issuance of any Letter of Credit: (a) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.04. (b) The representations and warranties set forth in Article III hereof shall be true and correct in all material respects on and as of the date of such Borrowing with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) Each Borrower shall be in compliance with all the terms and provisions set forth herein and at the time of and immediately after such Borrowing no Event of Default or Default shall have occurred and be continuing. 39 (d) After giving effect to such Borrowing, the aggregate outstanding principal amount of all Loans shall not exceed the Borrowing Base. (e) The Collateral and Guarantee Requirement shall have been satisfied at all times on and after the Initial Borrowing Date. Each Borrowing shall be deemed to constitute a representation and warranty by each Borrower on the date of such Borrowing as to the matters specified in paragraphs (b), (c) and (d) of this Section 4.01. SECTION 4.02. INITIAL BORROWING DATE. On the Initial Borrowing Date: (a) The Administrative Agent shall have received the favorable written opinions of Weil, Gotshal & Manges LLP and Freshfields, counsel for the Borrowers, and Mr. Donaldson C. Pillsbury, General Counsel of Sotheby's Holdings, Inc. dated the Initial Borrowing Date and addressed to the Lenders, the Administrative Agent and the Issuing Bank to the effect set forth in Exhibits D-1 and D-2, respectively; the Borrowers hereby instruct such counsel to deliver such opinions to the Administrative Agent. (b) All legal matters incident to this Agreement and the borrowings hereunder shall be satisfactory to the Lenders and to Cravath, Swaine & Moore, counsel for the Administrative Agent. (c) The Administrative Agent shall have received such evidence as it shall reasonably have requested as to the power and authority of Holdings and each Subsidiary to enter into and perform its obligations under each Loan Document to which it is party and as to the due execution and delivery of each such Loan Document. (d) The Administrative Agent shall have received a certificate of Holdings, dated the Initial Borrowing Date and signed by a Financial Officer of Holdings, confirming compliance with the conditions precedent set forth in paragraphs (b), (c) and (d) of Section 4.01. (e) The Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Initial Borrowing Date. (f) The Administrative Agent shall have received a completed Borrowing Base Certificate dated as of a recent date and signed by a Financial Officer on behalf of Holdings. (g) The Collateral and Guarantee Requirement shall have been satisfied at or prior to the earlier of (i) the Initial Borrowing Date and (ii) March 10, 2000. (h) The Collateral Agent shall have received the results of such lien searches as it shall reasonably have requested, together with copies of the financing statements (or similar documents) disclosed by such searches, and accompanied by evidence 40 satisfactory to the Collateral Agent that the Liens indicated in any such financing statement (or similar document) are permitted under Section 6.01 or have been released. (i) The Collateral Agent shall have received a Perfection Certificate dated the Initial Borrowing Date and duly executed by a Financial Officer of Holdings. ARTICLE V. AFFIRMATIVE COVENANTS The Borrowers covenant and agree with each Lender that, so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any Fees or any other expenses or amounts payable under any Loan Document shall be unpaid, or any Letter of Credit shall remain in effect, unless the Required Lenders shall otherwise consent in writing, Holdings will, and will cause each of its Subsidiaries to: SECTION 5.01. FINANCIAL STATEMENTS. In the case of Holdings, furnish to the Agent and each Lender: (a) within 90 days after the end of each fiscal year, (i) a consolidated balance sheet at the end of such fiscal year and the related statements of income and operations and changes in financial position and of shareholder's equity for such year, all prepared in accordance with GAAP and audited by and accompanied by the opinion of Deloitte & Touche or other independent public accountants reasonably satisfactory to the Required Lenders and (ii) a consolidating balance sheet by geographic region; (b) within 60 days after the end of the first, second and third quarter of each fiscal year, a consolidated balance sheet (and a consolidating balance sheet by geographic region) at the end of such quarter and the related statement of income for such period, all prepared in accordance with GAAP and certified by the Financial Officer of Holdings; (c) (i) at the time of each delivery of financial statements pursuant to (a) or (b) above, a certificate signed by a Responsible Officer of Holdings stating whether or not Holdings and its Subsidiaries are in compliance with Article VI and setting forth in detail satisfactory to the Administrative Agent calculations of the amounts, ratios and baskets referred to in Sections 6.07, 6.08, 6.09 and 6.10, and (ii) within 45 days after the end of each calendar quarter, a completed Borrowing Base Certificate setting forth the calculation of and certifying the Borrowing Base as of the last day of such calendar quarter, certified as complete and correct and signed on behalf of Holdings by a Financial Officer, together with such other supporting documentation and additional reports with respect to the Borrowing Base as the Administrative Agent shall reasonably request; (d) promptly after the filing thereof, copies of all forms and reports filed by it with the Securities and Exchange Commission and, promptly after knowledge thereof shall have come to the attention of any Responsible Officer, written notice of (i) any threatened or pending litigation or arbitral or governmental or administrative proceeding against Holdings or any of its Subsidiaries which could reasonably be expected to result in a Material Adverse Effect and (ii) any Event of Default (or event which with notice or the passage of time or both would constitute an Event of Default) together with a statement by a Responsible Officer describing the action, if any, which Holdings proposes to 41 take with respect thereto; and (e) promptly, such further information regarding the business affairs, legal affairs relating to the Litigation Liabilities, financial condition and contingent liabilities (including Litigation Liabilities) of Holdings and its Subsidiaries as the Administrative Agent may reasonably request. SECTION 5.02. PAYMENT OF OBLIGATIONS. (a) Pay and discharge or cause to be paid and discharged promptly when due all material and lawful taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become in default, as well as all material and lawful claims which, if unpaid, might become a lien or charge upon such properties or any part thereof; PROVIDED, HOWEVER, that neither Holdings nor any of the Subsidiaries shall be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity, applicability or amount thereof shall be contested in good faith by applicable proceedings and Holdings or such Subsidiary, as the case may be, shall have set aside on its books reserves reasonably deemed adequate by it with respect thereto. SECTION 5.03. MAINTAIN PROPERTY AND INSURANCE. (a) Maintain and preserve all properties which are used in the conduct of the business of Holdings and the Material Subsidiaries in good working order and condition, ordinary wear and tear excepted, and (b) maintain in respect of the assets of Holdings and the Material Subsidiaries, insurance in such amounts and against such risks as is generally maintained by companies operating similar businesses in the same general area. All insurance policies hereunder shall be maintained with sound and reputable insurance carriers of recognized standing. SECTION 5.04. MAINTAIN EXISTENCE. Preserve (a) the corporate existence and good standing of Holdings and the Material Subsidiaries and (b) all the material rights, privileges and franchises necessary and desirable in the normal conduct of the business of Holdings and the Material Subsidiaries. SECTION 5.05. COMPLIANCE WITH LAWS. Comply with the requirements of all applicable laws (including ERISA), regulations and orders of any Governmental Authority, a violation of which would materially affect the business or financial condition of Holdings and its Subsidiaries taken as a whole, except any such law, regulation or order which is being contested by Holdings or any Subsidiary in good faith by applicable proceedings. SECTION 5.06. INSPECTION. Give, upon the request of any Lender upon reasonable advance notice, any representative of such Lender access during normal business hours to inspect, and permit such representative to inspect, all properties belonging to it and permit such representative to examine, copy and make extracts from, financial records relating to its affairs, as such representative may reasonably require. SECTION 5.07. ERISA. (a) Comply in all material respects with the applicable provisions of ERISA and the Code and (b) furnish to the Administrative Agent and each Lender (i) as soon as possible, and in any event