NEW YORK.- Remarks Given by Michael I. Sovern, Chairman and William F. Ruprecht, President and Chief Executive Officer on Tuesday, April 29, 2003, 1334 York Avenue - New York, NY.
Michael I Sovern, Chairman
2002 was a year of challenge and accomplishment for Sotheby’s.  The Company continued its restructuring efforts, achieved a 10% increase in Auction Sales despite difficult economic conditions, and implemented important strategic decisions that considerably strengthened our financial outlook.  We are stronger today than at any time in the past three years.
Consider these accomplishments:
- Auction Sales increased 10% to $1.8 billion and our luxury real estate business saw sales volume increase by 13% over 2001.  Buyers proved undeterred by global and economic uncertainty when property of great quality was offered.  Two superb examples are Sir Peter Paul Rubens’ Massacre of the Innocents, which sold for $76.7 million in our summer London Old Master Paintings sale - setting a sterling world record for a work of art - and Willem de Kooning’s Orestes, which sold for $13.2 million in our fall Contemporary sale in New York.
- We continued to cut costs.  Last year we stated a goal of reducing our cost base by $60 million compared with 2000.  By the end of 2002, we had surpassed this goal, reducing operating expenses by over $70 million (excluding charges related to antitrust matters, restructuring plans and employee retention costs).  As a result of these reductions, we have lowered our operating income break-even point for our Auction Sales by some $500 million since 2000, and we expect to improve on that in 2003. 
- As we announced earlier this year, we will end online auctions on Sothebys.com in early May, yielding estimated net annual cost savings of approximately $8 million.
- In February, we dramatically strengthened our balance sheet when we successfully closed a sale-leaseback agreement for our York Avenue headquarters in New York for $167 million in net cash proceeds.  Sotheby’s will continue to occupy the building, widely considered the best auction facility in the world, under a lease agreement for a period of up to 40 years including renewals.  This transaction has provided the Company with vital liquidity by allowing us to refinance $100 million in borrowings under our credit facility and fund our remaining antitrust liabilities.
- We have settled the last of our antitrust cases.  The $20.1 million European Commission fine was paid on February 5th of this year, the International Antitrust Litigation, or Kruman case, settlement was announced in March and is awaiting court approval, of which our share was $20 million, and a settlement was recently reached with a claimant who had opted out of the U.S. Antitrust class.
All of these accomplishments would not have been possible without the exceptional efforts of our employees who are without equal in the auction world. 
Out thanks go also to our management team and Board of Directors, which has been indispensable during this time, and we extend particular appreciation to our departing Board members, Henry Kravis, George Blumenthal, Henry Jarecki and Brian Posner for their help and support of the Company.  Our shared goal is to lead the Company back to profitability, and we will do everything we can to achieve this in 2003.  Finally, I would like to thank Bill Ruprecht, whose leadership, sacrifice and commitment to the people of this great firm, is greatly appreciated.
William F. Ruprecht, President & Chief Executive Officer
Thank you, Michael.  2002 was certainly a year full of challenges and accomplishments.  I too would like to extend my appreciation to all those many people of Sotheby’s whose tremendous efforts have helped us to get through this period.
For the full year 2002, the Company reported a net loss of ($54.7) million or a diluted loss per share of ($0.89).  This figure included pre-tax charges of $65.6 million, or ($0.83) per share, related to antitrust charges, employee retention costs and the Company’s restructuring plans.  Excluding these items, the Company would have reported a net loss of ($3.8) million, or  ($0.06) per share, in 2002.  This represents a 78% improvement over full year 2001 results in which the Company would have recorded a net loss of ($16.9) million, or ($0.28) per share, excluding pre-tax charges of $38.8 million, or ($0.41) per share, related to employee retention costs, the Company’s restructuring plans and antitrust related charges.
As Michael Sovern reported, subject to the court approval of the settlement of the Kruman Litigation, all of our antitrust liabilities are now completely behind us.
Expense Reduction
A continuing goal for Sotheby’s over the past three years has been the reduction of our expense structure, an area in which we have made tremendous progress.  Total full year 2002 operating expenses, excluding employee retention costs, net restructuring charges and special charges were approximately $84 million lower than in 2000.  We believe that expense reductions are a prudent step towards returning the Company back to profitability, especially in light of the current economic and global uncertainties, and we will continue to focus on expense savings in 2003.
Live Auction - 2002
The high end auction market improved in 2002 as compared to 2001 despite continuing global and economic uncertainties.  As a result Sotheby’s Auction Sales increased 10% to $1.8 billion and we were the only auction house to experience such growth.  Also contributing to our enhanced results was the diminished presence of Phillips, who had been irrationally competing for market share in the high end auction market for the past two years.
The return of rational behavior to the high end auction market and strong fourth quarter sales contributed to a 7% increase in North America, while our European Auction Sales increased 13% in part due to the sale of Sir Peter Paul Rubens’ Massacre of the Innocents for a record setting $76.7 million.  We also experienced a 70% increase in Auction sales attributable to single owner collections.
Despite the state of the economic environment buyers will always compete when exceptional works of art are offered.  This was proved on numerous occasions in 2002 as we sold approximately 180 lots for a $1 million and above and increased the average selling price per lot by 35%.  Some of these notable achievements include sale of the previously mentioned Rubens for $76.7 million, a Monet Waterlilies painting for $20.2 million, Alberto Giacometti’s Grande Tete de Diego for $13.8 million, the highest price ever achieved for a coin - the 1933 Double Eagle for $7.6 million, and Willem de Kooning’s Orestes for $13.2 million, which highlighted our strongest Contemporary Art sales in over ten years.
