SOTHEBYS HOLDINGS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2002
Commission File Number 1-9750

Sotheby's Holdings, Inc.
--------------------------
(Exact name of registrant as specified in its charter)

Michigan 38-2478409
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

38500 Woodward Avenue, Suite 100
Bloomfield Hills, Michigan 48304
- ---------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (248) 646-2400

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/. No / /.

As of August 1, 2002, there were outstanding 44,930,877 shares of Class A
Limited Voting Common Stock, par value $0.10 per share, and 16,549,650 shares of
Class B Common Stock, par value $0.10 per share, of the Registrant. Each share
of Class B Common Stock is freely convertible into one share of Class A Limited
Voting Common Stock.

INDEX

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4

SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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SOTHEBY'S HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The consolidated financial statements included herein have been prepared by
Sotheby's Holdings, Inc. (together with its subsidiaries, the "Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). These consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
notes thereto on Form 10-K for the year ended December 31, 2001.

Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform to the current year presentation.

In the opinion of the management of the Company, all adjustments,
consisting of normal recurring adjustments, necessary for a fair
presentation of the financial statements included herein have been made.

2. SEASONALITY OF BUSINESS

The worldwide art auction market has two principal selling seasons, spring
and fall. Consequently, during the summer and winter, Auction Sales (as
defined in Part I, Item 2 "Management's Discussion and Analysis of Results
of Operations and Financial Condition") are considerably lower. The table
below demonstrates that approximately 80% to 84% of the Company's Auction
Sales are derived from the second and fourth quarters of the year.

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3. SEGMENT REPORTING

For the three and six months ended June 30, 2002 and 2001, revenues for the
Company's operating segments are as follows (in thousands):

For the three and six months ended June 30, 2002 and 2001, profit or (loss)
for the Company's operating segments are as follows (in thousands):

The following is a reconciliation of profit or (loss) for the Company's
reportable operating segments to the applicable line items in the
Consolidated Statements of Operations (in thousands):

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Total assets for the Company's reportable operating segments are as follows
(in thousands):

The following is a reconciliation of assets for the Company's reportable
operating segments to the applicable line items in the Consolidated Balance
Sheets (in thousands):

The other unallocated amounts consist primarily of deferred tax assets.

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4. RECEIVABLES

Receivables consist of the following (in thousands):

The Company provides collectors and dealers with financing generally
secured by works of art that the Company either has in its possession or
permits the borrower to possess. The Company generally makes two types of
secured loans: (1) advances secured by consigned property to borrowers who
are contractually committed, in the near term, to sell the property at
auction (a "consignor advance"); and (2) general purpose loans to
collectors 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 against 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. Under certain
circumstances, the Company also makes unsecured loans to collectors and
dealers. Included in net notes receivable and consignor advances are
unsecured loans totaling $14.1 million, $31.5 million and $33.0 million at
June 30, 2002, December 31, 2001 and June 30, 2001, respectively.

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

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lend at loan to value ratios higher than 50%. In certain of these
situations, the Company finances the purchase of works of art by certain
art dealers through unsecured loans. The property purchased pursuant to
such unsecured loans is sold by the dealer or at auction with any net
profit or loss shared by the Company and the dealer. During the fourth
quarter of 2000, the Company recorded a $9.0 million provision related to
one such unsecured loan. This loan was written off against the reserve
during the first quarter of 2001. At June 30, 2002, December 31, 2001 and
June 30, 2001, the net total of all such unsecured loans was $7.5 million,
$15.5 million and $16.9 million, respectively.

At June 30, 2002, one consignor advance comprised approximately 12% of the
net notes receivable and consignor advances balance (current and
non-current). No other note receivable or consignor advance exceeded 10% of
the Company's net notes receivable and consignor advances balance at June
30, 2002.

The weighted average interest rates charged on net notes receivable and
consignor advances were 5.3%, 7.9% and 8.9% at June 30, 2002, December 31,
2001 and June 30, 2001, respectively.

Changes in the allowance for credit losses related to notes receivable and
consignor advances for the six months ended June 30, 2002 and 2001 are as
follows (in thousands):

5. GOODWILL

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Intangible Assets." SFAS No. 142
eliminates the amortization of goodwill and instead requires that goodwill
be tested for impairment on at least an annual basis. The Company has
completed a transitional impairment test on its goodwill as of the date of
adoption and determined that its goodwill was not impaired.

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The table below reconciles the net income (loss) reported for the three and
six months ended June 30, 2001 to the adjusted net income (loss), which is
presented as if the Company adopted SFAS No. 142 on January 1, 2001. The
table below also compares the adjusted prior year amounts to current year
results.

The impact of goodwill amortization on basic and diluted loss per share for
the three and six months ended June 30, 2001 is less than $0.01 per share.

Changes in the carrying amount of goodwill for the six months ended June
30, 2002, by operating segment, are as follows:

6. CREDIT ARRANGEMENTS

Short-term borrowings and long-term debt consist of the following (in
thousands):

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BANK CREDIT FACILITIES - In July 2002, the Company extended the maturity
date of the senior secured revolving credit facility (the "Revolving
Facility") under its credit agreement ("the Amended and Restated Credit
Agreement") from July 10, 2002 to August 11, 2002 and reduced the borrowing
capacity from $120 million to $100 million. Effective August 12, 2002, the
maturity date of the Revolving Facility will be extended to
February 11, 2003.

Effective August 12, 2002, the maturity date of the senior secured term
facility (the "Term Facility") under the Amended and Restated Credit
Agreement will be extended from August 11, 2002 to February 11, 2003 and
the borrowing capacity will be reduced from $130 million to $100 million.

The Company will pay fees of $2.0 million in connection with the August
2002 extension of the Amended and Restated Credit Agreement, which will be
amortized over the extended term of the agreement.

The Company's obligations under the Amended and Restated Credit Agreement
are secured by substantially all of the assets of the Company and its
domestic subsidiaries, including a mortgage on the Company's headquarters
at 1334 York Avenue in New York (the "York Property"). In addition, any
borrowings by the Company's United Kingdom ("U.K.") affiliates and Swiss
affiliate are secured by their respective loan portfolios. Borrowings under
the Amended and Restated Credit Agreement may be used for general corporate
purposes and generally bear interest equal to LIBOR plus 3.5%. The Amended
and Restated Credit Agreement also contains certain financial covenants,
including covenants requiring the Company to maintain a minimum net worth
and to meet certain quarterly leverage ratio and interest coverage ratio
tests. Additionally, the Amended and Restated Credit Agreement has a
covenant that requires the Company to limit dividend payments. The Company
was in compliance with these financial covenants as of June 30, 2002.

At June 30, 2002, the Company had outstanding short-term borrowings of $130
million under the Term Facility of the Amended and Restated Credit
Agreement at a weighted average interest rate of 4.9%. At June 30, 2002,
the Company had no outstanding borrowings under the Revolving Facility.