within 30 days after any Responsible Officer of Holdings or any ERISA Affiliate either knows or has reason to know that any Reportable Event has occurred that alone or together with any other Reportable Event could reasonably be expected to result in liability of Holdings to the PBGC in an aggregate amount exceeding $5,000,000, a 42 statement of a Financial Officer setting forth details as to such Reportable Event and the action proposed to be taken with respect thereto, together with a copy of the notice, if any, of such Reportable Event given to the PBGC, (ii) promptly after receipt thereof, a copy of any notice Holdings or any ERISA Affiliate may receive from the PBGC relating to the intention of the PBGC to terminate any Plan or Plans (other than a Plan maintained by an ERISA Affiliate which is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code) or to appoint a trustee to administer any Plan or Plans, (iii) within 10 days after the due date for filing with the PBGC pursuant to Section 412(n) of the Code of a notice of failure to make a required installment or other payment with respect to a Plan, a statement of a Financial Officer setting forth details as to such failure and the action proposed to be taken with respect thereto, together with a copy of such notice given to the PBGC and (iv) promptly and in any event within 30 days after receipt thereof by any Borrower or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy of each notice received by such Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability or (B) a determination that a Multiemployer Plan is, or is expected to be, terminated or in reorganization, both within the meaning of Title IV of ERISA. SECTION 5.08. COLLATERAL AND BORROWING BASE EVALUATIONS. Permit any representatives designated by the Administrative Agent (including consultants or other advisors retained by the Administrative Agent) to conduct evaluations of its computation of the Borrowing Base and the assets included in the Borrowing Base, all at such reasonable times and as often as reasonably requested; PROVIDED that, if no Default shall have occurred and be continuing, no more than one such evaluation will be requested by the Administrative Agent during any fiscal year; and PROVIDED FURTHER that any consultants or other advisors retained by the Administrative Agent (i) shall not be employed by a competing auction house and (ii) shall be subject to the confidentiality provisions of Section 10.17. Holdings shall pay the reasonable fees and expenses of any such evaluation. SECTION 5.09. FURTHER ASSURANCES. Execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements, fixture filings, mortgages, deeds of trust and other documents), which may be required under any applicable law, or which the Collateral Agent or the Required Lenders may reasonably request, to cause the Collateral and Guarantee Requirement to be and remain satisfied at all times, all at the expense of Holdings. Holdings also agrees to provide to the Administrative Agent from time to time upon request evidence reasonably satisfactory to the Collateral Agent as to the perfection and priority of the Liens created or intended to be created by the Security Documents. SECTION 5.10. ART LOANS. Cause each Lending Subsidiary, in connection with each Art Loan made or to be made by it, to apply credit standards and loan to collateral value requirements, and to follow practices with respect to documentation and the perfection of security interests, not less strict than those generally applied and followed in the Lending Subsidiaries' art lending business prior to the Closing Date. SECTION 5.11. YORK AVENUE PROPERTY. (a) Sotheby's, Inc. agrees that it shall, within 30 days of the date hereof (i) transfer all 43 its rights under the Agreement of Sale and Purchase dated September 9, 1999 between The Beneson Capital Company, Lawrence A. Beneson, Raymond E. Beneson and York Avenue Development, Inc. (which entity assigned its rights to Sotheby's, Inc. by an Assignment and Assumption Agreement dated September 9, 1999) to a wholly owned subsidiary of Sotheby's, Inc., which has no significant assets, operations or liabilities (the "YORK AVENUE HOLDING SUBSIDIARY"), and (ii) pledge all the capital stock of the York Avenue Holding Subsidiary to the Collateral Agent, for the ratable benefit of the holders of the Obligations. (b) Sotheby's, Inc. agrees to maintain records that will enable it to determine the Construction and Improvement Amount at any time and to furnish copies of such records to the Administrative Agent from time to time upon request. Sotheby's, Inc. further agrees (i) to cause the York Avenue Holding Subsidiary or another Subsidiary of Holdings to acquire title to the York Avenue Property at the time provided in the York Avenue Purchase Agreement, (ii) at such time as the York Avenue Holding Subsidiary or such other Subsidiary shall have acquired such title, (A) to prepay or cause other Borrowers to prepay Loans outstanding hereunder in the amount, if any, required in order for the aggregate amount available for borrowing hereunder (taking into account the Borrowing Base at such time) to be at least equal to the Construction and Improvement Amount at such time, (B) promptly thereafter, execute and deliver a mortgage on the York Avenue Property as contemplated in the definition of Collateral and Guarantee Requirement and (C) promptly thereafter, to borrow hereunder in a principal amount equal to the Construction and Improvement Amount at such time to finance or refinance, as the case may be, the costs of construction and substantial improvements related to the York Avenue Property and (iii) from time to time after such Borrowing, to pay all costs of construction and substantial improvements related to the York Avenue Property with the proceeds of separate Borrowings, it being understood that the proceeds of the Borrowings relating to the costs of construction and substantial improvements will not be used for any other purpose. Sotheby's, Inc. agrees that any Borrowing made pursuant to this Section will be identified as such in the Borrowing Request submitted with respect thereto. ARTICLE VI. NEGATIVE COVENANTS The Borrowers covenant and agree with each Lender that, so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any Fees or any other expenses or amounts payable under any Loan Document shall be unpaid, or any Letters of Credits remain in outstanding, unless the Required Lenders shall otherwise consent in writing, Holdings will not, either directly or indirectly, and will not cause or permit any of its Subsidiaries to: SECTION 6.01. LIENS. Incur, create, assume or permit to exist any mortgage, pledge, security interest, lien, charge or other encumbrance of any nature whatsoever (including conditional sales or other title retention agreement) on any of its property or assets, whether owned at the date hereof or hereafter acquired, other than: (a) liens incurred or pledges and deposits made in connection with workmen's compensation, unemployment insurance, old-age pensions, social security and public liability and similar legislation; (b) liens securing the performance of bids, tenders, leases, contracts (other than for the repayment of borrowed money), 44 statutory obligations, surety and appeal bonds and other obligations of like nature, incurred incident to and in the ordinary course of business; (c) statutory liens of landlords and other liens imposed by law, such as carriers', warehousemen's, mechanics', materialmen's and vendors' liens, incurred in good faith in the ordinary course of business, including but not limited to those relating to the construction of the York Avenue Property; (d) liens securing the payment of taxes, assessments and governmental charges or levies, either (i) not delinquent or (ii) being contested in good faith by appropriate proceedings with adequate reserves; (e) zoning restrictions, easements, licenses, reservations, restrictions on the use of real property or minor irregularities incident thereto which do not in the aggregate materially detract from the value of the property or assets of Holdings and the Subsidiaries taken as a whole or materially impair the operation of the business of Holdings and the Subsidiaries taken as a whole; (f) liens incurred in the ordinary course of business (other than consensual liens on assets constituting Collateral) provided that these liens are not given as security for Indebtedness; (g) liens on property or assets of any Subsidiary securing Indebtedness of such Subsidiary to Holdings or to a wholly owned Subsidiary of Holdings; (h) liens for judgments or awards, so long as the finality of such judgment or award is being contested in good faith and execution thereof is stayed; PROVIDED that the aggregate amount of liens permitted by this clause may not exceed $10,000,000; (i) any lien existing on any property or assets of any corporation at the time it becomes a Subsidiary of Holdings, or existing prior to the time of acquisition upon any property or assets acquired by Holdings or any of its Subsidiaries through purchase, merger or consolidation or otherwise, whether or not assumed by