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

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2005

Commission File Number 1-9750

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

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        .

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes    X    No        .

As of May 1, 2005, there were outstanding 46,287,942 shares of Class A Limited Voting Common Stock, par value $0.10 per share, and 17,884,718 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.

TABLE OF CONTENTS

SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(Thousands of dollars, except per share data)

See accompanying Notes to Consolidated Financial Statements
 
 
3

SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)

See accompanying Notes to Consolidated Financial Statements

4

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Thousand of dollars)

See accompanying Notes to Consolidated Financial Statements
 
 
5

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

6

The table below demonstrates that approximately 80% of the Company’s Aggregate Auction Sales occur during the second and fourth quarters of the year.

			Percentage of Annual Aggregate Auction Sales
			2004			2003			2002
January - March				9	%		12	%		11	%
April - June				41	%		34	%		38	%
July - September				7	%		7	%		12	%
October - December				43	%		47	%		39	%
				100	%		100	%		100	%

3.

Discontinued Operations

In the fourth quarter of 2003, the Company committed to a plan to sell its domestic real estate brokerage business, Sotheby’s International Realty, Inc. (“SIR”), as well as most of its real estate brokerage offices outside of the U.S.. On February 17, 2004, the Company consummated the sale of SIR to a subsidiary of Cendant Corporation (“Cendant”). In conjunction with the sale, the Company entered into an agreement with Cendant to license the Sotheby’s International Realty trademark and certain related trademarks for an initial 50-year term with a 50-year renewal option (the “License Agreement”). The License Agreement is applicable worldwide except in Australia.

The total consideration paid by Cendant at closing for SIR’s company-owned real estate brokerage business and affiliate network, as well as the License Agreement was $100.7 million, consisting of $98.9 million in cash and the assumption of a $1.8 million note payable. Net cash proceeds from the sale, after deducting $4.9 million in transaction costs, were $94 million. In addition to the consideration received at closing, the License Agreement provides for an ongoing license fee during its term based on the volume of commerce transacted under the licensed trademarks.

The consideration received at closing was allocated among each of the following components based on a valuation of their respective fair values: (i) SIR’s company-owned real estate brokerage business and affiliate network, (ii) the License Agreement and (iii) options to acquire certain international operations, which have since been exercised (the “International Options”). Based on this valuation, $55.1 million was allocated to SIR’s company-owned real estate brokerage business and affiliate network, $45 million was allocated to the License Agreement and $0.6 million was allocated to the International Options.

As a result of the sale of the real estate brokerage business and affiliate network to Cendant, the Company recognized a pre-tax gain of $33.1 million in the first quarter of 2004, which is recorded within income from discontinued operations before taxes in the Consolidated Income Statements. As a result of this gain, the Company utilized approximately $12.7 million of the net Deferred Tax Asset related to its net operating loss carryforwards in the first quarter of 2004.

The $45 million of proceeds allocated to the License Agreement represents a one-time non-refundable upfront license fee received by the Company as consideration for entering into the License Agreement. The Company has no significant future performance obligations associated with the non-refundable upfront license fee. As a result, the Company recognized license fee revenue of $45 million in the first quarter of 2004, which is classified within the continuing operations section of the Consolidated Income Statements. This classification is consistent with how the Company will report ongoing license fees earned during the term of the License Agreement, as well as license fee revenue earned in the future from other potential licensing opportunities. As a result of this one-time license fee, the Company utilized approximately $15 million of the net Deferred Tax Asset related to its net operating loss carryforwards during the first quarter of 2004. The Company incurred transaction costs of approximately $2.2 million related to the consummation of

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the License Agreement, of which $2 million were incurred in the first quarter of 2004, and were recorded within General and Administrative Expenses in the Consolidated Income Statements.

In the fourth quarter of 2004, the Company committed to a plan to sell its real estate brokerage business in Australia. This business is the only remaining component of the Company’s former Real Estate segment. Accordingly, the assets and liabilities of the Australia real estate brokerage business are classified as held for sale in the Consolidated Balance Sheets, and its operating results are reported as discontinued operations in the Consolidated Income Statements. The Australia real estate brokerage business is not material to the Company’s results of operations, financial condition or liquidity.