As discussed above, the Term Facility and Revolving Facility under the
Company's Amended and Restated Credit Agreement are available through
February 11, 2003. On this date, the Term Facility and the Revolving
Facility will expire and any outstanding borrowings will

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be due and payable to the Company's existing lender group. In order to fund
the repayment of any such outstanding borrowings and to provide for the
Company's long-term operating needs and capital requirements, as well as to
fund the remaining payments due under the Company's antitrust fine (see
Part II, Item 1 "Legal Proceedings"), the redemption of Discount
Certificates to be distributed as part of the U.S. Antitrust Litigation
settlement (see Note 10), the fine resulting from the European Commission
investigation (see Note 10), payments due under the Company's retention
programs (see Note 11) and interest payments related to the Company's
long-term debt securities, additional funding will be necessary to
supplement operating cash flows.

On June 3, 2002, A. Alfred Taubman, the controlling shareholder of the
Company, filed with the SEC an amended Schedule 13D in which he announced
his intention to work in cooperation with the Company to explore a possible
sale or merger of the Company or the sale of his stake in the Company. If
there is a sale or merger of the Company or a sale of A. Alfred Taubman's
stake in the Company, management currently believes that any new
controlling shareholder would provide, arrange or facilitate the financing
necessary to conduct the Company's business.

If a sale or merger of the Company or a sale of A. Alfred Taubman's stake
in the Company is not consummated by February 11, 2003, management
currently believes it could obtain an extension, amendment or refinancing
of the Amended and Restated Credit Agreement. Alternatively, management
currently believes that it has other options available for capital
resources, including, but not limited to, the issuance of various types of
debt instruments with varying maturities including convertible debt, the
issuance of additional equity securities, a sale-leaseback of the York
Property, the sale of certain other corporate assets or operating units and
the collection of client loans. Some of the above alternatives might come
at a higher cost than an extension, amendment or refinancing of the Amended
and Restated Credit Agreement or would limit the Company's operating
flexibility. Additionally, any convertible debt or equity security issuance
may be dilutive.

If the Company were unable to secure adequate long-term funding or satisfy
its liquidity needs through a new controlling shareholder or pursuant to
one of the other options stated above prior to the expiration of the
Amended and Restated Credit Agreement, this would have a material adverse
effect on the Company's business, results of operations and/or financial
condition.

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SENIOR UNSECURED DEBT - In February 1999, the Company issued a tranche of
long-term debt securities (the "Notes"), pursuant to the Company's $200
million shelf registration with the SEC, 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 from placing liens on property and
entering into sale-leaseback transactions, excluding the York Property. The
Company was in compliance with these covenants as of June 30, 2002.

An event of default related to the Amended and Restated Credit Agreement
discussed above does not, in and of itself, constitute an event of default
under the Indenture pursuant to which the Notes were issued.

If and to the extent required under the Indenture pursuant to which the
Notes were issued and subject to certain exceptions contained in the
Indenture, the security documents executed in connection with the Amended
and Restated Credit Agreement provide that the obligations under the Notes
shall be secured equally and ratably with that portion of the obligations
under the Amended and Restated Credit Agreement that exceed the permitted
exceptions contained in the Indenture.

7. DERIVATIVE INSTRUMENTS

The Company utilizes forward exchange contracts to manage exposures related
to foreign currency risks, which primarily arise from foreign currency
denominated intercompany balances. Generally, such intercompany balances
are centrally funded and settled through the Company's global treasury
function. The Company's primary objective for holding derivative
instruments is to minimize foreign currency risks using the most effective
methods to eliminate or reduce the impacts of these exposures.

The forward exchange contracts entered into by the Company are used as
economic cash flow hedges of the Company's exposure to foreign currency
denominated intercompany balances. Such contracts are typically short-term
with settlement dates no more than one month from their inception. These
contracts are not designated as hedging instruments under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and are
recorded in the Company's Consolidated Balance Sheets at their fair value
with the changes in the fair value of the derivative being recognized
currently in earnings. Such changes in fair value are generally

14

offset by the revaluation of the underlying intercompany balance in
accordance with SFAS No. 52, "Foreign Currency Translation." As a result,
upon settlement, the net impact on the Company's earnings of such
derivative instruments represents the transaction costs related to the
derivatives. For the three and six months ended June 30, 2002 and 2001,
such costs, which are reflected in other income (expense), were not
material to the Company's results of operations.

The Company's Consolidated Balance Sheets at June 30, 2002 and 2001 include
a nominal liability recorded within accounts payable and accrued
liabilities reflecting the fair value of the Company's forward exchange
contracts.

The adoption of SFAS No. 133 on January 1, 2001, resulted in a cumulative
pre-tax decrease to other comprehensive income of $0.3 million ($0.2
million after-tax) during the first quarter of 2001. Substantially this
entire amount was reclassified into earnings as other expense during the
first quarter of 2001. The remaining amount was reclassified into earnings
during the second quarter of 2001.

8. COMPREHENSIVE INCOME (LOSS)

The Company's comprehensive income (loss) includes the net income (loss)
for the period, as well as other comprehensive income (loss), which
consists of the change in the foreign currency translation adjustment
account during the period. For the three and six months ended June 30,
2002, the Company's other comprehensive income is primarily attributable to
the weakening of the U.S. Dollar against the U.K. Pound Sterling and the
Euro during those periods. For the three and six months ended June 30, 2002
and 2001, comprehensive income (loss) is as follows (in thousands):

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9. SPECIAL CHARGES

For the three and six months ended June 30, 2002 and 2001, the Company
recorded the following charges (credits) in the Consolidated Statements
of Operations related to the investigation by the Antitrust Division of
the United States Department of Justice (the "DOJ") and other related
matters, as discussed in Part II, Item 1 "Legal Proceedings"
(in thousands):

In the first quarter of 2002, the Company entered into a final settlement
agreement with its former Chief Executive Officer with respect to the DOJ
investigation and other related matters. As part of this settlement
agreement, in addition to relinquishing all of her stock options in 2000,
the Company's former Chief Executive Officer paid the Company $3.25
million. Of this amount, $2.05 million was paid by her relinquishment of
vested benefits under the Company's Benefit Equalization Plan and the
remaining $1.2 million was paid in cash. As a result, the Company recorded
in special charges a reduction of accrued compensation cost of
approximately $2.05 million and a recovery of $1.2 million in the first
quarter of 2002.

Amounts charged to the Company's settlement liabilities related to the DOJ
investigation and other related matters during the six months ended June
30, 2002 were as follows (in thousands):

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10. COMMITMENTS AND CONTINGENCIES

COMMITMENTS - In conjunction with the retention programs approved during
2001 (see Note 11), the Company entered into employment agreements with a
group of certain key employees, which expire at various dates through
December 31, 2003. Such agreements provide, among other benefits, for
minimum salary levels and incentive bonuses which are payable if specified
Company and individual goals are attained, as well as cash awards in
conjunction with the Company's retention programs. The aggregate commitment
for future salaries at June 30, 2002, excluding incentive bonuses and cash
awards in conjunction with the Company's retention programs, was
approximately $3.5 million.

