6. Debt

Revolving Credit Facility—On August 31, 2009, Sotheby's and certain of its wholly-owned subsidiaries (collectively, the "Borrowers") entered into a credit agreement (the "Credit Agreement") with an international syndicate of lenders led by General Electric Capital Corporation ("GE Capital"). The Credit Agreement was amended by Sotheby's, GE Capital and the lenders named therein (collectively, the "Lenders") on November 23, 2010. This amendment, among other things, extended the maturity date of the Credit Agreement, reduced borrowing costs and fees, and provided additional flexibility to Sotheby's.

The following summary does not purport to be a complete summary of the Credit Agreement, as amended, and is qualified in its entirety by reference to the Credit Agreement and each of the respective amendments, copies of which were filed as exhibits to previous SEC filings. Terms used, but not defined in this summary, have the meanings set forth in the Credit Agreement and each of the respective amendments.

The Credit Agreement, as amended, provides for a $200 million revolving credit facility (the "Revolving Credit Facility"), subject to a borrowing base, and has a feature whereby any time on or before March 1, 2014 the Borrowers may request, with Lenders' approval, to increase the borrowing capacity of the Credit Agreement, as amended, by an amount not to exceed $50 million. In addition, up to $10 million of the Revolving Credit Facility may be used to issue letters of credit. Sotheby's has not borrowed or issued any letters of credit under the Revolving Credit Facility since its inception. As of June 30, 2011, the amount of available borrowings under the Revolving Credit Facility was approximately $98.3 million, as calculated under the borrowing base provided by the Credit Agreement, as amended.

Borrowings under the Revolving Credit Facility are available in either Dollars to U.S. Borrowers or Pounds Sterling to United Kingdom ("U.K.") Borrowers. The U.S. Borrowers and, subject to certain limitations, the U.K. Borrowers, are jointly and severally liable for all obligations under the Credit Agreement, as amended. In addition, certain subsidiaries of the Borrowers guarantee the obligations of the Borrowers under the Credit Agreement, as amended. The obligations under the Credit Agreement, as amended, are secured by liens on all or substantially all of the personal property of the Borrowers and the Guarantors.

Borrowings are, at the Borrowers' option, either Dollar Index Rate Loans (for U.S. Borrowers only) or LIBOR Rate Loans. Dollar Index Rate Loans bear interest at a rate per annum equal to (a) the highest of (i) the "Prime Rate" as quoted in The Wall Street Journal, (ii) the Federal Funds Rate plus 0.50%, or (iii) the LIBOR Rate plus 1.0%, plus (b) the Applicable Margin, as defined in the Credit Agreement, as amended, and which is generally 1.50% to 2.00% based upon the level of outstanding borrowings under the Revolving Credit Facility. The LIBOR Rate for Dollars or Sterling, as the case may be, for an interest period is equal to (x) the offered rate for deposits in such currency for a period equal to such interest period on the Reuters Screen LIBOR01 Page, plus (y) the Applicable Margin, as defined in the Credit Agreement, as amended, and which is generally 2.50% to 3.00% based upon the level of outstanding borrowings under the Revolving Credit Facility.

The Credit Agreement, as amended, contains certain customary affirmative and negative covenants including, but not limited to, limitations on capital expenditures, limitations on net outstanding auction guarantees and limitations on the use of proceeds from borrowings under the Credit Agreement, as amended. The Credit Agreement, as amended, also restricts quarterly dividend payments to the lesser of $0.10 per share or $8 million. However, the maximum level of quarterly dividend payments may be increased depending upon Sotheby's achievement of a certain Fixed Charge Coverage Ratio in any period. Management believes that Sotheby's is in compliance with the covenants and terms of the Credit Agreement, as amended.

The Credit Agreement, as amended, also contains certain financial covenants, which are only applicable during certain compliance periods. These financial covenants were not applicable for the twelve month period ended June 30, 2011.