Holdings or such Subsidiary; (j) any lien placed upon property or assets within 90 days of the time of acquisition of such property or assets by Holdings or any of its Subsidiaries to secure all or a portion of (or to secure Indebtedness incurred to pay all or a portion of) the purchase price thereof, provided that any such lien shall not encumber any other property or assets of Holdings or any Subsidiary; (k) liens, other than the liens permitted by clauses (a) through (j) above (including any such liens in existence as of the date hereof), existing as of the date hereof and set forth on Schedule 6.01; PROVIDED, HOWEVER, that no such lien shall be permitted under this clause (k) if it extends to property other than the property subject to such lien on the date hereof; (l) any lien renewing, extending or refunding any lien permitted by clause (i), (j) or (k) above, provided that the principal amount secured is not increased, and the lien is not extended to other property; (m) liens, in addition to the liens permitted by clauses (a) 45 through (l) above, on assets not constituting Collateral securing obligations in an aggregate amount not greater than 10% of Consolidated Net Worth; and (n) liens created under the Security Documents. SECTION 6.02. SUBSIDIARY INDEBTEDNESS. Permit any Subsidiary to create, incur, assume or permit to exist any Indebtedness except: (a) in the case of any Subsidiary that is a Borrower, Indebtedness not prohibited under any other Section of this Agreement; (b) Indebtedness of any Subsidiary the proceeds of which are used by such Subsidiary to make secured loans to consignors, dealers or clients in the ordinary course of business of the Borrowers and their subsidiaries and in a manner that is consistent with established practices pursuant to the auction finance business of the Borrowers and their subsidiaries; (c) Indebtedness of any Subsidiary to another Subsidiary or any Borrower; (d) Indebtedness of any Subsidiary outstanding on the date hereof or available to any Subsidiary under credit facilities existing on the date hereof, not in excess of $20,000,000 in the aggregate with respect to all Subsidiaries; and (e) other Indebtedness, provided that the aggregate principal amount of all such other Indebtedness of all Subsidiaries outstanding at any time (excluding amounts permitted under clauses (a) through (d) above) does not exceed 10% of Consolidated Net Worth at such time. SECTION 6.03. CONSOLIDATIONS, MERGERS, AND SALES OF ASSETS. (a) Merge or consolidate with any other corporation, except that (i) any Borrower may merge or consolidate with a Subsidiary so long as the Borrower is the surviving entity in such merger or consolidation, (ii) any Subsidiary may merge or consolidate with a Subsidiary so long as the surviving entity in such merger or consolidation is a Subsidiary (and, if either constituent corporation is a Domestic Subsidiary, a Domestic Subsidiary) or (iii) any Borrower may merge or consolidate with any other Person so long as the Borrower is the surviving entity in such merger or consolidation and, after giving effect to such merger or consolidation, no Event of Default exists. (b) Sell, lease, transfer or otherwise dispose of all or a substantial part of its assets, other than assets no longer used or useful in the conduct of its business or leases for space used in the ordinary course of business which are near the end of their term, except dispositions in the ordinary course of business for a full and adequate consideration. (c) Sell, lease, transfer or otherwise dispose of any Art Loan. SECTION 6.04. LINES OF BUSINESS. Engage to any substantial extent in any line or lines of business activity fundamentally different 46 from the business presently engaged in. SECTION 6.05. TRANSACTIONS WITH AFFILIATES. Sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that as long as no Default or Event of Default shall have occurred and be continuing, Holdings or any of its Subsidiaries may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to Holdings or any Subsidiary than could be obtained on an arm's-length basis from unrelated third parties. SECTION 6.06. RESTRICTIONS ON DIVIDENDS. Enter into any agreement, contract or arrangement which expressly limits the right of any Subsidiary to pay dividends to its parent corporation. SECTION 6.07. CONSOLIDATED LEVERAGE RATIO. Permit the Consolidated Leverage Ratio at any time to exceed .50 to 1.0. SECTION 6.08. ADJUSTED CONSOLIDATED NET WORTH. Permit Adjusted Consolidated Net Worth at any time to be less than $315,000,000. SECTION 6.09. CONSOLIDATED COVERAGE RATIO. Permit the Consolidated Coverage Ratio for any period of four consecutive financial quarters ending after the date hereof to be less than 4.5 to 1.0. SECTION 6.10. RESTRICTED PAYMENTS; CERTAIN PAYMENTS IN RESPECT OF INDEBTEDNESS. (a) Declare or make, or agree to make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except that (i) Subsidiaries may declare and pay dividends ratably with respect to their capital stock and (ii) if no Default or Event of Default has occurred and is continuing or would occur as a result thereof, Holdings may make any Restricted Payment that, taken together with all other Restricted Payments made after the date hereof, would not exceed 40% of Consolidated Net Income of Holdings, adjusted to exclude nonrecurring or extraordinary reserves and charges relating to the Litigation Liabilities, for the period (treated as one accounting period) commencing January 1, 2000, and ending at the most recent fiscal quarter end for which financial statements shall have been delivered under Section 5.01(a) or (b). (b) Make any payment on account of the purchase, redemption, prepayment, retirement or defeasance of the Senior Notes. SECTION 6.11. ART LOANS. Permit any of the Pledged Art Loans (as such term is defined in the Pledge Agreement) to be represented or evidenced by an instrument or a certificate, or permit any agreement relating to any Pledged Art Loan to provide that any of the documentation evidencing such Pledged Art Loan is a security governed by Article 8 of the Uniform Commercial Code as in effect in any applicable jurisdiction. ARTICLE VII. EVENTS OF DEFAULT In case of the happening of any of the following events ("Events of Default"): (a) default shall be made in the payment of any principal of any Loan or any amount due in respect of the reimbursement of any LC Disbursement when and as the same shall become due and payable, 47 whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (b) default shall be made in the payment of any interest on any Loan or LC Disbursement or any Fee or any other amount due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of five days; (c) default shall be made in the due observance or performance by a Borrower or any Subsidiary of any other covenant, condition or agreement contained in Section 5.04(a) or 5.10 or in Article VI; (d) default shall be made in the due observance or performance by a Borrower or any Subsidiary of any other covenant, condition or agreement contained in any Loan Document and such default shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent or any Lender to Holdings, or default shall be made in the due observance or performance by a Borrower or any Subsidiary of any other covenant, condition or agreement contained in any Security Document and such default shall continue unremedied for a period of 5 Business Days after notice thereof from the Administrative Agent or any Lender to Holdings; (e) Holdings or any Subsidiary shall fail to pay any Indebtedness greater than $1,000,000, or fail during any 30-day period to pay Indebtedness aggregating more than $1,000,000, owing by Holdings or such Subsidiary, or any interest or premium thereon aggregating $1,000,000 or more, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; (f) Any event or condition shall occur or exist under any agreement or instrument of Holdings or any Subsidiary evidencing or securing or relating to any Indebtedness exceeding $10,000,000, if the effect of such event or condition is to accelerate, or to permit the holder or holders of such Indebtedness or the trustee or trustees under any such agreement or instrument to accelerate, the maturity of such Indebtedness; (g) any representation or warranty made or deemed made in or in connection with any Loan Document or the borrowings hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (h)(i) a Reportable Event or Reportable Events, or a failure to make a required installment or other payment (within the meaning of Section 412(n)(1) of the Code), shall have occurred with respect to any Plan or Plans that reasonably could be expected to result in liability of Holdings to the PBGC or to a Plan in an aggregate amount exceeding $5,000,000 and, within 30 days after the reporting of any such Reportable Event to the Agent or after the receipt by the Agent of a statement required pursuant to Section 5.07(b(iii) hereof, the Agent shall have notified the Borrower in writing that (A) the Required Lenders have made a determination that, on the basis of such Reportable Event or 48 Reportable Events or the failure to make a required