LEGAL ACTIONS - The European Commission is conducting an investigation
regarding commissions charged by the Company and Christie's for auction
services and other trading terms. Although the outcome of this
investigation cannot presently be determined, the fine resulting from this
investigation is likely to have a material impact on the Company's
financial condition, liquidity and/or results of operations. Although the
amount of the fine that will be imposed by the European Commission
cannot be reasonably estimated, the maximum fine would be 10% of the
Company's prior year total revenues. The European Commission has confirmed
that the Company is regarded as cooperating with its investigation and may
be entitled to a degree of leniency. (See Part II, Item 1 "Legal
Proceedings" for further information regarding the investigation by the
European Commission.)

Certain class members appealed the court's order approving the settlement
of the U.S. Antitrust Litigation (as defined in Part II, Item 1 "Legal
Proceedings"). On July 30, 2002, the United States Court of Appeals for the
Second Circuit affirmed the decision of the court.

One of the parties that opted out of the class action settlement in the
U.S. Antitrust Litigation has threatened to commence a lawsuit against the
Company and Christie's alleging antitrust violations and is seeking
approximately $19 million in damages. The parties have agreed to enter into
non-binding mediation to attempt to resolve this claim, and the mediation
process is expected to begin shortly. Although there were other opt-outs
from the settlement of the U.S. Antitrust Litigation, no other claims have
been asserted to date. The Company believes that its maximum potential
exposure in this matter is substantially less than the amount of the claim;

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however, the amount of any potential loss is not currently estimatable.

On January 30, 2001, the United States District Court for the Southern
District of New York granted the Company's motion to dismiss the
International Antitrust Litigation (as defined in Part II, Item 1 "Legal
Proceedings"). Plaintiffs appealed the court's decision to the United
States Court of Appeals for the Second Circuit. On March 13, 2002, the
Second Circuit Court of Appeals reversed the District Court's ruling that
it lacked jurisdiction over auctions held by the Company, its subsidiaries
and Christie's outside of the United States and remanded the case to the
District Court to consider whether the International Antitrust Litigation
should be dismissed on other grounds. The Company intends to file a
petition for certiorari seeking review of the Court of Appeals' decision by
the United States Supreme Court. (See Part II, Item 1 "Legal Proceedings"
for further information regarding the International Antitrust Litigation.)

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.

LENDING AND OTHER CONTINGENCIES - The Company enters into legally binding
arrangements to lend, primarily on a collateralized basis, to potential
consignors and other individuals who have collections of fine art or other
objects (see Note 4). However, potential consignor advances related to such
arrangements are subject to certain limitations and conditions. Unfunded
commitments to extend additional credit were approximately $13.2 million at
June 30, 2002.

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 and, therefore, the Company must pay the
difference between the sale price at auction and the amount of the
guarantee or if the property does not sell, the amount of the guarantee
must be paid. At August 1, 2002, the Company had outstanding guarantees
totaling approximately $23.9 million, which covers auction property having
a mid-estimate sales price of approximately $28.9 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

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Company is obligated under the terms of certain guarantees to fund a
portion of the guaranteed amount prior to the auction. As of August 1,
2002, $6.1 million had been funded in connection with outstanding
guarantees.

The vendor's commission discount certificates (the "Discount Certificates")
to be distributed as part of the U.S. Antitrust Litigation settlement will
expire five years after the date they are first issued. However, the face
value of any unused Discount Certificates may be redeemed for cash at the
end of four years. The Court determined that the $62.5 million face value
of the Discount Certificates had a fair market value of not less than $50
million, which equals the value of the Discount Certificates that the
Company has recorded in the Consolidated Balance Sheets within the
long-term settlement liability. The Discount Certificates are currently
expected to be printed and issued to the class of plaintiffs sometime in
2003. The Company expects to incur administrative costs for printing and
issuing the Discount Certificates, as well as for processing any
redemptions of the Discount Certificates. These costs have not been
expensed since they are currently not estimatable due to the expected
timing of when the Discount Certificates will be printed and issued.

In the opinion of management, the commitments and contingencies described
above currently are not expected to have a material adverse effect on the
Company's financial condition, liquidity and/or results of operations, with
the exception of the resolution of the investigation by the European
Commission regarding commissions charged by the Company and Christie's for
auction services and other trading terms and the resolution of the
threatened litigation by one of the parties that opted out of the class
action settlement in the U.S. Antitrust Litigation, and the possible
exception of the cash redemption of any unused Discount Certificates, the
administrative costs for printing and issuing the Discount Certificates,
as well as for processing any redemptions of the Discount Certificates and
the resolution of the International Antitrust Litigation.

(See Note 11 for other contingencies.)

11. RETENTION PROGRAMS

During 2000, the Compensation Committee of the Board of Directors (the
"Compensation Committee") approved cash awards for the retention of certain
key employees. During 2001, the Compensation Committee approved plans
providing for further cash awards for the retention of certain key
employees. Employees granted such cash awards will receive cash payments
upon fulfillment of full-time

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employment through certain dates in 2002 and 2003. An employee granted a
cash award under any of the foregoing arrangements who leaves the Company
prior to such date will, generally, forfeit his or her right to payment.
Under all of the foregoing arrangements, up to $7.2 million is payable in
September 2002, up to $4.0 million is payable in December 2002, up to $11.6
million is payable in January 2003 and up to $3.0 million is payable in
December 2003.

Certain employees granted such awards received cash payments of
approximately $21.5 million in the first quarter of 2002 upon the
fulfillment of full-time employment through certain dates.

All amounts related to the retention programs discussed above are being
amortized over the contractual service period. For the three and six months
ended June 30, 2002 and 2001, the Company expensed the following amounts
related to its retention programs (in thousands):

(See Note 13, Related Party Transactions.)

12. NET RESTRUCTURING CHARGES

The Company recorded the following amounts related to the restructuring
plans described below during the three and six months ended June 30, 2002
and 2001 (in thousands):

1998 RESTRUCTURING PLAN

During the second quarter of 2001, the Company reversed the remaining 1998
restructuring liability related to the consolidation and integration of its
New York operations into the York Property. As the consolidation and
integration was completed in the second

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quarter of 2001, the Company determined that this liability was no longer
necessary.

2000 RESTRUCTURING PLAN

During the fourth quarter of 2000, management completed a strategic and
operational review of the Company's businesses. Based on the results of
this review, the Board of Directors approved a restructuring plan in the
Company's Auction segment in December 2000. The liability related to the
2000 Restructuring Plan is recorded within accounts payable and accrued
liabilities in the Company's Consolidated Balance Sheets. Amounts charged
to the restructuring liability through June 30, 2002 were as follows (in
thousands):

The remaining cash expenditures related to the 2000 Restructuring Plan,
expected to be approximately $0.5 million, are expected to be substantially
completed by the end of 2002.