The following is a summary of the operating results of the Company’s discontinued operations for the three months ended March 31, 2005 and 2004:

			Three Months Ended March 31,
			2005			2004
			(Thousands of dollars)
Revenues			$	400		$	10,869
Expenses:
Direct costs of services				31			709
Salaries and related costs				45			4,626
General and administrative expenses				281			1,856
Depreciation and amortization expense				—			13
Total expenses				357			7,204
Operating income				43			3,665
Gain on sale of discontinued operations				—			33,061
Other income (expense)				1			(14	)
Income from discontinued operations before taxes				44			36,712
Income tax expense				22			13,480
Income from discontinued operations			$	22		$	23,232

According to the terms of the Stock Purchase Agreement related to the sale of SIR, the Company is due to receive amounts collected by Cendant for the closing of real estate transactions subsequent to February 17, 2004 that were under contract prior to that date. For the three months ended March 31, 2005 and 2004, revenues from discontinued operations included $0.3 million and $4.4 million respectively, of such amounts.

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The following is a summary of the assets and liabilities related to the Company’s discontinued operations which were classified as held for sale as of March 31, 2005, December 31, 2004 and March 31, 2004:

			March 31, 2005			December 31, 2004			March 31, 2004
			(Thousands of dollars)
Assets:
Cash and cash equivalents			$	69		$	101		$	162
Restricted cash				1,448			437			397
Accounts receivable, net				104			6			305
Properties, net				9			10			25
Other current assets				30			34			171
Assets held for sale			$	1,660		$	588		$	1,060
Liabilities:
Accounts payable and accrued liabilities			$	1,554		$	455		$	1,024
Liabilities held for sale			$	1,554		$	455		$	1,024

4.

Segment Reporting

The Company’s continuing operations are organized under two business segments – Auction and Finance. The Company’s discontinued real estate brokerage business, which comprised its former Real Estate segment, is not included in this presentation. (See Note 3 for further information on discontinued operations.)

Prior to the fourth quarter of 2004, the Company’s share of earnings from equity method investments was presented on a pre-tax basis within Auction and Related Revenues in the Consolidated Income Statements. Beginning in the fourth quarter of 2004, such amounts were presented net of taxes in the Consolidated Income Statements as a separate line below Income (Loss) from Continuing Operations before Taxes. Prior year amounts in the presentation below have been adjusted to conform to current period presentation.

The table below presents revenues for the Company’s operating segments, as well as a reconciliation of segment revenues to total revenues from continuing operations for the three months ended March 31, 2005 and 2004:

			Three Months Ended March 31,
			2005			2004
			(Thousands of dollars)
Auction			$	72,175		$	58,853
Finance				1,208			1,216
All Other				468			357
Total segment revenues				73,851			60,426
Unallocated amounts:
License fee revenue (see Note 3)				176			45,000
Total revenues from continuing operations			$	74,027		$	105,426

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The table below presents loss before taxes for the Company’s operating segments, as well as a reconciliation of segment loss before taxes to (loss) income from continuing operations before taxes for the three months ended March 31, 2005 and 2004:

			Three Months Ended March 31,
			2005			2004
			(Thousands of dollars)
Auction				($12,662	)		($19,966	)
Finance				(622	)		(269	)
All Other				(125	)		(118	)
Segment loss before taxes				(13,409	)		(20,353	)
Unallocated amounts:
Antitrust related expenses (see Note 1)				(249	)		(512	)
License fee revenues (see Note 3)				176			45,000
License Agreement transaction costs (see Note 3)*				—			(2,046	)
Amortization of discount - DOJ antitrust fine				(364	)		(532	)
(see Note 12)
Amortization of discount - Discount Certificates				(696	)		(715	)
(see Note 12)
Equity in earnings of investees**				(537	)		(249	)
Retention costs				—			(285	)
Net restructuring charges				—			(119	)
(Loss) income from continuing operations before taxes			$	(15,079	)	$	20,189

*

Represents transaction costs related to the consummation of the License Agreement, which are not allocated to the Company’s operating segments. This is consistent with how the related license fee revenue is presented for segment reporting purposes.

**

Represents the Company’s pre-tax share of earnings related to its equity investees. Such amounts are included in the table above in loss before taxes for the Auction segment, but are presented net of taxes below (loss) income from continuing operations before taxes in the Consolidated Income Statements.

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The table below presents assets for the Company’s operating segments, as well as a reconciliation of segment assets to consolidated assets as of March 31, 2005, December 31, 2004 and March 31, 2004:

			March 31, 2005			December 31, 2004			March 31, 2004
			(Thousands of dollars)
Auction			$	659,896		$	1,064,091		$	553,785
Finance				78,172			86,601			69,259
All Other				267			915			1,107
Total segment assets				738,335			1,151,607			624,151
Unallocated amounts:
Deferred tax assets				80,038			73,151			88,347
Assets held for sale (see Note 3)				1,660			588			1,060
Consolidated Assets			$	820,033		$	1,225,346		$	713,558

5.