payment, there are reasonable grounds for the termination of such Plan or Plans by the PBGC, the appointment by the appropriate United States district court of a trustee to administer such Plan or Plans or the imposition of a lien in favor of a Plan and (B) as a result thereof an Event of Default exists hereunder; or (ii) a trustee shall be appointed by a United States district court to administer any such Plan or Plans; or (iii) the PBGC shall institute proceedings (including giving notice of intent thereof) to terminate any such Plan or Plans; (i)(i) the Borrowers or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan, (ii) such Borrower or such ERISA Affiliate does not have reasonable grounds for contesting such Withdrawal Liability or is not contesting such Withdrawal Liability in a timely and appropriate manner and (iii) the amount of such Withdrawal Liability specified in such notice, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date or dates of such notification), either (A) exceeds $5,000,000 or requires payments exceeding $1,000,000 in any year or (B) is less than $5,000,000 but any Withdrawal Liability payment remains unpaid 30 days after such payment is due; (j) the Borrower or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if solely as a result of such reorganization or termination the aggregate annual contributions of the Borrower and its ERISA Affiliates to all Multiemployer Plans that are then in reorganization or have been or are being terminated have been or will be increased over the amounts required to be contributed to such Multiemployer Plans for their most recently completed plan years by an amount exceeding $1,000,000; (k) a judgment or judgments for the payment of money in excess of $5,000,000 in the aggregate shall have been rendered against Holdings or any Subsidiary and the same shall have remained unsatisfied and in effect, without stay of execution, for any period of 60 days; (l) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of Holdings or any Material Subsidiary, or of a substantial part of the property or assets of Holdings or any Material Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law (or similar statute or law in any other jurisdiction), (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings or any Material Subsidiary or for a substantial part of the property or assets of Holdings or a Material Subsidiary or (iii) the winding-up or liquidation of Holdings or any Material Subsidiary; and such proceeding or petition shall continue undismissed for 30 days or an order or decree approving or 49 ordering any of the foregoing shall be entered; (m) Holdings or any Material Subsidiary shall (i) volun tarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law (or similar statute or law in any other jurisdiction), (ii) consent to the institution of, or fail to contest in a timely and applicable manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings or any Material Subsidiary or for a substantial part of the property or assets of Holdings or any Material Subsidiary, (iv) file an answer admitting the Material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; (n) A Change in Control shall occur; or (o) any Lien purported to be created under any Security Document shall cease to be, or shall be asserted in writing by any Borrower or any Subsidiary party to a Security Document not to be, a valid and perfected Lien on any Collateral, with the priority required by the applicable Security Document, except (i) as a result of the sale or other disposition of the applicable Collateral in a transaction permitted under the Loan Documents or (ii) as a result of the Administrative Agent's failure to maintain possession of any stock certificates, promissory notes or other instruments delivered to it under the Pledge Agreement or to make or continue UCC filings; provided that no such cessation shall give rise to an Event of Default unless such cessation (x) affects Collateral that is or should be subject to a Lien in favor of the Collateral Agent having an aggregate value in excess of $1,000,000 or (y) is not corrected upon request by the Collateral Agent upon reasonable notice. then, and in every such event (other than an event with respect to any Borrower described in paragraph (l) or (m) above), and at any time thereafter during the continuance of such event, the Administrative Agent shall at the request of the Required Lenders, by notice to the Borrowers, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrowers, anything contained herein to the contrary notwithstanding; and, in any event with respect to a Borrower described in paragraph (l) or (m) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrowers, anything contained herein to the contrary notwithstanding. Any Letters of Credit issued to Lenders to support the obligations listed on Schedule 1.01A hereto may be drawable 50 on or after an Event of Default. ARTICLE VIII. THE AGENTS In order to expedite the transactions contemplated by this Agreement, The Chase Manhattan Bank is hereby appointed to act as Administrative Agent and Collateral Agent on behalf of the Lenders. Each of the Lenders hereby irrevocably authorizes the Agents to take such actions on behalf of such Lender and to exercise such powers as are specifically delegated to the Agents by the terms and provisions hereof and of the other Loan Documents, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Loans and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) as provided in Article VII, to give notice on behalf of each of the Lenders to the Borrowers of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by any Borrower pursuant to this Agreement as received by the Administrative Agent. Neither the Agents nor any of their directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its or his own gross negligence or wilful misconduct, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by the Borrowers of any of the terms, conditions, covenants or agreements contained in any Loan Document. The Agents shall not be responsible to the Lenders for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement, or any other Loan Documents or other instruments or agreements. The Agents shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders. The Agents shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by them in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither the Agents nor any of their directors, officers, employees or agents shall have any responsibility to the Borrowers on account of the failure of or delay in performance or breach by any Lender of any of its obligations hereunder or to any Lender on account of the failure of or delay in performance or breach by any other Lender or a Borrower of any of their respective obligations hereunder or under any other Loan Document or in connection herewith or therewith. The Agents may execute any and all duties hereunder and under the other Loan Documents by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by them with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by them in accordance with the advice of such counsel. The Lenders hereby acknowledge that the Agents shall be under no duty to take any discretionary action permitted to be taken by them pursuant to the provisions of this Agreement or any other Loan Document unless they shall be requested in writing to do so by the Required Lenders. 51 Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Borrowers. Upon any such resignation, the Required Lenders shall have the right to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, having a combined capital and surplus of at least $500,000,000 or an affiliate of any such bank. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 10.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. With respect to the Loans made by it hereunder, the Agents in their individual capacity and not as Agents shall have the same rights and powers as any other Lender and may exercise the same as though they were not the Agents, and the Agents and their affiliates may accept deposits from, lend money to and generally engage in any kind of business with Holdings or any Subsidiary or other Affiliate thereof as if they were not the Agents. Each Lender agrees (a) to reimburse the Agents, on demand, in the amount of its pro rata share (based on its Commitment hereunder or, if the Commitments shall have been terminated, its outstanding Loans) of any expenses incurred for the benefit of the Lenders by the Agents, including counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, which shall not have been reimbursed by one of the Borrowers and (b) to indemnify and hold harmless the Agents and any of their directors, officers, employees or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against them in their capacity as Agents or any of them in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by any of them under this Agreement or any other Loan Document, to the extent the same shall not have been reimbursed by the Borrowers; PROVIDED that no Lender shall be liable to the Agents for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or wilful