2001 RESTRUCTURING PLAN

During the third quarter of 2001, management completed a further review of
the Company's businesses. Based on the results of this review, the Board of
Directors approved a restructuring plan in September 2001 for the Company's
live auction business within the Auction segment, as well as its Finance
and Real Estate segments and certain corporate departments.

During the fourth quarter of 2001, as authorized by the Board of Directors,
management approved a restructuring plan for the Company's online auction
business within the Auction segment.

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The liability related to the 2001 Restructuring Plan is recorded within
accounts payable and accrued liabilities in the Company's Consolidated
Balance Sheets. Amounts charged to the restructuring liability through June
30, 2002 were as follows (in thousands):

The remaining cash expenditures related to the 2001 Restructuring Plan are
expected to be approximately $2.9 million and are expected to be
substantially completed by the end of 2002.

13. RELATED PARTY TRANSACTIONS

For the three and six months ended June 30, 2002, the Company recognized
approximately $0.5 million and $0.6 million, respectively, of auction
commission revenue related to transactions with related parties.

For the three and six months ended June 30, 2001, the Company recognized
approximately $0.7 million and $3.0 million, respectively, of auction
commission revenue related to transactions with related parties.

Approximately $13.1 million of the cash retention awards remaining to be
paid by the Company is guaranteed by A. Alfred Taubman, a principal
shareholder of the Company. (See Note 11 for additional information on the
Company's retention programs.)

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

The worldwide auction business is highly seasonal in nature, with two principal
selling seasons, spring and fall. Accordingly, first and third quarter results
reflect lower Auction Sales (as defined below) and lower operating results than
the second and fourth quarters due to the fixed nature of many of the Company's
operating expenses. (See Note 2 of Notes to Consolidated Financial Statements
for additional information.)

AUCTION SALES FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001 - The aggregate
hammer price of property sold at auction by the Company ("Auction Sales"), which
includes buyer's premium, totaled $684.0 million for the three months ended June
30, 2002, a decrease of 6% compared to the same period in 2001. Excluding the
impact of favorable foreign currency translations, Auction Sales decreased 8%.
The decrease in worldwide Auction Sales reflects a 21% decrease in the number of
lots sold in the second quarter of 2002 when compared to the same period in
2001, partially offset by a 17% increase in the average selling price per lot
sold.

The following is a geographical breakdown of Auction Sales for the three months
ended June 30, 2002 and 2001 (in thousands):

Auction Sales in North America decreased $35.7 million, or 9%, for the three
months ended June 30, 2002 when compared to the same period in 2001. The
decrease in North America was primarily the result of a $68.6 million, or
75%, decrease in Auction Sales attributable to single-owner collections.
Specifically, the second quarter of 2001 included the single-owner sale of
Works from the Collection of Stanley J. Seeger for which there was no
comparable sale in the second quarter of 2002. This decrease was partially
offset by increased sales of Impressionist Art and American Paintings.

Auction Sales in Europe decreased $14.4 million, or 5%, for the three months
ended June 30, 2002 when compared to the same period in 2001. Excluding the
impact of favorable foreign currency translations, Auction Sales in Europe
decreased 9%. The decrease in Europe was primarily the result of a $16.0
million, or 40%, decrease in

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Auction Sales attributable to single-owner collections. Specifically, the second
quarter of 2001 included a significant single-owner Manuscripts sale, as well as
the single-owner sale of The Leverhulme Collection for which there were no
comparable sales in the second quarter of 2002. Also unfavorably impacting the
comparison to the prior year are decreased sales of jewelry in Switzerland and
British Pictures. These decreases were partially offset by better results from
the spring Impressionist and Contemporary sales and, to a lesser extent,
improvements in other small paintings sales.

Auction Sales in Asia increased $7.9 million, or 20%, for the three months
ended June 30, 2002 when compared to the same period in 2001. The increase in
Asia was primarily due to the successful spring sales in Hong Kong of Chinese
Ceramics and Western Jewelry. For the three months ended June 30, 2002,
Auction Sales in Asia were not materially affected by the translation to U.S.
Dollars.

AUCTION SALES FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 - For the six
months ended June 30, 2002, Auction Sales totaled $874.1 million, a decrease of
7% compared to the same period in 2001. Excluding the impact of favorable
foreign currency translations, Auction Sales decreased 8%. The decrease in
worldwide Auction Sales reflects a 25% decrease in the number of lots sold
during the first six months of 2002 when compared to the same period in 2001,
partially offset by a 22% increase in the average selling price per lot sold.

The following is a geographical breakdown of Auction Sales for the six months
ended June 30, 2002 and 2001 (in thousands):

Auction Sales in North America decreased $58.9 million, or 11%, for the six
months ended June 30, 2002 when compared to the same period in 2001. The
decrease in North America was primarily the result of a $72.9 million, or
60%, decrease in Auction Sales attributable to single-owner collections.
Specifically, the first six months of 2001 included the single-owner sale of
Works from the Collection of Stanley J. Seeger for which there was no
comparable sale in the first six months of 2002. Also unfavorably impacting
the comparison to the prior year are decreased sales of Old Master Paintings,
Jewelry and Contemporary

24

Art. These decreases were partially offset by increased sales of Impressionist
Art and American Paintings.

Auction Sales in Europe decreased $17.8 million, or 5%, for the six months
ended June 30, 2002 when compared to the same period in 2001. Excluding the
impact of favorable foreign currency translations, Auction Sales in Europe
decreased 7%. The decrease in Europe was primarily attributable to decreased
jewelry sales in Switzerland and lower sales of British Pictures, as well as
reduced results in the winter Impressionist sales.

Auction Sales in Asia increased $7.9 million, or 20%, for the six months
ended June 30, 2002 when compared to the same period in 2001. The increase in
Asia was primarily due to the successful spring sales in Hong Kong of Chinese
Ceramics and Western Jewelry. For the six months ended June 30, 2002, Auction
Sales in Asia were not materially affected by the translation to U.S. Dollars.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
- - Note 3 of Notes to Consolidated Financial Statements ("Segment Reporting")
should be read in conjunction with this discussion.

Worldwide auction and related revenues decreased 4% for the three months
ended June 30, 2002 when compared to the same period in 2001. Excluding the
impact of favorable foreign currency translations, worldwide auction and
related revenues decreased 6%. The decrease was principally due to lower
buyer's premium revenues primarily resulting from the decreased Auction Sales
discussed above partially offset by incremental revenues associated with the
new buyer's premium rate structure that became effective on April 1, 2002.
Additionally, results for the period reflect increased shared and
introductory auction commissions as well as decreased expense recoveries
primarily due to the competitive environment for consignments. These
unfavorable variances are partially offset by increased principal activities
primarily due to successful auction guarantees in the spring Impressionist
and Contemporary sales in New York.

Worldwide auction and related revenues decreased 8% for the six months ended
June 30, 2002 when compared to the same period in 2001. Excluding the impact of
favorable foreign currency translations, worldwide auction and related revenues
decreased 9%. The decrease was principally due to lower buyer's premium and
vendor's commission revenues, as well as decreased private treaty revenues
partially offset by increased principal activities. The decrease in buyer's
premium revenues was primarily due to the factors discussed in the previous
paragraph. The decrease in vendor's commission revenues was principally due to
the decreased Auction Sales

25

discussed above. The increase in principal activities was primarily due to the
successful auction guarantees discussed in the previous paragraph.