Notes Receivable and Consignor Advances

The Company’s Finance segment provides certain 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’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 also lend at loan to value ratios higher than 50%. All of the Company’s loans are variable interest rate loans.

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 term loans to collectors or dealers secured by property not presently intended for sale (a “term loan”). 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. Term loans allow the Company to establish or enhance mutually beneficial relationships with dealers and collectors. Term loans are generally made with full recourse against the borrower. In certain instances, however, term 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 gross Notes Receivable and Consignor Advances are unsecured loans totaling $5.7 million, $6.0 million and $5.3 million at March 31, 2005, December 31, 2004 and March 31, 2004, respectively.

In certain situations, the Company also 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 profit or loss shared by the Company and the dealer. Interest income related to such unsecured loans is reflected in the results of the Finance segment, while the Company’s share of any profit or loss is reflected in the results of the Auction segment. The total of all such unsecured loans was $5.0 million, $5.4 million and $4.4 million at March 31, 2005, December 31, 2004 and March 31, 2004,

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respectively. These amounts are included in the total unsecured loan balances provided in the previous paragraph.

At March 31, 2005, one note receivable comprised approximately 12% of the net Notes Receivable and Consignor Advances balance. The Company expects this loan to be repaid in January 2006.

The weighted average interest rates charged on Notes Receivable and Consignor Advances were 5.9% and 4.7% for the three months ended March 31, 2005 and 2004, respectively.

Changes in the Allowance for Credit Losses relating to Notes Receivable and Consignor Advances for the three months ended March 31, 2005 and 2004 were as follows:

			Three Months Ended March 31,
			2005			2004
			(Thousands of dollars)
Allowance for credit losses at January 1			$	1,759		$	1,600
Change in loan loss provision				100			—
Write-offs				—			(103	)
Foreign currency exchange rate changes				(12	)		2
Allowance for credit losses at March 31			$	1,847		$	1,499

6.

Goodwill

Goodwill is entirely attributable to the Auction segment. For the three months ended March 31, 2005 and 2004, changes in the carrying value of Goodwill were as follows:

			Three Months Ended March 31,
			2005			2004
			(Thousands of dollars)
Balance as of January 1			$	13,753		$	13,565
Foreign currency exchange rate changes				(114	)		(37	)
Balance as of March 31			$	13,639		$	13,528

7.

Credit Arrangements

Bank Credit Facilities — On March 4, 2004, the Company entered into a senior secured credit agreement with General Electric Capital Corporation (the “GE Capital Credit Agreement”). The GE Capital Credit Agreement is available through March 4, 2007 and provides for borrowings of up to $200 million provided by an international syndicate of lenders. The Company’s obligations under the GE Capital Credit Agreement are secured by substantially all of the assets of the Company, as well as the assets of its subsidiaries in the U.S. and the United Kingdom (the “U.K.”).

The GE Capital Credit Agreement contains financial covenants requiring the Company to not exceed $15 million in annual capital expenditures, to not make dividend payments and to have a quarterly fixed charge coverage ratio of not less than 1.0. The GE Capital Credit Agreement also has certain non-financial covenants and restrictions. The Company is in compliance with its covenants.

At the option of the Company, borrowings under the GE Capital Credit Agreement generally bear interest equal to: (i) 1.25% plus the higher of the Prime Rate or the Federal Funds Rate plus 0.5%, or (ii)

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LIBOR plus 2.5%. Pursuant to the GE Capital Credit Agreement, on a quarterly basis, the applicable interest rate charged for borrowings is adjusted up or down depending on the Company’s performance under the quarterly fixed charge coverage ratio tests.

For the three months ended March 31, 2005 and 2004, the Company had no outstanding borrowings under the GE Capital Credit Agreement. For the three months ended March 31, 2004, the weighted average interest rate charged on outstanding short-term borrowings under the Company’s previous senior secured credit facility, which were fully repaid on March 4, 2004, was approximately 6.2%.

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 Securities and Exchange Commission, for an aggregate offering price of $100 million. The ten-year Notes have an effective interest rate of 6.98% payable semi-annually in February and August.