The maturity date of the Credit Agreement, as amended, is September 1, 2014, subject to Sotheby's meeting certain liquidity requirements during the period commencing on December 15, 2012 and ending on the date Sotheby's 3.125% Convertible Notes (the "Convertible Notes") are converted or discharged.

Long-Term Debt—As of June 30, 2011, December 31, 2010 and June 30, 2010, Long-Term Debt consisted of the following (in thousands of dollars):


	June 30, 2011			December 31, 2010			June 30, 2010
York Property Mortgage, net of unamortized discount of $14,257, $16,039 and $17,822	$	218,020		$	217,538		$	217,178
Senior Notes, net of unamortized discount of $829, $898 and $1,398		79,143			79,073			126,852
Convertible Notes, net of unamortized discount of $16,678, $20,665 and $24,404		183,222			179,335			175,596
Less current portion:
York Property Mortgage		(3,134	)		(3,084	)		(2,743	)
Convertible Notes, net of unamortized discount of $1,521		(16,611	)		—			—

Total Long-Term Debt	$	460,640		$	472,862		$	516,883

(See the captioned sections below for detailed information related to the York Property Mortgage, Senior Notes and Convertible Notes.)

York Property Mortgage—On February 6, 2009, Sotheby's purchased the land and building located at 1334 York Avenue, New York, New York (the "York Property") from RFR Holding Corp. ("RFR") for a purchase price of $370 million. The York Property is home to Sotheby's sole North American auction salesroom and its principal North American exhibition space, as well as its corporate headquarters.

Sotheby's financed the $370 million purchase price through an initial $50 million cash payment made in conjunction with the signing of the related purchase and sale agreement on January 11, 2008, an $85 million cash payment made when the purchase was consummated on February 6, 2009 and the assumption of an existing $235 million mortgage on the York Property (the "York Property Mortgage"). Sotheby's also agreed to give the principals of RFR favorable consignment terms for the future sale of art at Sotheby's auctions. Management estimated the value of these terms to be approximately $3.8 million.

The York Property Mortgage matures on July 1, 2035, but has an optional pre-payment date of July 1, 2015 and bears an annual rate of interest of approximately 5.6%, which increases subsequent to July 1, 2015. It is Sotheby's current intention to either pre-pay or refinance the mortgage on or about July 1, 2015. In conjunction with the final accounting for the York Property purchase in February 2009, the York Property Mortgage was recorded on Sotheby's balance sheet at its $212.1 million fair value. The fair value of the York Property Mortgage was computed using a discounted cash flow approach based on a market rate of interest, which was estimated by management. The resulting $22.9 million debt discount is being amortized to interest expense over the remaining expected term of the loan. Sotheby's paid fees of $2.4 million in conjunction with the assumption of the York Property Mortgage, which are also being amortized to Interest Expense over the remaining expected term of the loan.

As of June 30, 2011, December 31, 2010 and June 30, 2010, the carrying value of the York Property Mortgage was $218 million, $217.5 million and $217.2 million, respectively. As of June 30, 2011 and December 31, 2010, the current liability related to the York Property Mortgage was $3.1 million. As of June 30, 2010, the current liability related to the York Property Mortgage was $2.7 million. The current portion of the York Property Mortgage is reflected on Sotheby's balance sheet within Other Current Liabilities. As of June 30, 2011, the fair value of the York Property Mortgage was approximately $232 million.

The York Property and the York Property Mortgage are held by 1334 York, LLC, a separate legal entity of Sotheby's that maintains its own books and records and whose results are ultimately consolidated into Sotheby's financial statements. The assets of 1334 York, LLC are not available to satisfy the obligations of other Sotheby's affiliates or any other entity.

Senior Notes—On June 17, 2008, Sotheby's issued $150 million aggregate principal amount of 7.75% Senior Notes, due June 15, 2015. The net proceeds from the issuance of the Senior Notes were approximately $145.9 million, after deducting the initial purchasers' discounts and fees. The Senior Notes have an effective interest rate of 8%. Interest on the Senior Notes is payable semi-annually in cash on June 15 and December 15 of each year.