Other revenues increased 17% for the three months ended June 30, 2002 when
compared to the same period in 2001. The increase was primarily due to a $3.4
million, or 43%, increase in revenues from the Real Estate segment partially
offset by a $1.8 million, or 56%, decrease in revenues from the Finance segment.
The increase in Real Estate revenues was primarily due to higher sales volume
principally resulting from an increase in unit sales. The decrease in Finance
revenues was primarily due to a lower average outstanding balance of notes
receivable and consignor advances and lower interest rates. For the three months
ended June 30, 2002, other revenues were not materially affected by the
translation to U.S. Dollars.

Other revenues decreased 5% for the six months ended June 30, 2002 when compared
to the same period in 2001. The decrease was primarily due to a $4.4 million, or
60%, decrease in revenues from the Finance segment partially offset by a $2.9
million, or 18%, increase in revenues from the Real Estate segment. The decrease
in Finance revenues was primarily due to a lower average outstanding balance of
notes receivable and consignor advances and lower interest rates. The increase
in Real Estate revenues was primarily due to higher sales volume principally
resulting from an increase in unit sales. For the six months ended June 30,
2002, other revenues were not materially affected by the translation to U.S.
Dollars.

Direct costs of services (consisting largely of corporate marketing and sale
marketing expenses, as well as catalogue production and distribution costs)
decreased 21% and 20% for the three and six months ended June 30 2002,
respectively, when compared to the same periods in 2001. These decreases were
principally due to lower catalogue production costs primarily resulting from
a decrease in sales volume, as well as the Company's use of digital
photography and other catalogue savings initiatives. Additionally, results
for the three and six months ended June 30, 2002 reflect savings in other
live auction direct costs and marketing expenses principally resulting from
the Company's restructuring plans (as discussed below and in Note 12 of Notes
to Consolidated Financial Statements) and other cost containment efforts. For
the three and six months ended June 30, 2002, direct costs of services were
not materially affected by the translation to U.S. Dollars.

Salaries and related costs decreased 7% and 9% for the three and six months
ended June 30, 2002, respectively, when compared to the same periods in 2001
primarily due to savings achieved in the Auction segment as a result of the
Company's restructuring plans and other cost

26

containment efforts. For the three and six months ended June 30, 2002, salaries
and related costs were not materially affected by the translation to U.S.
Dollars.

General and administrative expenses increased 1% for the three months ended
June 30, 2002 when compared to the same period in 2001. The comparison to the
prior year is unfavorably influenced by the reversal of approximately $2.0
million of accruals due to positive changes in circumstances in the second
quarter of 2001 for which there was no comparable event in the current
period. Additionally, results for the second quarter of 2002 reflect
increased insurance costs principally in the Auction segment. These
unfavorable variances are almost entirely offset by the reversal of a $1.1
million bad debt accrual that was no longer necessary due to the collection
of the related client receivable balance in the second quarter of 2002, as
well as savings in professional fees and travel and entertainment expenses
primarily as a result of the Company's restructuring plans and other cost
containment efforts. For the three months ended June 30, 2002, general and
administrative expenses were not materially affected by the translation to
U.S. Dollars.

General and administrative expenses decreased 5% for the six months ended
June 30, 2002 when compared to the same period in 2001 primarily due to
savings in professional fees and travel and entertainment expenses primarily
as a result of the Company's restructuring plans and other cost containment
efforts. Also favorably influencing the comparison to the prior year is the
reversal of a $1.1 million bad debt accrual that was no longer necessary due
to the collection of the related client receivable balance in the second
quarter of 2002. These favorable variances are partially offset by increased
insurance costs principally in the Auction segment. Also unfavorably
influencing the comparison to the prior year is the reversal of approximately
$2.0 million of accruals in the second quarter of 2001 due to positive
changes in circumstances for which there was no comparable event in the
current period. For the six months ended June 30, 2002, general and
administrative expenses were not materially affected by the translation to
U.S. Dollars.

Depreciation and amortization expense decreased 7% and 4% for the three and six
months ended June 30, 2002, respectively, when compared to the same periods in
2001. These decreases were primarily attributable to lower depreciation expense
due to the write-off of computer hardware and software in the fourth quarter of
2001 as a result of the Company's strategic alliance with eBay, Inc., as well as
the ceasing of goodwill amortization as a result of the adoption of SFAS No. 142
on January 1, 2002 (see Note 5 of Notes to Consolidated Financial Statements).
These decreases were partially offset by depreciation expense associated with
the final phase of the York Property, which was placed in service in April 2001,
and other capital projects placed in service subsequent to the second quarter of
2001. For the three and six months ended June 30, 2002, depreciation and
amortization expense was not materially affected by the translation to U.S.
Dollars.

RETENTION COSTS - See Note 11 of Notes to Consolidated Financial Statements for
information related to the Company's retention programs for key employees.

27

INTERNET RELATED OPERATING EXPENSES - Internet related operating expenses
totaled $2.7 million and $5.8 million for the three and six months ended June
30, 2002, respectively. For the three and six months ended June 30, 2001, total
Internet related operating expenses were $6.4 million and $14.2 million,
respectively. These significant decreases were principally due to savings
achieved in salaries and related costs, general and administrative expenses and
marketing costs as a result of the Company's restructuring plans and other cost
containment efforts.

RESTRUCTURING PLANS - Total estimated net annual cost savings following the full
implementation of the Company's restructuring plans is expected to be
approximately $60 million. These savings were initiated during 2001, primarily
in the Internet, and are currently expected to be fully realized by the end of
2002. Most of the anticipated savings are being achieved through lower salaries
and related costs resulting from terminations and attrition, as well as
reductions in direct costs of services and general and administrative expenses.

(See Note 12 of Notes to Consolidated Financial Statements for additional
information on the Company's restructuring plans.)

(With respect to all statements made herein regarding the Company's
restructuring plans, see statement on Forward Looking Statements.)

SPECIAL CHARGES - See Note 9 of Notes to Consolidated Financial Statements for
information on special charges.

NET INTEREST EXPENSE - Net interest expense decreased $0.1 million and $0.6
million for the three and six months ended June 30, 2002, respectively, when
compared to the same periods in 2001. These decreases were due to lower interest
expense resulting from a lower average cost of borrowing related to the
Company's existing credit facility (see Note 6 of Notes to Consolidated
Financial Statements), as well as lower outstanding borrowings partially offset
by lower interest income due to reduced cash balances and decreased interest
rates.

INCOME TAX BENEFIT - The consolidated effective tax rate was 36% for the three
and six months ended June 30, 2002 and 2001.

NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE - For the three months ended
June 30, 2002, net income increased to $17.9 million from $14.3 million for the
same period in 2001. Diluted earnings per share for the three months ended June
30, 2002 increased to $0.29 from $0.23 for the same period in 2001. The impact
on diluted earnings per share related to the Company's Internet operating loss
was ($0.01) and ($0.05) for the three months ended June 30, 2002 and 2001,
respectively.

28

For the six months ended June 30, 2002, net loss decreased to ($5.3) million
from ($8.3) million for the same period in 2001. Diluted loss per share for the
six months ended June 30, 2002 decreased to ($0.09) from ($0.14) for the same
period in 2001. The impact on diluted loss per share related to the Company's
Internet operating loss was ($0.02) and ($0.11) for the six months ended June
30, 2002 and 2001, respectively.

CONTINGENCIES - See Note 10 of Notes to Consolidated Financial Statements for
information on contingencies and Note 11 of Notes to Consolidated Financial
Statements for information on the Company's employee retention programs. (See
statement on Forward Looking Statements.)

FINANCIAL CONDITION AS OF JUNE 30, 2002 - For the six months ended June 30,
2002, total cash and cash equivalents decreased $41.4 million from December 31,
2001 primarily due to the factors discussed below.

Net cash used by operations was $56.1 million for the six months ended June
30, 2002 and was due in part to retention payments to key employees (see Note
11 of Notes to Consolidated Financial Statements). Also influencing cash used
by operations during this period is an $88.7 million increase in accounts
receivable partially offset by a $62.7 million increase in due to consignors,
both principally resulting from Auction Sales during June.

Net cash provided by investing activities was $11.2 million for the six months
ended June 30, 2002 and was primarily due to the collection of maturing client
loans during the period partially offset by the funding of consignor advances
and capital expenditures of $6.6 million.

Net cash provided by financing activities was $2.2 million for the six months
ended June 30, 2002 and was the result of proceeds received from the exercise of
stock options.

29

COMMITMENTS AS OF JUNE 30, 2002 - The table below summarizes the Company's
material contractual obligations and commitments as of June 30, 2002.

(1) Represents the outstanding principal and approximate interest payments due
under the Amended and Restated Credit Agreement, as discussed below and in
Note 6 of Notes to Consolidated Financial Statements.

(2) Represents the outstanding principal and semi-annual interest payments due
on the Company's long-term debt. (See Note 6 of Notes to Consolidated
Financial Statements.)

(3) See Note 11 of Notes to Consolidated Financial Statements.

(4) See Part II, Item 1 "Legal Proceedings."

(5) On certain occasions, the Company guarantees 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 and, therefore, the Company must pay the
difference between the sale price at auction and the amount of the
guarantee (or if the property does not sell, the amount of the guarantee
must be paid). (See Note 10 of Notes to Consolidated Financial Statements.)

30

(6) Represents the aggregate commitment for future salaries related to
employment agreements with certain key employees, excluding incentive
bonuses and awards in conjunction with the Company's retention programs.
(See Note 10 of Notes to Consolidated Financial Statements.)

The Discount Certificates to be distributed as part of the U.S. Antitrust
Litigation settlement (see Note 10 of Notes to Consolidated Financial Statements
and Part II, Item 1 "Legal Proceedings") will expire five years after the date
they are first issued. However, the face value of any unused Discount
Certificates may be redeemed for cash at the end of four years. The Court
determined that the $62.5 million face value of the Discount Certificates had a
fair market value of not less than $50 million, which equals the value of the
Discount Certificates that the Company has recorded in the Consolidated Balance
Sheets within the long-term settlement liability. The Discount Certificates are
currently expected to be printed and issued to the class of plaintiffs sometime
in 2003.

Additionally, in certain situations, the Company makes short-term commitments to
consignors to extend additional credit. However, potential consignor advances
related to such commitments are subject to certain limitations and conditions.
The total amount of such commitments was $13.2 million as of June 30, 2002. (See
Notes 4 and 10 of Notes to Consolidated Financial Statements.)

LIQUIDITY AND CAPITAL RESOURCES - The Company generally relies on operating cash
flows supplemented by borrowings to meet its financing requirements.

In July 2002, the Company extended the maturity date of the Revolving
Facility under the Amended and Restated Credit Agreement from July 10, 2002
to August 11, 2002 and reduced the borrowing capacity from $120 million to
$100 million. Effective August 12, 2002, the maturity date of the Revolving
Facility will be extended to February 11, 2003.

Effective August 12, 2002, the maturity date of the Term Facility under the
Amended and Restated Credit Agreement will be extended from August 11, 2002
to February 11, 2003 and the borrowing capacity will be reduced from $130
million to $100 million.

The Company will pay fees of $2.0 million in connection with the August 2002
extension of the Amended and Restated Credit Agreement, which will be
amortized over the extended term of the agreement.

The Company's obligations under the Amended and Restated Credit Agreement are
secured by substantially all of the assets of the Company

31

and its domestic subsidiaries, including a mortgage on the York Property. In
addition, any borrowings by the Company's U.K. affiliates and Swiss affiliate
are secured by their respective loan portfolios. Borrowings under the Amended
and Restated Credit Agreement may be used for general corporate purposes and
generally bear interest equal to LIBOR plus 3.5%. The Amended and Restated
Credit Agreement also contains certain financial covenants, including covenants
requiring the Company to maintain a minimum net worth and to meet certain
quarterly leverage ratio and interest coverage ratio tests. Additionally, the
Amended and Restated Credit Agreement has a covenant that requires the Company
to limit dividend payments. The Company was in compliance with these financial
covenants as of June 30, 2002.

The Company currently believes that operating cash flows, current cash balances
and borrowings under the Amended and Restated Credit Agreement will be adequate
to meet its operating needs and capital requirements through February 11, 2003.
Such operating needs and capital requirements include peak seasonal working
capital requirements, other short-term commitments to consignors, the potential
funding of the Company's client loan program, capital expenditures and severance
payments related to the Company's restructuring plans (see Note 12 of Notes to
Consolidated Financial Statements), as well as the short-term commitments
detailed above.

The Term Facility and Revolving Facility under the Company's Amended and
Restated Credit Agreement are available through February 11, 2003. On this date,
the Term Facility and the Revolving Facility will expire and any outstanding
borrowings will be due and payable to the Company's existing lender group. In
order to fund the repayment of any such outstanding borrowings and to provide
for the Company's long-term operating needs and capital requirements, as well as
to fund the fine resulting from the European Commission investigation (see Note
10 of Notes to Consolidated Financial Statements and Part II, Item 1 "Legal
Proceedings") and the long-term commitments detailed above including the
remaining payments due under the Company's Antitrust fine (see Part II, Item 1
"Legal Proceedings"), the redemption of Discount Certificates to be distributed
as part of the U.S. Antitrust Litigation settlement (see Note 10 of Notes to
Consolidated Financial Statements and Part II, Item 1 "Legal Proceedings"),
payments due under the Company's retention programs (see Note 11 of Notes to
Consolidated Financial Statements) and interest payments related to the
Company's long-term debt securities, additional funding will be necessary to
supplement operating cash flows.