The Notes have covenants that impose limitations on the Company from placing liens on certain property and entering into certain sale-leaseback transactions. The Company is in compliance with these covenants.

Interest Expense—For the three months ended March 31, 2005 and 2004, interest expense related to the Company’s continuing operations was $8.1 million and $8.4 million, respectively, and consisted of the following:

			Three Months Ended March 31,
			2005			2004
			(Thousands of dollars)
Credit Facility Borrowings:
Interest expense on outstanding borrowings			$	—		$	298
Amortization of amendment and arrangement fees				250			240
Commitment fees				250			101
Sub-total				500			639
Interest expense on York Property capital lease obligation				4,476			4,479
Interest expense on long-term debt				1,739			1,738
Amortization of discount - DOJ antitrust fine (see Note 12)				364			532
Amortization of discount - Discount Certificates (see Note 12)				696			715
Other interest expense				367			307
Total			$	8,142		$	8,410

Other interest expense principally relates to interest accrued on the obligations under the Sotheby’s, Inc. Benefits Equalization Plan and its successor, the Sotheby’s, Inc. 2005 Benefit Equalization Plan, which are unfunded defined contribution plans available to certain U.S. officers of the Company whose contributions to the Sotheby’s, Inc. Retirement Savings Plan are limited by Internal Revenue Service regulations.

8.

Defined Benefit Pension Plan

The Company makes contributions to a defined benefit pension plan covering substantially all U.K. employees (the “U.K. Plan”). Effective April 1, 2004, the U.K. Plan was closed to new employees. From that date, a defined contribution plan was made available to new employees in the U.K.

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For the three months ended March 31, 2005 and 2004, the components of net periodic pension cost were:

			Three Months Ended March 31,
			2005			2004
			(Thousands of dollars)
Service cost			$	1,629		$	1,672
Interest cost				3,252			2,802
Expected return on plan assets				(4,158	)		(4,128	)
Amortization of prior service cost				69			67
Amortization of actuarial loss				541			263
Sub-total				1,333			676
Special termination benefits				—			13	*
Net periodic pension cost			$	1,333		$	689

*

Special termination benefits are reflected in the Consolidated Income Statements within Net Restructuring Charges.

The Company expects to contribute approximately $18 million to the U.K. Plan in 2005, including a $15 million discretionary contribution expected to be made in the second quarter of 2005.

9.

Derivative Instruments

The Company utilizes forward exchange contracts to manage exposures related to foreign currency risks, which primarily arise from short-term foreign currency denominated intercompany balances. Generally, such intercompany balances are centrally managed by the Company’s global treasury function. The Company’s 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 short-term foreign currency denominated intercompany balances. Such forward exchange 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 Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and are recorded in the Consolidated Balance Sheets at fair value, which is based on referenced market rates. Changes in the fair value of the Company’s forward exchange contracts are recognized currently in earnings and are generally offset by the revaluation of the underlying intercompany balances in accordance with SFAS No. 52, “Foreign Currency Translation.”

As of March 31, 2005 and 2004, the Consolidated Balance Sheets included liabilities of $0.5 million and $0.7 million, respectively, recorded within Accounts Payable and Accrued Liabilities reflecting the fair value of the Company’s outstanding forward exchange contracts on those dates. As of December 31, 2004, the Consolidated Balance Sheets included assets of approximately $30,000 recorded within Prepaid Expenses and Other Current Assets reflecting the fair value of the Company’s outstanding forward exchange contracts on that date.

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10.

Commitments and Contingencies

Employment Agreements—During the second half of 2003 the Company entered into employment agreements with a number of employees, which expire in June 2006. Such agreements provide, among other benefits, for minimum salary levels, as well as incentive bonuses which are payable only if specified Company and individual goals are attained. The aggregate commitment for future salaries related to these employment agreements for the entire three-year period, excluding incentive bonuses, is approximately $10.4 million, of which approximately $6.2 million had been paid through May 1, 2005.

Lending Commitments—In certain situations, the Company’s Finance segment enters into legally binding arrangements to lend, primarily on a collateralized basis and subject to certain limitations and conditions, to potential consignors and other individuals who have collections of fine art or other objects. Unfunded commitments to extend additional credit were approximately $8.9 million at March 31, 2005.

Legal Actions—The Canadian Competition Bureau is continuing to conduct an investigation regarding anti-competitive practices relating to commissions charged by the Company and Christie’s International, PLC (“Christie’s”) for auction services during the period 1993 to 2000.