misconduct of the Agents or any of their directors, officers, employees or agents. Each Lender acknowledges that it has, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it has deemed applicable, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agents or any other Lender and based on such documents and informa tion as it shall from time to time deem applicable, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or 52 any document furnished hereunder or thereunder. ARTICLE IX. GUARANTEE SECTION 9.01. GUARANTEE. (a) Subject to the last sentence of this Section 9.01(a), each Guarantor hereby guarantees to each Lender and the Administrative Agent and their respective successors and assigns the prompt payment in full when due (whether at stated maturity, by acceleration, by optional prepayment or otherwise) of the principal of and interest (accruing at the rate specified herein after the filing or commencement of any bankruptcy or similar proceeding) on the Loans made by the Lenders to any Borrower and all other amounts from time to time owing to the Lenders or the Administrative Agent by any Borrower under this Agreement, strictly in accordance with the terms thereof (such obligations being herein collectively called the "Guaranteed Obligations"). Each Guarantor hereby further agrees that if any Borrower shall fail to pay in full when due (whether at stated maturity, by acceleration, by optional prepayment or otherwise) any of the Guaranteed Obligations, the Guarantor will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. Notwithstanding anything in this Article IX to the contrary, Oatshare Limited and Sotheby's will not be liable as Guarantors for the obligations of Sotheby's Holdings, Inc. and Sotheby's, Inc. (b) Anything herein to the contrary notwithstanding, the maximum liability of each Guarantor hereunder shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors. SECTION 9.02. OBLIGATIONS UNCONDITIONAL. The obligations of each Guarantor under Section 9.01 hereof are absolute and unconditional irrespective of the value, genuineness, validity, regularity or enforceability of the obligations of any Borrower under this Agreement or any other agreement or instrument referred to herein or therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 9.02 that the obligations of each Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not affect the liability of any Guarantor hereunder: (a) at any time or from time to time, without notice to the Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (b) any of the acts mentioned in any of the provisions of this Agreement or any other agreement or instrument referred to herein or therein shall be done or omitted; or 53 (c) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under this Agreement or any other agreement or instrument referred to herein or therein shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with. Each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Administrative Agent or any Lender exhaust any right, power or remedy or proceed against any Borrower under this Agreement or any other agreement or instrument referred to herein or therein, or against any other person under any other guarantee of, or security for, any of the Guaranteed Obligations. SECTION 9.03. REINSTATEMENT. The obligations of each Guarantor under this Article IX shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Borrower in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Administrative Agent and each Lender on demand for all reasonable costs and expenses (including, without limitation, fees of counsel) incurred by the Administrative Agent or such Lender in connection with such rescission or restoration. SECTION 9.04. SUBROGATION. Each Guarantor hereby irrevocably waives all rights of subrogation or contribution, whether arising by operation of law (including, without limitation, any such right arising under Title 11 of the United States Code) or otherwise, by reason of any payment by it pursuant to the provisions of this Article IX and further agrees for the benefit of each of its creditors (including, without limitation, each Lender and the Administrative Agent) that any such payment by it of the Guaranteed Obligations of any Borrower shall constitute a contribution of capital or a dividend, as the case may be, by such Guarantor to such Borrower. SECTION 9.05. REMEDIES. Each Guarantor agrees that, as between the Guarantors and the Lenders, the obligations of any Borrower under this Agreement may be declared to be forthwith due and payable as provided in Article VII hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Article VII) for purposes of Section 9.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing such obligations from becoming automatically due and payable) as against any Borrower and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by such Approved Borrower) shall forthwith become due and payable by each Guarantor for purposes of such Section 9.01. SECTION 9.06. CONTINUING GUARANTEE. The guarantee in this Article IX is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. ARTICLE X. MISCELLANEOUS SECTION 10.01. NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or 54 sent by telecopy, as follows: (a) if to any Borrower, to it in care of Holdings at 1334 York Avenue, New York, New York 10021, Attention of the Chief Financial Officer (Telecopy No. (212) 606-7132); (b) if to the Administrative Agent, to The Chase Manhattan Bank, One Chase Plaza, 8th Floor, New York, New York, 10005 Attention of Jackie Carter (Telecopy No. 212-552-7500), with copies to The Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, Attention of Margaret Lane (Telecopy No. 212- 270-5646); (c) if to the Issuing Bank, to The Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, Attention of Margaret Lane (Telecopy No. 212-270-5646); (d) if to the Collateral Agent, to The Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, Attention of Margaret Lane (Telecopy No. 212-270-5646); and (e) if to a Lender, to it at its address (or telecopy number) set forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy, or on the date five Business Days after dispatch by certified or registered mail, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 10.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 10.01. SECTION 10.02. SURVIVAL OF AGREEMENT. All covenants, agreements, representations and warranties made by the Borrowers herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans and the issuance of the Letters of Credit by the Issuing Bank, regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid and so long as the Commitments have not been terminated. SECTION 10.03. BINDING EFFECT. This Agreement shall become effective when it shall have been executed by the Borrowers and the Administrative Agent and when the Administrative Agent shall have received copies hereof which, when taken together, bear the signatures of the Required Lenders, and thereafter shall be binding upon and inure to the benefit of the Borrowers, the Administrative Agent and each Lender and their respective successors and assigns, except that the Borrowers shall not have the right to assign rights hereunder or any interest herein without the prior consent of all the Lenders. SECTION 10.04. SUCCESSORS AND ASSIGNS. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party (including any affiliate of the Issuing Bank that issues any Letter of Credit); and all covenants, promises and agreements by or on behalf of 55 the Borrowers, the Administrative Agent, the Issuing Bank or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns (including any affiliate of the Issuing Bank that issues any Letter of Credit). (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment or outstanding Loans or Letters of Credit at the time owing to it); PROVIDED, HOWEVER, that (i) except in the case of (A) an assignment to a Lender or an affiliate of such Lender or (B) an assignment after the occurrence and during the continuance of an Event of Default referred to in paragraph (l) or (m) of Article VII, Holdings and the Administrative Agent (and, in the case of an assignment of all or a portion of any Lender's LC Exposure, the Issuing Bank) must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement, (iii) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance Agreement with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 (or, if smaller, such Lender's remaining Commitment) and the amount of the Commitment of such Lender remaining after such assignment shall not be less than $5,000,000 or shall be zero, (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance Agreement and a processing and recordation fee of $4,000 and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Upon acceptance and recording pursuant to paragraph (e) of this Section 10.04, from and after the effective date specified in each Assignment and Acceptance Agreement, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance Agreement, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance Agreement, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance Agreement covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto (but shall continue to be entitled to the benefits of Sec tions 2.13, 2.15, 2.19 and 10.05, as well as to any Fees accrued for its account hereunder and not yet paid)). (c) By executing and delivering an Assignment and Acceptance Agreement, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment, if any, and the outstanding balances of its Standby Loans, if any, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance Agreement, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto or the financial condition of the Borrowers or any Subsidiary or the performance or observance by any Borrower of any of its obligations under this Agreement, any other Loan Document or any 56 other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance Agreement; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.01 and such other documents and information as it has deemed applicable to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance Agreement delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive in the absence of manifest error and the Borrower, the Administrative Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance Agreement executed by an assigning Lender and an assignee, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and, as required, the written consent of Holdings and the Administrative Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance Agreement, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders. (f) Each Lender may without the consent of Holdings, the Issuing Bank or the Administrative Agent sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans or LC Disbursements owing to it); PROVIDED, HOWEVER, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if they were Lenders and (iv) the Borrowers, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrowers relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable hereunder or the 57 amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans or changing or extending the Commitments). (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.04, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrowers furnished to such Lender by or on behalf of the Borrowers; PROVIDED that, prior to any such disclosure of information, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree on terms substantially similar to those set forth in Section 10.17 to preserve the confidentiality of such confidential information. (h) Any Lender may at any time assign all or any portion of its rights under this Agreement to a Federal Reserve Bank; PROVIDED that no such assignment shall release a Lender from any of its obligations hereunder. In order to facilitate such an assignment to a Federal Reserve Bank, the applicable Borrower shall, at the request of the assigning Lender, duly execute and deliver to the assigning Lender a promissory note or notes evidencing the Loans made to such Borrower by the assigning Lender hereunder. (i) The Borrowers shall not assign or delegate any of their rights or duties hereunder, except pursuant to a merger permitted by Section 6.03. SECTION 10.05. EXPENSES; INDEMNITY. (a) Each Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Administrative Agent in connection with the preparation of this Agree ment and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby contemplated shall be consummated) or incurred by the Administrative Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made hereunder, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent, and, in connection with any such enforcement or protection, the reasonable fees, charges and disbursements of any other counsel for the Administrative Agent or any Lender and all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder. Each Borrower further agrees that it shall indemnify the Lenders from and hold them harmless against any docu mentary taxes, assessments or charges made by any Governmental Authority by reason of the execution and delivery of this Agreement or any of the other Loan Documents. (b) Each Borrower agrees to indemnify the Administrative Agent, the Issuing Bank, each Lender and each of their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all actual losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument 58 contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the transactions contemplated thereby, (ii) the actual or proposed use of the proceeds of the Loans or (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto; PROVIDED that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) The provisions of this Section 10.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Letters of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent, the Issuing Bank or any Lender. All amounts due under this Section 10.05 shall be payable on written demand therefor. SECTION 10.06. RIGHT OF SETOFF. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of any Borrower against any of and all the obligations of such Borrower now or hereafter existing under this Agreement, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 10.07. APPLICABLE LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 10.08. WAIVERS; AMENDMENT. (a) No failure or delay of the Administrative Agent or any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Issuing Bank and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by any Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on any Borrower in any case shall entitle such Borrower to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders; PROVIDED, HOWEVER, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any 59 Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, without the prior written consent of each Lender affected thereby, (ii) change or extend the Commitment or decrease the Commitment Fees of any Lender or extend any payment date therefor without the prior written consent of such Lender, or (iii) amend or modify the provisions of Section 2.16, the provisions of Article IX, the provisions of this Section or the definition of the term "Required Lenders", without the prior written consent of each Lender; PROVIDED FURTHER that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. SECTION 10.09. INTEREST RATE LIMITATION. Notwithstanding anything herein to the contrary, if at any time the applicable interest rate, together with all fees and charges which are treated as interest under applicable law (collectively the "Charges"), as provided for herein or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken or reserved by any Lender, shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by such Lender in accordance with applicable law, the rate of interest payable on the Loans of such Lender, together with all Charges payable to such Lender, shall be limited to the Maximum Rate. SECTION 10.10. ENTIRE AGREEMENT. This Agreement and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents. SECTION 10.11. WAIVER OF JURY TRIAL. Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement or any of the other Loan Documents. Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it and the other parties hereto have been induced to enter into this Agreement and the other Loan Documents, as applicable, by, among other things, the mutual waivers and certifications in this Section 10.11. SECTION 10.12. SEVERABILITY. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotia tions to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 10.13. JUDGMENT CURRENCY. (a) The Borrowers' obligations hereunder and under the other Loan Documents to make payments in Dollars or in the Alternative Currency (the "Obligation Currency") shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any currency other than the Obligation Currency, except to the extent that 60 such tender or recovery results in the effective receipt by the Administrative Agent or a Lender of the full amount of the Obligation Currency expressed to be payable to the Administrative Agent or such Lender under this Agreement or the other Loan Documents. If, for the purpose of obtaining or enforcing judgment against any Borrower or in any court or in any jurisdiction, it becomes necessary to convert into or from any currency other than the Obligation Currency (such other currency being hereinafter referred to as the "Judgment Currency") an amount due in the Obligation Currency, the conversion shall be made at the Alternative Currency Equivalent or Dollar Equivalent, in the case of any Alternative Currency or Dollars, and, in the case of other currencies, the rate of exchange (as quoted by the Administrative Agent or if the Administrative Agent does not quote a rate of exchange on such currency, by a known dealer in such currency designated by the Administrative Agent) determined, in each case, as of the date immediately preceding the day on which the judgment is given (such Business Day being hereinafter referred to as the "Judgment Currency Conversion Date"). (b) If there is a change in the rate of exchange prevailing between the Judgment Currency Conversion Date and the date of actual payment of the amount due, the Borrower covenants and agrees to pay, or cause to be paid, as a separate obligation and notwithstanding any judgment, such additional amounts, if any (but in any event not a lesser amount), as may be necessary to ensure that the amount paid in the Judgment Currency, when converted at the rate of exchange prevailing on the date of payment, will produce the amount of the Obligation Currency which could have been purchased with the amount of Judgment Currency stipulated in the judgment or judicial award at the rate of exchange prevailing on the Judgment Currency Conversion Date. (c) For purposes of determining the Alternative Currency Equivalent or Dollar Equivalent or rate of exchange for this Section, such amounts shall include any premium and costs payable in connection with the purchase of the Obligation Currency. SECTION 10.14. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 10.03. SECTION 10.15. HEADINGS. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 10.16. JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against any Borrower or its properties in the courts of 61 any jurisdiction. (b) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 10.17. CONFIDENTIALITY. Except as otherwise provided in Section 10.04(g), the Administrative Agent, the Issuing Bank, the Collateral Agent and each of the Lenders agrees to keep confidential (and (i) to cause its respective officers, directors and employees to keep confidential and (ii) to use its best efforts to cause its respective agents and representatives to keep confidential) the Information (as defined below) and all copies thereof, extracts therefrom and analyses or other materials based thereon, except that the Agent or any Lender shall be permitted to disclose Information (a) to such of its respective affiliates, officers, directors employees, agents and representatives as need to know such Information, (b) to the extent requested by any bank regulatory authority, (c)(i) to the extent otherwise required by applicable laws and regulations or by any subpoena or similar legal process or (ii) in connection with the enforcement of this Agreement, (d) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Agreement or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrowers or (e) to the extent Holdings shall have consented to such disclosure in writing. For the purposes of this Section, "Information" shall mean all information that is received from and relates to Holdings or any of its Subsidiaries other than any such information available to the Administrative Agent or any Lender on a nonconfidential basis prior to its disclosure thereto by Holdings or any such Subsidiary. The provisions of this Section 10.17 shall remain operative and in full force and effect regardless of the expiration of this Agreement. SECTION 10.18. RELEASE OF LIENS AND GUARANTEES. (a) Except as provided in paragraph (b) below, no amendment to the Loan Documents that has the effect of releasing all or substantially all the Collateral or any of the guarantees under the Subsidiary Guarantee Agreements or hereunder shall be effective except pursuant to an agreement or agreements in writing entered into by the Borrowers and all the Lenders. It is expressly understood that an amendment providing that additional obligations will be secured under the Security Documents will not constitute a release of Collateral for purposes of this paragraph. (b) In the event that Holdings or any Subsidiary sells, transfers or otherwise disposes of all or any portion of any of the Equity Interests, assets or property owned by Holdings or such Subsidiary in a transaction not prohibited by this Agreement, the Administrative Agent and the Collateral Agent shall promptly (and the Lenders hereby authorize and instruct the Administrative Agent and the Collateral Agent to) take such action and execute any such documents as may be reasonably requested by the Borrower to release any Liens created by any Loan Document in respect of such Equity Interests, assets or property, including the release and satisfaction of record 62 of any mortgage or deed of trust granted in connection herewith, and, in the case of a disposition of all or substantially all the Equity Interests or assets of any Subsidiary, to terminate such Subsidiary's obligations under the Subsidiary Guarantee Agreement and each other Loan Document. In addition, the parties hereto acknowledge and agree that the Liens and security interests created by the Security Documents will automatically terminate when all the Obligations have been paid in full and the Commitments have been terminated, and the Administrative Agent and the Collateral Agent will take such actions as are reasonably requested by the Borrower to evidence such termination. Holdings agrees to pay all out-of-pocket expenses of the Administrative Agent and the Collateral Agent in connection with releases of Liens and obligations under the Subsidiary Guarantee Agreement provided for in this Section. 63 IN WITNESS WHEREOF, the Borrowers (in their capacity as Borrowers and Guarantors), the Administrative Agent and the Lenders have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. SOTHEBY'S HOLDINGS, INC., by /s/ William S. Sheridan ---------------------------- Name: William S. Sheridan Title: Senior Vice President and Chief Financial Officer SOTHEBY'S, INC., by /s/ William S. Sheridan ---------------------------- Name: William S. Sheridan Title: Senior Vice President and Chief Financial Officer OATSHARE LIMITED, by /s/ William S. Sheridan ---------------------------- Name: William S. Sheridan Title: Director SOTHEBY'S, by /s/ William S. Sheridan ---------------------------- Name: William S. Sheridan Title: Director THE CHASE MANHATTAN BANK, N.A., individually and as Administrative Agent, Collateral Agent, and Issuing Bank, by /s/ Thomas H. Newkirk ---------------------------- Name: Thomas H. Newkirk Title: Vice President 64 BARCLAYS BANK PLC, by /s/ Dennis J. Diczok ---------------------------- Name: Dennis J. Diczok Title: Director 65 THE BANK OF NEW YORK, by /s/ Eliza S. Adams ---------------------------- Name: Eliza S. Adams Title: Vice President 66 COMERICA BANK, by /s/ Robert M. Porterfield ---------------------------- Name: Robert M. Porterfield Title: Vice President 67 UBS AG, STAMFORD BRANCH, by /s/ Paul R. Morrison ---------------------------- Name: Paul R. Morrison Title: Executive Director by /s/ Dorothy McKinley ---------------------------- Name: Dorothy McKinley Title: Associate Director Loan Portfolio Support 68 THE BANK OF NOVA SCOTIA, by /s/ J. Alan Edwards ---------------------------- Name: J. Alan Edwards Title: Managing Director 69 BANCA COMMERCIALE ITALIANA, NEW YORK BRANCH by /s/ E. Bermant ---------------------------- Name: E. Bermant Title: FVP/Deputy Manager by /s/ Joseph Carlani ---------------------------- Name: Joseph Carlani Title: Vice President 70 BANCA MONTE dei PASCHI di SIENA S.P.A. by /s/ G. Natalizoni ---------------------------- Name: G. Natalizoni Title: Senior Vice President and General Manager by /s/ Brian R. Landy ---------------------------- Name: Brian R. Landy Title: Vice President 71 BANK ONE, NA (Main Office Chicago) by /s/ Stephen McDonald ---------------------------- Name: Stephen McDonald Title: Senior Vice President 72 BBL INTERNATIONAL (U.K.) LIMITED, by ---------------------------- Name: Title: 73 BANK HAPPALIM, by ---------------------------- Name: Title: 74 FUJI BANK, by /s/ Raymond Ventura ---------------------------- Name: Raymond Ventura Title: Vice President and Manager 75 VIA BANQUE (PARIS), by /s/ Christel Prot ---------------------------- Name: Christel Prot Title: Vice President by /s/ Jean Francois Vitte ---------------------------- Name: Jean Francois Vitte Title: DGA 76 BAYERSCHE HYPO-UND VEREINSBANK AG (NEW YORK BRANCH), by /s/ Marianne Weinzinger ---------------------------- Name: Marianne Weinzinger Title: Director by /s/ Imke Engelmann ---------------------------- Name: Imke Engelmann Title: Associate Director 77 SCHEDULE 1.01A OTHER OBLIGATIONS OF THE LENDERS 1. All obligations of Holdings and any Subsidiary owed to Barclay's Bank PLC ("Barclay's") or any affiliate of Barclay's in connection with rent guarantees and overdraft guarantees in France in the amount of FFR 26.7 million and rent guarantees in Monaco in the amount of FFR 40,000. 2. All obligations of Holdings and any Subsidiary owed to Barclay's or any affiliate of Barclay's in connection with a guarantee line in the amount of L20.5 million. 3. All obligations of Holdings and any Subsidiary owed to any Lender in connection with cash management services provided by such Lender or commitments to provide such services. 4. All guarantee obligations of Holdings and any Subsidiary owed to Chase or any affiliate of Chase in connection with loans and other extensions of credit make by Chase for officers and employees of Holdings and its Subsidiaries. 