Through December 31, 2010, Sotheby's had repurchased an aggregate principal amount of $70 million of its Senior Notes for a purchase price of $65.3 million. These repurchases have resulted in a life-to-date non-cash net gain of approximately $2.5million, net of fees, consisting of a $7.8 million gain recognized in the fourth quarter of 2008, a $1 million gain recognized in the first quarter of 2009 and a $6.3 million loss recognized in the fourth quarter of 2010. There have been no Senior Notes repurchases in 2011. As of June 30, 2011, the Senior Notes had a fair value of approximately $87.6 million based on a broker quoted price.

Convertible Notes—On June 17, 2008, Sotheby's issued $200 million aggregate principal amount of 3.125% Convertible Notes, due June 15, 2013. The net proceeds from the issuance of the Convertible Notes were approximately $194.3 million, after deducting transaction costs. Each of Sotheby's existing and future domestic subsidiaries have jointly, severally, fully and unconditionally guaranteed the Convertible Notes on a senior unsecured basis to the extent such subsidiaries guarantee borrowings under the Credit Agreement, as amended.

Interest on the Convertible Notes is payable semi-annually in cash on June 15 and December 15 of each year. Sotheby's may not redeem the Convertible Notes prior to their stated maturity date. As of June 30, 2011, the Convertible Notes had a fair value of approximately $283.3 million based on a broker quoted price.

Upon conversion, the principal amount of the Convertible Notes is payable in cash, shares of Sotheby's Common Stock, or a combination thereof, at the option of Sotheby's, based on an initial conversion rate of 29.4122 shares of Common Stock per $1,000 principal amount of Convertible Notes, which is equivalent to a conversion price of approximately $34 per share (the "Conversion Price"). The maximum number of shares of Common Stock that may be issued upon conversion is approximately 5.8 million shares. The conversion rate for the Convertible Notes is subject to adjustment for certain events.

The Convertible Notes may be converted at any time beginning on March 15, 2013 and ending on the close of business on June 14, 2013. Prior to March 15, 2013, the Convertible Notes may only be converted under certain conditions, including, if during any fiscal quarter (and only during such fiscal quarter), the closing price of Sotheby's Common Stock exceeds $44.20 per share (i.e., 130% of the Conversion Price) for at least 20 trading days in the period of 30 consecutive trading days at the end of the previous quarter (the "Stock Price Trigger"). Upon conversion, Sotheby's will pay or deliver, as the case may be, cash, shares of Common Stock, or a combination thereof, at its election. It is Sotheby's current intent and policy to settle up to the principal amount of the Convertible Notes in cash. However, depending on the level of available cash and Sotheby's liquidity, as well as the amount of conversion requests received at any one time, management may elect to settle the entire Conversion Obligation (i.e., principal amount plus conversion premium) in cash.

On April 1, 2011, the trustee for the Convertible Notes notified bondholders that the Convertible Notes would be convertible at their option for a period beginning on April 1, 2011 and ending on June 30, 2011 as a result of the closing price of Sotheby's Common Stock exceeding $44.20 for 20 trading days in the 30 consecutive trading days ending on March 31, 2011.

In June 2011, Sotheby's received conversion requests totaling a principal amount of $18.1 million from holders of the Convertible Notes. Sotheby's has notified these holders that it will pay the entire Conversion Obligation in cash. In accordance with the terms of the Convertible Notes, the Conversion Obligation will be based on a formula, which is the sum of 1/30^th of the product of the applicable conversion rate and the daily per share volume weighted average stock price for 30 consecutive trading days beginning three trading days after the conversion request is received from the trustee. Management estimates that the Conversion Obligation related to these conversion requests will be approximately $24 million ($18.1 million related to principal and approximately $6 million related to the conversion premium). Sotheby's will simultaneously recover the cash paid to fund the conversion premium through its exercise of a portion of the Convertible Note Hedges (see discussion below). The settlement of the June 2011 conversion requests and the corresponding Convertible Note Hedges will occur in August 2011. Management does not expect the settlement of these transactions to have a material effect on Sotheby's future earnings.