On June 3, 2002, A. Alfred Taubman, the controlling shareholder of the Company,
filed with the SEC an amended Schedule 13D in which he announced his intention
to work in cooperation with the Company to

32

explore a possible sale or merger of the Company or the sale of his stake in the
Company. If there is a sale or merger of the Company or a sale of A. Alfred
Taubman's stake in the Company, management currently believes that any new
controlling shareholder would provide, arrange or facilitate the financing
necessary to conduct the Company's business.

If a sale or merger of the Company or a sale of A. Alfred Taubman's stake in
the Company is not consummated by February 11, 2003, management currently
believes it could obtain an extension, amendment or refinancing of the
Amended and Restated Credit Agreement. Alternatively, management currently
believes that it has other options available for capital resources,
including, but not limited to, the issuance of various types of debt
instruments with varying maturities including convertible debt, the issuance
of additional equity securities, a sale-leaseback of the York Property, the
sale of certain other corporate assets or operating units and the collection
of client loans. Some of the above alternatives might come at a higher cost
than an extension, amendment or refinancing of the Amended and Restated
Credit Agreement or would limit the Company's operating flexibility.
Additionally, any convertible debt or equity security issuance may be
dilutive.

If the Company were unable to secure adequate long-term funding or satisfy its
liquidity needs through a new controlling shareholder or pursuant to one of the
other options stated above prior to the expiration of the Amended and Restated
Credit Agreement, this would have a material adverse effect on the Company's
business, results of operations and/or financial condition.

RISK FACTORS AFFECTING OPERATING REVENUES AND LIQUIDITY - Operating revenues
from the Company's Auction, Finance and Real Estate operating segments, as well
as the Company's liquidity, are significantly influenced by a number of factors
not within the Company's control, including:

(1) The overall strength of the international economy and financial markets
and, in particular, the economies of the United States, the U.K., and the
major countries or territories of Continental Europe and Asia (principally
Japan and Hong Kong);

(2) Interest rates;

(3) Political conditions in various nations;

(4) Export and exchange controls;

(5) Competition with other auctioneers and art dealers;

33

(6) The amount of quality property being consigned to art auction houses (and,
in particular, the number of single-owner sale consignments);

(7) The level of guarantees or the terms of other financial arrangements
offered by other auction houses;

(8) The success of the Company in attracting and retaining qualified
personnel;

(9) The demand for art-related financing;

(10) The demand for luxury residential real estate; and

(11) The final resolution of various antitrust matters including the ultimate
outcome of the International Antitrust Litigation, the threatened
litigation by one of the parties that opted out of the class action
settlement in the U.S. Antitrust Litigation, and the European Commission
investigation regarding commissions charged by the Company and Christie's
for auction services and other trading terms.

RECENTLY ISSUED ACCOUNTING STANDARDS - In July 2002, the Financial Accounting
Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities." SFAS No. 146 will supersede Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that costs associated with an exit or
disposal plan be recognized when incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.

FORWARD LOOKING STATEMENTS - This form 10-Q 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. 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 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 ranked in any particular order:

(1) The factors listed under "Risk Factors Affecting Operating Revenues and
Liquidity" above;

(2) The Company's business is seasonal, with peak revenues and operating
income primarily occurring in the second and fourth quarters of each year
as a result of the traditional spring and fall art auction season;

34

(3) The Company's success in developing and implementing its Internet auction
strategy;

(4) The effects of market risk;

(5) The successful implementation of the Company's restructuring plans;

(6) The outcome of the process currently underway regarding a possible sale or
merger of the Company or sale of A. Alfred Taubman's stake in the Company
and

(7) The extension or refinancing of the Amended and Restated Credit Agreement
or the ability to obtain other long-term funding.

35

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company continually 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, consignor advances, short-term borrowings and long-term debt. At
June 30, 2002, a hypothetical 10% strengthening or weakening of the United
States dollar relative to all other currencies would result in a decrease or
increase in cash flow of approximately $3.1 million. Excluding the potential
impact of this hypothetical strengthening or weakening of the United States
dollar, the market risk of the Company's financial instruments has not changed
significantly as of June 30, 2002 from that set forth in the Company's Form 10-K
for the year ended December 31, 2001.

At June 30, 2002, the Company had $27.4 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 such contracts. The Company's Consolidated
Balance Sheet at June 30, 2002 includes a nominal liability recorded within
accounts payable and accrued liabilities reflecting the fair value of the
Company's forward exchange contracts. See Note 7 of Notes to Consolidated
Financial Statements for additional information on the Company's use of
derivative instruments.

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 June 30, 2002, all of the Company's forward exchange contracts were
with Credit Suisse.

36

PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

In April 1997, the Antitrust Division of the United States Department of Justice
(the "DOJ") began an investigation of certain art dealers and major auction
houses, including the Company and its principal competitor, Christie's
International, PLC. The Company has pled guilty to a violation of the United
States ("U.S.") antitrust laws in connection with a conspiracy to fix auction
commission rates charged to sellers in the U.S. and elsewhere and, on February
2, 2001, the U.S. District Court for the Southern District of New York accepted
the Company's plea and imposed on the Company a fine of $45 million payable
without interest over a period of five years. The Company has funded $6 million
of the fine payable to the DOJ in accordance with the plea, and the remaining
$39 million of the fine is payable as follows: (a) $6 million due February 6,
2003, (b) $6 million due February 6, 2004, (c) $12 million due February 6, 2005
and (d) $15 million due February 6, 2006. The European Commission and the
Canadian Competition Bureau are also conducting investigations regarding
commissions charged by the Company and Christie's for auction services, and the
Company is cooperating with such investigations.

On April 19, 2002 the European Commission sent a Statement of Objections to the
Company and Christie's setting out its preliminary conclusion that the Company
and Christie's breached European Union competition rules by colluding to fix
commission fees and other trading terms in connection with auctions in the
European Union. The Company has filed a Reply to the allegations set forth in
the Statement of Objections. Although the amount of the fine that will be
imposed by the European Commission is not currently estimatable, the maximum
fine would be 10% of the Company's prior year total revenues. The European
Commission has confirmed that the Company is regarded as cooperating with its
investigation and may be entitled to a degree of leniency. (See Note 10 of Notes
to Consolidated Financial Statements.)

A number of private civil complaints, styled as class action complaints, were
also filed against the Company alleging violations of federal and state
antitrust laws based upon alleged agreements between Christie's and the Company
regarding commissions charged to purchasers and sellers of property in the U.S.
and elsewhere. In addition, several shareholder class action complaints were
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 (the "Shareholder Litigation").
And a number of shareholder derivative suits were filed against the directors of
the

37

Company based on allegations related to the foregoing lawsuits and
investigations. The Shareholder Litigation and all of the shareholder derivative
suits have been settled pursuant to non-appealable court-approved settlement
agreements that have been fully funded.