The Company also becomes involved, from time to time, in various claims and lawsuits incidental to the ordinary course of its business.

Management does not believe that the outcome of any of the pending claims or proceedings described above will have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity.

Gain Contingency—During the third quarter of 2004, the Company signed an agreement for the sale of land and buildings at Billingshurst, West Sussex in the U.K. (the “Sussex Property”). The completion of the sale is conditional upon the receipt of planning permission for redevelopment of part of the site. If completed, the sale of the Sussex Property would result in a pre-tax gain in the range of approximately $5 to $6 million. The Company expects this contingency to be resolved some time in 2005 or 2006.

(See Note 11 for other commitments and contingencies.)

11.

Auction Guarantees

From time to time in the ordinary course of business, the Company will guarantee to consignors a minimum price in connection with the sale of property at auction. The Company must perform under its auction 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 auction guarantee. If the property does not sell, the amount of the auction guarantee must be paid, but the Company has the right to recover such amount through future sale of the property. Generally, the Company is entitled to a share of the excess proceeds if the property under the auction guarantee sells above a minimum price. In addition, the Company is obligated under the terms of certain guarantees to advance a portion of the guaranteed amount prior to the auction. In certain situations, the Company reduces its financial exposure under auction guarantees through sharing arrangements with unaffiliated third parties.

As of March 31, 2005, the Company had outstanding auction guarantees totaling $54.5 million, the property relating to which had a mid-estimate sales price (1) of $64.1 million. The Company’s financial exposure under these auction guarantees is reduced by $6.3 million as a result of sharing arrangements with unaffiliated third parties. The property related to such auction guarantees is being offered at auctions throughout 2005. As of March 31, 2005, $14.1 million of the guaranteed amount had been advanced by the Company and its partners, of which $13 million is recorded within Notes Receivable and Consignor Advances in the Consolidated Balance Sheets (see Note 5). As of March 31, 2005, December 31, 2004 and March 31, 2004, the carrying amount of the liability related to the Company’s auction guarantees was approximately $0.5 million, $0.1 million and $0.7 million, respectively, and was reflected in the

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Consolidated Balance Sheets within Accounts Payable and Accrued Liabilities.

As of May 6, 2005, the Company had outstanding auction guarantees totaling $112.3 million, the property relating to which had a mid-estimate sales price (1) of $125.3 million. The Company’s financial exposure under these auction guarantees is reduced by $11.3 million as a result of sharing arrangements with unaffiliated third parties. The property related to such auction guarantees will be offered at auctions throughout 2005. As of May 6, 2005, $8.4 million of the guaranteed amount had been advanced by the Company and its partners, of which the Company will record its $7.2 million share within Notes Receivable and Consignor Advances.

(1)

The mid-estimate sales price is calculated as the average of the low and high pre-sale auction estimates for the property under the auction guarantee. Pre-sale estimates are not always accurate predictions of auction sale results.

12.

Settlement Liabilities

In February 2001, the U.S. District Court for the Southern District of New York imposed on the Company a fine of $45 million payable to the DOJ without interest over a period of five years. As a result, in the third quarter of 2000, the Company recorded Settlement Liabilities of $34.1 representing the present value of the fine payable. The $10.9 million discount on the amount due is being amortized to interest expense over the five-year period during which the fine is being paid. As of March 31, 2005, the carrying value of the fine payable to the DOJ was $14 million. The final payment of $15 million owed under the fine is due on February 6, 2006.

Additionally, in conjunction with the settlement of certain civil litigation related to the investigation by the DOJ, the Company issued to the class of plaintiffs vendor’s commission discount certificates (“Discount Certificates”) with a face value of $62.5 million. The Discount Certificates are fully redeemable in connection with any auction conducted by the Company or Christie’s in the U.S. or in the U.K. and may be used to satisfy consignment charges involving vendor’s commission, risk of loss and/or catalogue illustration. 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 represents the amount recorded as Settlement Liabilities in the third quarter of 2000. The Discount Certificates will expire on May 14, 2008 and cannot be redeemed subsequent to that date; however, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. The $12.5 million discount on the face value of the Discount Certificates is being amortized to interest expense over the four-year period prior to May 15, 2007, the first date at which the Discount Certificates are redeemable for cash. As of March 31, 2005, the outstanding face value of unused Discount Certificates that the Company could be required to redeem was $55.9 million and the carrying value of such Discount Certificates was $49.6 million.