Upon the adoption of Accounting Standards Codification ("ASC") 470-20, Debt – Debt With Conversion and Other Options, the liability and equity components of the Convertible Notes were separately accounted for in Sotheby's financial statements. The liability component was initially valued at $161.8 million using Sotheby's nonconvertible debt borrowing rate, which was estimated to be 7.75% at the date of adoption, and was accounted for as Long-Term Debt. The equity component (i.e., the embedded conversion option) was initially valued at $38.2 million ($21 million, net of taxes) and was accounted for as a component of Additional Paid-In Capital within Shareholders' Equity. The corresponding debt discount is being amortized to Interest Expense over the life of the Convertible Notes using the effective interest rate method. The amount recorded in Shareholders' Equity is not remeasured as long as it continues to meet the conditions for equity classification. As of June 30, 2011, the unamortized discount related to the Convertible Notes was $16.8 million. To the extent that any Convertible Notes are converted prior to June 15, 2013, a pro rata portion of the unamortized discount and deferred transaction costs relating to such conversions would be written off in the period during which the conversions are settled.

As of June 30, 2011, management evaluated the embedded conversion option in the Convertible Notes and concluded that a portion of the amount recorded in Shareholders' Equity no longer met the conditions for equity classification as a result of Sotheby's irrevocable election to settle the Conversion Obligation related to the June 2011 conversion requests solely in cash. Accordingly, as of June 30, 2011, the $4.1 million fair value of this portion of the embedded conversion option was recorded in Other Current Liabilities, with a corresponding reduction to Shareholders' Equity of $2.6 million, net of taxes. Management evaluated the portion of the embedded conversion option that will remain after the settlement of the June 2011 conversion requests as of June 30, 2011 and concluded that it should not be accounted for separately as a derivative financial instrument because it continues to be indexed to Sotheby's Common Stock. Accordingly, this portion of the embedded conversion option in the Convertible Notes was not remeasured and remains recorded as a component of Additional Paid-In Capital within Shareholders' Equity. As of June 30, 2011, the amount recorded in Additional Paid-In Capital related to the embedded conversion option was $34.1 million ($18.4 million, net of taxes). As of December 31, 2010 and June 30, 2010, this amount was $38.2 million ($21 million, net of taxes).

The Stock Price Trigger was not met during the second quarter of 2011. Therefore, as of June 30, 2011, $16.6 million of the Convertible Notes (representing the principal amount of the Convertible Notes to be redeemed in the third quarter of 2011, net of unamortized discount) is reflected within Current Liabilities and the remaining carrying amount of Convertible Notes ($166.6 million) is reported within Long-Term Debt on Sotheby's balance sheet. The Convertible Notes may again be classified within Current Liabilities if the Stock Price Trigger is met in future fiscal quarters.

Convertible Note Hedge and Warrant Transactions—On June 11, 2008, in conjunction with the issuance of the Convertible Notes, Sotheby's entered into convertible note hedge transactions (the "Convertible Note Hedges") that allow Sotheby's to purchase its Common Stock from affiliates of Bank of America and Goldman Sachs & Co. (collectively, the "Counterparties") at a price equal to the Conversion Price of the Convertible Notes. The Convertible Note Hedges cover, subject to customary anti-dilution adjustments, approximately 5.8 million shares of Common Stock. The Convertible Note Hedges may be settled in cash, Sotheby's Common Stock, or a combination thereof, and are intended to offset the impact of any conversion premium payable upon potential future conversions of the Convertible Notes. In the event that Sotheby's elects to settle the conversion premium related to any Convertible Note redemptions in cash, the Convertible Note Hedges will allow Sotheby's to recover this amount. In the event that Sotheby's elects to settle the conversion premium related to any Convertible Note redemptions in shares of its Common Stock, the Convertible Note Hedges will offset the dilutive impact of any shares issued. The Convertible Note Hedges expire upon the maturity of the Convertible Notes.