Real Estate
Our luxury real estate business also benefited from a stronger real estate market in 2002.  Real estate revenues for 2002 were up 10% to $36.6 million and operating income was up 72% to $6.3 million.
Steps to Improve Profitability
Our continued goal is to improve profitability and we have taken a number of steps in recent months towards that outcome.
- In January, we announced an increase in our buyer’s premium for sales in New York, London and Geneva.  The increase has been accepted by our clients and we expect it to favorably impact our operating results going forward.
- In February, after Internet sales continued not to meet our expectations we announced that our separate online auctions will be discontinued in early May.  We anticipate that the change in the Company’s Internet strategy will result in an estimated net annual cost savings of approximately $8 million.  The Company will also continue to promote its live auction business through its website and provide online bidding at Sotheby’s live auctions through eBay’s Live Auctions technology.  
-  Also in February, the Company concluded the transaction initially announced in December to sell its York Avenue headquarters for $167 million in net cash proceeds to RFR Holdings.  Sotheby’s has leased back the building from the buyer for a period of up to 40 years including renewals.  This transaction has greatly improved our financial position by providing the Company with much needed liquidity.  The net cash proceeds allows us to pay down $100 million in credit facility borrowings, fund the $20.1 million European Union fine in February, fund the $20 million International Antitrust Litigation, or Kruman case, settlement, which is subject to court approval, and complete a settlement with a claimant who had opted out of the US Antitrust Litigation settlement.
- The Company also refinanced its senior secured credit facility until February 2004.  Additionally, the facility has been reduced to $75 million.
- Finally, as I stated earlier, we will continue to examine our cost structure in 2003 and we hope to add to our successful past efforts to reduce our annual costs.
2003 Auctions
Auction sales in 2003 have gotten off to a good start.  In January, we held our various owners Old Master and Americana sales in New York.  Old Master Paintings and Drawings brought approximately $48 million.  The highlight of the sale was Andrea Mantegna’s Descent into Limbo, which brought $28.6 million and set a record for the artist at auction.  Our Americana Week sales totaled approximately $16 million and The Appell Family Collection, which brought $3.7 million, doubled its presale high estimate.
Our February London Impressionist and Contemporary sales also performed well.  The Impressionist and Modern Art sales brought $37.1 million and were highlighted by Pierre Bonnard’s Le Porte fenetre, which brought $7.0 million demonstrating the continuing demand by buyers for paintings for this quality and rarity.  The Contemporary market continues to perform well.    Our Contemporary sales fetched approximately $25 million - $5 million above the presale low estimate. Our winter business-getting efforts have enabled us to sign a number of extraordinary collections and individual works of art for our spring and summer auction seasons.  In May, in our American Paintings, Americana and Prints sales in New York we will feature the Collection of Meyer and Vivian Potamkin estimated to sell in excess of $10 million.  The collection represents a broad range of the Potamkin’s taste from furniture and decorative arts to prints and American paintings.  Sotheby’s Paris next week will offer Karl Lagerfeld’s Collection of Modernist 1920’s and 30’s furniture, ceramics and metalwork.
Our Impressionist & Modern Art sales in New York in May are estimated to bring between $88 and 123 million.  The anticipated highlight is Pierre-Auguste Renoir’s Dans le Roses estimated at $20 to $30 million.  This extraordinary painting has not been publicly exhibited in over 65 years and is the highest quality Renoir to come to the auction market since Sotheby’s 1990 historic sale of Au Moulin de la Galette for $78.1 million.  Also being offered in the May 6th evening sale are three outstanding works from the collection of the Museum of Fine Arts, Boston, including two exceptional pastels from Degas’ ballet series and a charming scene by Renoir.  The paintings are  estimated to bring between $13 and $17 million.  Our Contemporary sale series is estimated at $44 to $62 million and will be highlighted by a collection of works being sold for the AG Foundation to benefit their charitable works.  Chief among this collection is a Jackson Pollack "drip" painting entitled Number 17, 1949, estimated at $5 to $7 million.
We have a number of exciting works consigned for our London sales as well.  Later this month, we will be auctioning the working manuscript of  Beethoven’s Ninth Symphony, arguably the most important musical work ever to appear at auction.  Prepared for Beethoven by two copyists, the manuscript is marked throughout by thousands of revisions by Beethoven and is estimated in excess of $3 million.  We’re delighted that the manuscript will be coming to New York for exhibition in the next couple of weeks prior to its sale on May 22nd.
And in July, also in London, Sotheby’s is proud to offer for sale a newly discovered Rembrandt self-portrait in its Old Master Paintings Sale.  The painting, which has been hidden for over 300 years behind layers of over-paint has recently emerged after years of painstaking cleaning.  It is only one of three known Rembrandt self-portraits still in private hands and the first to come to auction in 30 years.  The work is estimated to realize in excess of $8 million.
Outlook
While we are encouraged with our improving performance in 2002, the final resolution of our antitrust litigation, and of course the wonderful items we will offer this spring, we do remain guarded about our upcoming spring and summer sales.  The current economic environment, the health crisis in Asia, and the Iraqi war during our spring consignment gathering season have not been helpful.  As I stated before, high end works have sold extremely well over the last few years.  Nevertheless, these worldwide situations have impacted auction consignments and therefore may impact second quarter results.
Closing
We take considerable pride in Sotheby’s strengthening and stable position - the strongest in over three years - as the 2003 spring season gets underway.  Our art market expertise remains unmatched, as does the unwavering commitment of our staff.  It is they who will continue to make the difference.
Once again, we thank our employees, management, Board of Directors and of course you, our shareholders, for your continued support.  We will continue to do everything possible to earn it - and return this Company to profitability.  We look forward to continuing the great tradition of Sotheby’s.