As of March 31, 2005, December 31, 2004 and March 31, 2004, Settlement Liabilities consisted of the following:

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			March 31, 2005			December 31, 2004			March 31, 2004
			(Thousands of dollars)
Current:
Discount Certificates (net)			$	3,800	*	$	3,700		$	2,600
DOJ antitrust fine (net)				14,017			10,754			10,118
Sub-total				17,817			14,454			12,718
Long-term:
Discount Certificates (net)				45,846			46,186			48,267
DOJ antitrust fine (net)				—			14,899			14,018
Sub-total				45,846			61,085			62,285
Total			$	63,663		$	75,539		$	75,003

*

The current portion of the liability for the Discount Certificates is based on management’s estimate of redemptions expected during the twelve-month period after the current balance sheet date.

During the three months ended March 31, 2005, amounts charged to and cash payments made against Settlement Liabilities were:

			Discount Certificates (net)			DOJ Antitrust Fine (net)			Total
			(Thousands of dollars)
Settlement Liabilities as of January 1, 2005			$	49,886		$	25,653		$	75,539
Cash payment to DOJ				—			(12,000	)		(12,000	)
Redemption of Discount Certificates				(1,059	)		—			(1,059	)
Amortization of discount				696			364			1,060
Loss on redemption of Discount Certificates				123			—			123
Settlement Liabilities as of March 31, 2005			$	49,646		$	14,017		$	63,663

13.

Comprehensive (Loss) Income

The Company’s comprehensive (loss) income includes the net (loss) income for the period, as well as other comprehensive loss, which consists of the change in the foreign currency translation adjustment account during the period. For the three months ended March 31, 2005 and 2004, comprehensive (loss) income is as follows:

			Three Months Ended March 31,
			2005			2004
			(Thousands of dollars)
Net (loss) income				($ 9,721	)	$	36,720
Other comprehensive loss				(2,918	)		(644	)
Comprehensive (loss) income				($12,639	)	$	36,076

14.

Stock-Based Compensation

Stock Option Plans—As currently permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to measure stock-based compensation related to its employee stock option plans using the intrinsic value approach under Accounting Principles Board Opinion No. 25,

17

“Accounting for Stock Issued to Employees.” When the intrinsic value approach is used, SFAS No. 123 requires supplemental disclosure to show the effects of using this approach on net income (loss) and earnings (loss) per share.

Compensation expense related to restricted stock shares issued pursuant to the Sotheby’s Holdings, Inc. 2003 Restricted Stock Plan (the “Restricted Stock Plan”) is determined based on the fair value of the shares issued on the date of grant. Such compensation expense is subsequently amortized to Salaries and Related Costs over the corresponding graded vesting period.

The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to all of its employee stock compensation plans:

			Three Months Ended March 31,
			2005			2004
			(Thousands of dollars, except per share data)
Net (loss) income, as reported				($ 9,721	)		$36,720
Add: Stock-based employee compensation
expense included in reported net (loss) income,
net of tax effects				1,648			144
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of related
tax effects				(2,019	)		(1,148	)
Pro forma net (loss) income				($10,092	)		$35,716
(Loss) earnings per share:
Basic (loss) earnings per share, as reported				($0.16	)		$0.60
Basic (loss) earnings per share, pro forma				($0.16	)		$0.58
Diluted (loss) earnings per share, as reported				($0.16	)		$0.59
Diluted (loss) earnings per share, pro-forma				($0.16	)		$0.58

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) requires the recognition of compensation expense equal to the fair value of stock options or other share-based payments. Under SFAS No. 123(R), the Company would have been required to implement the standard as of July 1, 2005. In April 2005, the SEC announced the adoption of a new rule that amended the compliance date for SFAS No. 123(R). The SEC’s new rule will allow the Company to implement SFAS No. 123(R) as of January 1, 2006. The Company will adopt SFAS No. 123(R) using the modified prospective method, which will result in the amortization of stock compensation expense related to unvested stock options outstanding on the date of adoption, as well as any stock options granted subsequent to that date. The Company expects the adoption of SFAS No. 123(R) to result in the recording of compensation expense in the range of $0.5 million to $1.0 million in 2006 related to unvested stock options outstanding on the date of adoption.