Included in the lawsuits described above are more than fifty purported class
action lawsuits that were filed against the Company and/or its wholly-owned
subsidiary, Sotheby's, Inc., beginning January 30, 2000, alleging violations of
the federal antitrust laws in connection with auctions in the U.S. (the "U.S.
Antitrust Litigation"). Christie's International, PLC and Christie's, Inc.
(collectively "Christie's") were also named as defendants in these actions. All
of these federal antitrust actions were filed in or later transferred to the
U.S. District Court for the Southern District of New York. On February 23, 2000,
the U.S. District Court for the Southern District of New York entered an order
consolidating all of the actions theretofore filed in that court. Pursuant to
the court's consolidation Order, plaintiffs filed a consolidated complaint on
March 15, 2000, captioned In Re Auction Houses Antitrust Litigation, No. 00 Civ.
0648. The consolidated complaint was brought on behalf of individuals that
purchased and/or sold items auctioned by defendants during the period of January
1, 1993 through February 7, 2000.

On September 24, 2000, the Company agreed to settle the U.S. Antitrust
Litigation, subject to court approval. On April 20, 2001, the Court approved an
amended settlement agreement (the "Amended Settlement Agreement"). Under the
Amended Settlement Agreement, the Company has deposited into an escrow account
for the benefit of members of the class (a) $206 million in cash and (b) a
global vendor's commission discount certificate with a face value of $62.5
million. The court determined that the $62.5 million face value of the global
vendor's commission discount certificate had a fair market value of not less
than $50 million. Of these amounts, $156 million in cash was funded by A. Alfred
Taubman, holder of approximately 13.2 million shares of the Company's Class B
Common Stock, the Company's former Chairman and a co-defendant in the U.S.
Antitrust Litigation. The vendor's commission discount certificates may be used
to pay vendor's commissions and certain other sale charges at the Company or
Christie's during the five years after their distribution to members of the
class and are redeemable for cash at the end of four years. The Company entered
into the Amended Settlement Agreement without any admission of liability.
Certain class members appealed the court's order approving the settlement. On
July 30, 2002, the U.S. Court of Appeals for the Second Circuit affirmed the
decision of the District Court.

38

One of the parties that opted out of the class action settlement in the U.S.
Antitrust Litigation has threatened to commence a lawsuit against the Company
and Christie's alleging antitrust violations and is seeking approximately $19
million in damages. The Company believes that its maximum potential exposure in
this matter is substantially less than the amount of the claim. The parties have
agreed to enter into non-binding mediation to attempt to resolve this claim, and
the mediation process is expected to begin shortly. Although there were other
opt-outs from the settlement of the U.S. Antitrust Litigation, no other claims
have been asserted to date.

Three other purported class action lawsuits were filed in the U.S. District
Court for the Southern District of New York against the Company and its
wholly-owned subsidiary, Sotheby's, Inc., beginning in August 2000, alleging
violations of the federal antitrust laws and international law, on behalf of
purchasers and sellers in auctions conducted outside the U.S. Christie's was
also named as a defendant in these actions along with several current or former
directors and/or officers of both the Company and Christie's. The complaints in
these actions (the "International Antitrust Litigation") contained allegations
identical to the complaints in the U.S. Antitrust Litigation, but were
considered separately from the U.S. Antitrust Litigation. On October 30, 2000,
plaintiffs filed a consolidated amended complaint in the International Antitrust
Litigation. On January 30, 2001, the court granted the Company's motion to
dismiss the International Antitrust Litigation on the grounds of lack of
jurisdiction over auctions held by the Company and its subsidiaries outside of
the U.S. Plaintiffs appealed the court's decision to the U.S. Court of Appeals
for the Second Circuit. On March 13, 2002, the Second Circuit Court of Appeals
reversed the District Court's ruling that it lacked jurisdiction over auctions
held by the Company, its subsidiaries and Christie's outside of the U.S. and
remanded the case to the District Court to consider whether the International
Antitrust Litigation should be dismissed on other grounds - namely, the
plaintiffs' lack of standing or the fact that New York is an improper venue for
consideration of this matter. The Company and Christie's intend to file a
petition for certiorari seeking review of the Court of Appeals' decision by the
U.S. Supreme Court.

In addition to the federal actions, six indirect purchaser class action lawsuits
have been filed against the Company, its subsidiary, Sotheby's, Inc. and
Christie's in the Superior Court of the State of California, alleging violations
of the Cartwright Act, California's antitrust statute, and the California Unfair
Competition Act. The complaints in these lawsuits purport to be brought on
behalf of individuals that indirectly purchased items in California from one or
more of the defendants. The complaints generally allege, among other things,
that

39

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. On May 3,
2002, the Company agreed, subject to court approval, to pay $192,500 to settle
all of these lawsuits. The Company entered into this agreement without any
admission of liability.

The Company's agreement with A. Alfred Taubman, pursuant to which Mr. Taubman
provided funding for the settlements of the U.S. Antitrust Litigation and the
Shareholder Litigation, also provided for mutual releases by the Company and Mr.
Taubman of claims against each other relating to the DOJ investigation and
related investigations and civil litigation. In addition, the agreement provides
for the Company to bear all liability and to indemnify Mr. Taubman for damages
in connection with any civil proceeding relating to any antitrust claim asserted
by buyers or sellers at auctions conducted outside of the U.S., including the
International Antitrust Litigation, and for legal fees and expenses incurred by
Mr. Taubman after April 12, 2001 in connection with any such proceeding.

In the U.K., on June 12, 2002, the Company and Christie's each received a letter
of claim from a law firm purporting to be acting on behalf of 41 identified and
an unspecified number of unidentified individuals and businesses who sold items
at auctions held by the Company and Christie's in London, England, during the
period from September 1995 through at least February 7, 2000. The letter of
claim was sent in anticipation of possible litigation seeking damages on behalf
of the law firm's clients as a result of an alleged anti-competitive agreement
between the Company and Christie's relating to sellers' commissions. The Company
has requested further information from the law firm regarding the number and
identity of its clients and the nature and amounts of their claims, and is
awaiting a response. The Company cannot predict at this time whether any legal
proceedings will ultimately result from this letter of claim or what the amount
of any damages claimed in any such legal proceedings might be.

In Canada, a purported class action has been commenced in the Superior Court of
Ontario against the Company, Sotheby's (Canada) Limited, Christie's and other
defendants claiming damages in the amount of approximately $14 million plus
costs for alleged anticompetitive activities. It is anticipated that a Statement
of Defense will be filed denying any liability with respect to the claim.

40

The Company is also aware of a governmental investigation in Italy 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 U.K.
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, the relevant
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.)

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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

99(a) Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

99(b) Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

(b) Reports on Form 8-K

None

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EXHIBIT INDEX

43

SOTHEBY'S HOLDINGS, INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed this the 6th day of August, 2002, on
its behalf by the undersigned, thereunto duly authorized and in the capacity
indicated.

SOTHEBY'S HOLDINGS, INC.

By: /s/ Michael L. Gillis
Michael L. Gillis
Senior Vice President,
Controller and Chief
Accounting Officer

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