As discussed above, in June 2011, Sotheby's received conversion requests totaling a principal amount of $18.1 million from holders of the Convertible Notes. As a result, in June 2011, Sotheby's exercised the portion of the Convertible Note Hedges related to these conversion requests and will recover the cash paid to fund the conversion premium. The settlement of the June 2011 conversion requests and the corresponding Convertible Note Hedges will occur in August 2011. Management does not expect the settlement of these transactions to have a material effect on Sotheby's future earnings.

The Convertible Note Hedges initially met all of the applicable criteria for equity classification and, as a result, in June 2008, the related $40.6 million cost ($22.5 million, net of taxes) was recorded on Sotheby's balance sheet as a component of Additional Paid-In Capital within Shareholders' Equity. As of June 30, 2011, management evaluated the Convertible Note Hedges and concluded that a portion of the amount recorded in Shareholders' Equity no longer met the conditions for equity classification as a result of the irrevocable election to settle the June 2011 exercises of the Convertible Note Hedges solely in cash. Accordingly, as of June 30, 2011, the $8.2 million fair value of this portion of the Convertible Note Hedges was recorded in Other Current Assets, with a corresponding increase to Shareholders' Equity of $5.3 million, net of taxes. Management evaluated the portion of the Convertible Note Hedges that will remain after the settlement of the June 2011 exercises as of June 30, 2011 and concluded that it should not be accounted for separately as a derivative financial instrument because it continues to be indexed to Sotheby's Common Stock. Accordingly, this portion of the Convertible Note Hedges was not remeasured and remains recorded as a component of Additional Paid-In Capital within Shareholders' Equity.

On June 11, 2008, Sotheby's also entered into warrant transactions, whereby it sold to the Counterparties Warrants to acquire, subject to customary anti-dilution adjustments, approximately 5.8 million shares of Common Stock at $44.905 per share that may only be exercised beginning on the June 15, 2013 maturity date of the Convertible Notes. As of June 11, 2008, the Warrants met all of the applicable criteria for equity classification and, as a result, the $22.3 million in net proceeds received from the sale of the Warrants was recorded on Sotheby's balance sheet within Additional Paid-In Capital in Shareholders' Equity. As of June 30, 2011, management evaluated the Warrants and concluded that they should not be accounted for separately as a derivative financial instrument because they continue to be indexed to Sotheby's Common Stock. Accordingly, the $22.3 million in net proceeds received from the sale of the Warrants remains recorded as a component of Additional Paid-In Capital within Shareholders' Equity.

Future Principal and Interest Payments—As of June 30, 2011, the aggregate future principal and interest payments due under the York Property Mortgage, the Convertible Notes and the Senior Notes are as follows (in thousands of dollars):


July 2011 to June 2012	$	45,851
July 2012 to June 2013		209,769
July 2013 to June 2014		22,202
July 2014 to June 2015		102,173
July 2015 to June 2016		219,516

Total future principal and interest payments	$	599,511

Interest Expense—For the three and six months ended June 30, 2011 and 2010, Interest Expense consisted of the following (in thousands of dollars):


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Revolving credit facility:
Amortization of amendment and arrangement fees	$	436	$	674	$	881	$	1,345
Commitment fees		316		506		622		989

Sub-total		752		1,180		1,503		2,334

York Property Mortgage		4,213		4,240		8,401		8,444
Senior Notes		1,585		2,537		3,169		5,073
Convertible Notes		3,524		3,379		7,012		6,723
Other interest expense		485		381		862		762

Total interest expense	$	10,559	$	11,717	$	20,947	$	23,336

For the three and six months ended June 30, 2011 and 2010, Other interest expense consisted primarily of the amortization of debt issuance costs related to the Senior Notes and Convertible Notes.

For the three and six months ended June 30, 2011 and 2010, Interest Expense related to the Convertible Notes consisted of the following (in thousands of dollars):


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Contractual coupon interest expense	$	1,562	$	1,562	$	3,125	$	3,125
Discount amortization		1,962		1,817		3,887		3,598

Total	$	3,524	$	3,379	$	7,012	$	6,723