Restricted Stock Plan—In February 2003, the Compensation Committee of the Board of Directors approved an exchange offer of cash or restricted stock for certain stock options held by eligible employees under the Sotheby’s Holdings, Inc. 1997 Stock Option Plan (the “Exchange Offer”). The Exchange Offer was tendered during the first half of 2004. As a result of the Exchange Offer, approximately 5.6 million

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stock options were cancelled and 1.1 million shares of restricted stock were issued. The restricted stock shares were issued upon acceptance of the Exchange Offer at the closing market price of the Company’s Class A Common Stock on that date and resulted in the recording of Deferred Compensation Expense and Additional Paid-in Capital of approximately $14 million. The amount recorded as Deferred Compensation Expense is being amortized to Salaries and Related Costs over the vesting period described above. For the three months ended March 31, 2005, the Company recognized stock compensation expense of $1.7 million related to the Exchange Offer. The cash payment made in conjunction with the Exchange Offer was approximately $2.2 million and was expensed in full upon acceptance on March 31, 2004.

In February 2005, the Compensation Committee approved the issuance of 276,000 shares of restricted stock with a fair value of $4.9 million. These restricted stock shares vest ratably after each of the first, second, third and fourth years following the date of grant.

15.

Variable Interest Entity

In December 2003, the Financial Accounting Standards Board (the “FASB”) issued a revision to FIN No. 46, “Consolidation of Variable Interest Entities,”which was originally issued in January 2003. FIN No. 46, as revised, provides guidance on the consolidation of certain entities when control exists through other than voting (or similar) interests and was effective immediately with respect to entities created after January 31, 2003. For certain special purpose entities created prior to February 1, 2003, FIN No. 46, as revised, became effective for financial statements issued after December 15, 2003. FIN No. 46, as revised, was effective for all other entities created prior to February 1, 2003 beginning with financial statements for reporting periods ending after March 15, 2004. FIN No. 46, as revised, requires consolidation by the majority holder of expected losses, expected residual returns, or both of the activities of a variable interest entity (“VIE”).

The Company has concluded that an entity with whom its Finance segment has outstanding loans of approximately $3.7 million and to whom the Company provides management consulting services meets the definition of a VIE under FIN No. 46, as revised. As primary beneficiary of the VIE, the Company was required to consolidate the entity as part of the Auction segment beginning on March 31, 2004.

The entity is an art gallery which is engaged in business as a broker/dealer in works of art. The Company provides management consulting services to the entity in exchange for a management fee, which is equal to 50% of the entity’s net income (excluding the management fee and certain other specified revenues and expenses). Included in the Company’s consolidated assets as of March 31, 2005 is inventory with a carrying value of approximately $3.7 million. Such inventory consists entirely of artwork and is the collateral for the $3.7 million in outstanding loans discussed above, which are eliminated in the consolidation. The Company has no equity investment in the entity.

The Company accounts for its interest in the entity on a quarter lag applied on a consistent basis. As of December 31, 2004, the entity had total assets of $5.0 million, total liabilities of $4.6 million and capital of $0.4 million.

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

Seasonality

        The worldwide art auction market has two principal selling seasons, spring and fall. Consequently, first and third quarter results of the Auction segment typically reflect lower Aggregate Auction Sales (as defined in the chart below under “Key Performance Indicators”) when compared to the second and fourth quarters and, accordingly, a net loss due to the fixed nature of many of the Company’s operating expenses. (See Note 2 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”)

Use of Non-GAAP Financial Measures

        GAAP refers to generally accepted accounting principles in the United States of America. Included in Management’s Discussion and Analysis of Financial Condition and Results of Operations are financial measures presented in accordance with GAAP and also on a non-GAAP basis. When material, the Company excludes the impact of changes in foreign currency exchange rates when comparing current year results to the prior year. Consequently, such period-to-period comparisons are provided on a constant dollar basis by eliminating the impact of changes in foreign currency exchange rates since the prior year. Management believes that excluding the impact of material changes in foreign currency exchange rates when comparing current year results to the prior year provides a more meaningful discussion and analysis of material fluctuations in the Company’s operating results. Management also utilizes this non-GAAP financial measure in analyzing its operating results.A reconciliation of each of the non-GAAP financial measures used in this Form 10-Q to their most directly comparable GAAP financial measures is provided in the appropriate sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations below.