5. All obligations of Holdings and any Subsidiary in connection with interest rate and foreign exchange rate hedging agreements with persons that are Lenders on the date hereof or were Lenders at the time such agreements were entered into. 6. All obligations of Holdings and any Subsidiary in connection with Letters of Credit provided by persons that are Lenders on the date hereof or were Lenders at the time such letters of credit were entered into. 78 SCHEDULE 1.01B 100 shares of Common Stock, no par value, of Sotheby's-Deitch Holdings, Inc. owned by Sotheby's, Inc. 50% membership interest in Deitch Projects LLC, held by Sotheby's-Deitch Holdings, Inc. 49% membership interest in a limited liability company (in formation), to be held by Sotheby's, Inc., and operating as a fine jewelry designer and dealer. 50% partnership interest in Acquavella Modern Art held by Sotheby's Nevada, Inc. 49.99% membership interest in a joint venture to be formed by Sotheby's International Realty, Inc. with a major investment bank for a residential mortgage program. Sotheby's, Inc.'s rights under that certain Agreement of Sale and Purchase dated September 9, 1999, between The Benenson Capital Company, Lawrence A. Benenson, Raymond E. Benenson and York Avenue Development, Inc. (which entity assigned its rights to Sotheby's, Inc. by an Assignment and Assumption Agreement dated September 9, 1999), until such time that Sotheby's, Inc. or an affiliate of Sotheby's, Inc. is the owner of the York Avenue Property. The rights under any other real property lease or software license agreement to which any of the Borrowers or any Subsidiary is a party that would require the consent of the counter-party thereto in connection with the grant of security interests contemplated hereunder. Issued and outstanding shares (and assets, if any) of York Storage, Inc. (Inactive and in process of liquidation) , for so long as York Storage, Inc. remains an inactive subsidiary or holds no significant assets and conducts no significant operations Issued and outstanding shares (and assets, if any) of Sotheby's Art Sales Corporation (Inactive and in process of liquidation) , for so long as Sotheby's Art Sales Corporation remains an inactive subsidiary or holds no significant assets and conducts no significant operations Issued and outstanding shares (and assets, if any) of Sotheby's International Realty of Colorado, Inc. (inactive and in process of liquidation) , for so long as Sotheby's International Realty of Colorado, Inc. remains an inactive subsidiary or holds no significant assets and conducts no significant operations Issued and outstanding shares (and assets, if any) of Sotheby's Holdings International, Inc. (Inactive and in process of liquidation) , for so long as Sotheby's Holdings International, Inc. remains an inactive subsidiary or holds no significant assets and conducts no significant operations EX-21 7 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF SOTHEBY'S HOLDINGS, INC. The significant subsidiaries of Sotheby's Holdings, Inc., which are wholly owned except where indicated, are as follows: JURISDICTION OF INCORPORATION --------------- Sotheby's Holdings, Inc. Michigan Sotheby's Financial Services, Inc. Nevada SPTC, Inc. Nevada SFS Holdings, Inc. Delaware Fine Art Insurance Ltd. Bermuda Sotheby's, Inc. New York Oatshare Limited United Kingdom Sotheby's United Kingdom EX-23 8 EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-26008 of Sotheby's Holdings, Inc. on Form S-8, Registration Statement No. 33-54057 of Sotheby's Holdings, Inc. on Form S-8, Registration Statement No. 333-02315 on Form S-8, Registration Statement No. 333-28007 on Form S-8, Registration Statement No. 333-34621 on Form S-8, Registration Statement No. 333-34623 on Form S-8, Registration Statement No. 333-92193 on Form S-8 and Registration Statement No. 333-55995 on Form S-3 of our reports dated February 24, 2000, appearing in Item 8 "Financial Statements and Supplementary Data" on Form 10-K of Sotheby's Holdings, Inc. for the year ended December 31, 1999. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP New York, New York March 14, 2000 EX-24 9 EXHIBIT 24 POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of Diana D. Brooks and William S. Sheridan, with full power of substitution, as his true and lawful attorney and agent to execute in his name and on his behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 16th day of February, 2000. /s/ A. Alfred Taubman ---------------------------------- A. ALFRED TAUBMAN POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of Diana D. Brooks and William S. Sheridan with full power of substitution, as his true and lawful attorney and agent to execute in his name and on his behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 2nd day of February, 2000. /s/ Max M. Fisher ---------------------------------- MAX M. FISHER POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of Diana D. Brooks and William S. Sheridan with full power of substitution, as his true and lawful attorney and agent to execute in his name and on his behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 2nd day of February, 2000. /s/ Viscount Blakenham ---------------------------------- VISCOUNT BLAKENHAM POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of Diana D. Brooks and William S. Sheridan with full power of substitution, as his true and lawful attorney and agent to execute in his name and on his behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 1st day of February, 2000. /s/ Walter J.P. Curley ---------------------------------- WALTER J.P. CURLEY POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of Diana D. Brooks and William S. Sheridan with full power of substitution, as her true and lawful attorney and agent to execute in her name and on her behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed her signature this 3rd day of February, 2000. /s/ Sharon Percy Rockefeller ---------------------------------- SHARON PERCY ROCKEFELLER POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of Diana D. Brooks and William S. Sheridan with full power of substitution, as his true and lawful attorney and agent to execute in his name and on his behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 3rd day of February, 2000. /s/ The Marquess of Hartington ---------------------------------- THE MARQUESS OF HARTINGTON POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of Diana D. Brooks and William S. Sheridan, with full power of substitution, as his true and lawful attorney and agent to execute in his name and on his behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 9th day of February, 2000. /s/ Henry R. Kravis ---------------------------------- HENRY R. KRAVIS POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of Diana D. Brooks and William S. Sheridan, with full power of substitution, as his true and lawful attorney and agent to execute in his name and on his behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 1st day of February, 2000. /s/ Conrad Black ---------------------------------- CONRAD BLACK POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of Diana D. Brooks and William S. Sheridan, with full power of substitution, as his true and lawful attorney and agent to execute in his name and on his behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 16th day of February, 2000. /s/ Jeffrey H. Miro ---------------------------------- JEFFREY H. MIRO POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of William F. Ruprecht and William S. Sheridan, with full power of substitution, as his true and lawful attorney and agent to execute in his name and on his behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 29th day of February, 2000. /s/ Michael I. Sovern --------------------------------------- MICHAEL I. SOVERN POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of William F. Ruprecht and William S. Sheridan, with full power of substitution, as her true and lawful attorney and agent to execute in her name and on her behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 9th day of March, 2000. /s/ Diana D. Brooks ----------------------------------- DIANA D. BROOKS POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of William F. Ruprecht and William S. Sheridan, with full power of substitution, as his true and lawful attorney and agent to execute in his name and on his behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 10th day of March, 2000. /s/ Robin Woodhead ------------------------------- ROBIN WOODHEAD POWER OF ATTORNEY The undersigned, a Director of Sotheby's Holdings, Inc., a Michigan corporation (the "Company"), does hereby constitute and appoint each of William F. Ruprecht and William S. Sheridan, with full power of substitution, as her true and lawful attorney and agent to execute in her name and on her behalf, as a Director of the Company, the Company's Annual Report on form 10-K, and any and all amendments thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Each such attorney or agent shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his signature this 9th day of March, 2000. /s/ Deborah Zoullas ------------------------------------ DEBORAH ZOULLAS EX-27 10 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 DEC-31-1999 42,319 0 652,430 11,085 20,843 736,247 305,124 72,463 1,073,512 576,787 100,000 0 0 5,885 371,159 1,073,512 0 442,585 0 85,563 302,849 3,476 5,589 52,150 19,296 32,854 0 0 0 32,854 0.57 0.56
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