Overview

        The Company’s first quarter results for 2005 reflect the continuing strength of the international art market as auction commission revenues increased by 56%, or $21.5 million, when compared to the same period in the prior year and private sale commission revenues remained at historically high levels, totaling $5.1 million for the current period. However, because first quarter results for 2004 included a one-time license fee of $45 million earned in conjunction with the sale of the Company’s domestic real estate brokerage business (see “Discontinued Operations” below), as well as private sale commission revenues related to the landmark private sale of the Forbes Collection of Faberge, first quarter results for 2005 are substantially lower than those reported for the same period in the prior year. The Company’s pre-tax results from continuing operations for the three months ended March 31, 2005 and 2004 are summarized below (in thousands of dollars):

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		Three Months Ended March 31,
		2005		2004		$ Change		% Change
Revenues:
Auction and related revenues		$ 72,175		$   58,853		$ 13,322		22.6	%
License fee revenue		176		45,000		(44,824	)	-99.6	%
Other revenues		1,676		1,573		103		6.5	%
Total revenues		74,027		105,426		(31,399	)	-29.8	%
Expenses		82,578		78,036		4,542		5.8	%
Operating (loss) income		(8,551	)	27,390		(35,941	)		*
Net interest expense and other		(6,528	)	(7,201	)	673		9	%
(Loss) income from continuing operations before taxes		($ 15,079	)	$   20,189		($ 35,268	)		*

* Represents a change in excess of 100%.

        Management currently anticipates a continuation of the strong international art market and is encouraged by its 2005 auction sales results to-date, as well as by the level of consignments for the remainder of the spring auction season. However, despite this optimism about the art market, it is unlikely that Auction segment results for the second quarter of 2005 will reach the level achieved during the same period in the prior year as there will not be a sale equivalent to the May 2004 single-owner sale of property of the Greentree Foundation, which totaled approximately $213.1 million in Aggregate Auction Sales and included the record breaking sale of Pablo Picasso’s “Garcon a la Pipe” for $104.2 million. (See statement on Forward Looking Statements.)

        Please refer to the discussion below for a more detailed discussion of the significant factors impacting the Company’s results from continuing operations for the three months ended March 31, 2005.

Discontinued Operations

        In the fourth quarter of 2003, the Company committed to a plan to sell its domestic real estate brokerage business, Sotheby’s International Realty, Inc. (“SIR”), as well as most of its real estate brokerage offices outside of the U.S.. On February 17, 2004, the Company consummated the sale of SIR to a subsidiary of Cendant Corporation (“Cendant”) and, as a result, recognized a gain of $33.1 million in the first quarter of 2004. In conjunction with the sale, the Company entered into an agreement with Cendant to license the Sotheby’s International Realty trademark and certain related trademarks for an initial 50-year term with a 50-year renewal option (the “License Agreement”). The License Agreement is applicable worldwide except in Australia. Additionally, in the fourth quarter of 2004, the Company committed to a plan to sell its real estate brokerage business in Australia. This business is the only remaining component of the Company’s former Real Estate segment. Accordingly, the assets and liabilities of the Australia real estate brokerage business are classified as held for sale in the Consolidated Balance Sheets, and its operating results are reported as discontinued operations in the Consolidated Income Statements. The Australia real estate brokerage business is not material to the Company’s results of operations, financial condition or liquidity. For additional information related to these transactions, refer to Note 3 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”.

Revenues

        For the three months ended March 31, 2005 and 2004, revenues from continuing operations consisted of the following (in thousands of dollars):

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		Three Months Ended March 31,
		2005		2004		$ Change		% Change
Auction and related revenues:
Auction commission revenues		$  60,108		$  38,585		$   21,523		55.8	%
Auction expense recoveries		2,867		1,603		1,264		78.9	%
Private sale commissions		5,133		13,262		(8,129	)	-61.3	%
Principal activities		406		1,986		(1,580	)	-79.6	%
Catalogue subscription revenues		2,338		2,143		195		9.1	%
Other		1,323		1,274		49		3.8	%
Total auction and related revenues		72,175		58,853		13,322		22.6	%
License fee revenues		176		45,000		(44,824	)	-99.6	%
Other revenues:
Finance segment revenues		1,207		1,216		(9	)	-0.7	%
Other		469		357		112		31.4	%
Total other revenues		1,676		1,573		103		6.5	%
Total revenues		$  74,027		$105,426		($ 31,399	)	-29.8	%
Key performance indicators:
Aggregate Auction Sales (a)		$355,980		$233,197		$ 122,783		52.7	%
Net Auction Sales (b)		$305,052		$200,806		$ 104,246		51.9	%
Auction commission margin (c)		19.7	%	19.2	%	N/A		2.5	%
Average loan portfolio		$  76,322		$  95,045		($ 18,723	)	-19.7	%