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

For the Quarterly Period Ended March 31, 2003
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 / /.

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 7, 2003, there were outstanding 45,014,513 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.

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3

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

5

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, 2002.

Certain amounts in the 2002 Consolidated Financial Statements in notes
receivable and settlement liabilities 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
Financial Condition and Results of Operations") are considerably lower. The
table below demonstrates that approximately 77% 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

Revenues and loss before taxes for the Company's operating segments are as
follows:

The following is a reconciliation of loss before taxes for the Company's
reportable operating segments to the applicable line items in the
Consolidated Statements of Operations:

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Total assets for the Company's reportable operating segments are as
follows:

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

4. RECEIVABLES

Accounts receivable primarily relates to the Company's Auction segment. At
March 31, 2003, approximately $50 million, or 35%, of the net accounts
receivable balance was due from one purchaser. This amount is due and
payable to the Company in July 2003. The Company's credit risk resulting
from this receivable balance is largely offset by the remaining $47 million
owed to the consignor, which will not be paid by the Company until it
collects the remaining amount due from the purchaser. The Company's net
exposure represents a portion of its commission revenue earned from the
sale.

The Company 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 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

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(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
$18.7 million, $23.2 million and $17.0 million at March 31, 2003, December
31, 2002 and March 31, 2002, 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 lend at loan to value
ratios higher than 50%. In certain of these 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 net 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.
At March 31, 2003, December 31, 2002 and March 31, 2002, the net total of
all such unsecured loans was $12.6 million, $17.0 million and $10.4
million, respectively. These amounts are included in the total unsecured
loan balances provided in the previous paragraph.

The weighted average interest rates charged on net notes receivable and
consignor advances were 6.2%, 5.4% and 5.1% at March 31, 2003, December 31,
2002 and March 31, 2002, respectively.

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Changes in the allowance for credit losses related to notes receivable and
consignor advances for the three months ended March 31, 2003 and 2002 are
as follows:

5. GOODWILL

Changes in the carrying amount of the Company's goodwill for the three
months ended March 31, 2003, by segment, are as follows:

6. CREDIT ARRANGEMENTS

BANK CREDIT FACILITIES -- On February 7, 2003, the Company refinanced $100
million in outstanding borrowings under the senior secured term facility
(the "Term Facility") of its existing credit agreement (the "Amended and
Restated Credit Agreement") in conjunction with a sale-leaseback
transaction involving the Company's headquarters building in New York (See
Note 7). Additionally, on February 7, 2003, the Company extended the
maturity date of the Amended and Restated Credit Agreement from February
11, 2003 to February 6, 2004.

The borrowing capacity under the Amended and Restated Credit Agreement is
$75 million, which includes a $20 million loan under the Term Facility and
$55 million available under a senior secured revolving credit facility (the
"Revolving Facility"). The Company paid amendment and arrangement fees of
$1.7 million in connection with the extension of the Amended and Restated
Credit Agreement, which are being amortized to interest expense over the
extended term of the agreement.

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Outstanding borrowings under the Amended and Restated Credit Agreement
consist of the following:

Outstanding borrowings under the Term Facility were at weighted average
interest rates of 4.8%, 5.2% and 4.9% at March 31, 2003, December 31, 2002
and March 31, 2002, respectively.

Outstanding borrowings under the Revolving Facility were at a weighted
average interest rate of 6.8% at March 31, 2003.

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. 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: (i) LIBOR plus 3.5% or (ii) the Prime Rate plus
2.5%, as selected by the Company. 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 is in compliance with these financial
covenants.

As discussed above, the Amended and Restated Credit Agreement is available
through February 6, 2004. On this date, the Amended and Restated Credit
Agreement 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 subsequent to
February 6, 2004 including the aggregate monthly rent payments due under
the York Property capital lease obligation (see Note 7), the aggregate

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monthly rent payments due under the Company's operating lease obligations,
the remaining payments due under the Company's DOJ antitrust fine (see Note
10), the redemption of any Discount Certificates to be distributed as part
of the U.S. Antitrust Litigation settlement (see Note 10) and interest
payments related to the Company's long-term debt securities, an extension,
amendment or refinancing of the Amended and Restated Credit Agreement will
be necessary to supplement operating cash flows. Management currently
believes that the Company will secure adequate long-term funding prior to
the expiration of the Amended and Restated Credit Agreement. If the Company
were unable to secure such funding, this would have a material adverse
effect on the Company's business, results of operations, financial
condition and/or ability to operate.

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.

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.

INTEREST EXPENSE -- For the three months ended March 31, 2003 and 2002, the
Company incurred interest expense of $7.1 million and $5.8 million,
respectively, consisting of the following:

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Other interest expense principally relates to interest accrued on the
unfunded obligation under the Company's Benefits Equalization Plan.

7. SALE-LEASEBACK TRANSACTION

On February 7, 2003, the Company completed the sale of its headquarters
building at 1334 York Avenue in New York, New York (the "York Property") to
an affiliate of RFR Holding LLC ("RFR") for $175 million in cash. Net cash
proceeds of approximately $167 million, after deducting taxes and fees
related to the transaction, were used in part to refinance $100 million in
outstanding borrowings under the Term Facility of the Amended and Restated
Credit Agreement (see Note 6). The Company is leasing the York Property
back from RFR for an initial 20-year term, with options for the Company to
extend the lease for two additional 10-year terms. The resulting lease is
being accounted for as a capital lease. Under the lease agreement, rental
payments escalate 7% every three years during the initial term.

The sale of the York Property resulted in a deferred gain of approximately
$23 million, which is being amortized on a straight-line basis against
depreciation and amortization expense over the initial 20-year lease term.

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As of March 31, 2003, the amount recorded within Properties in the
Company's Consolidated Balance Sheets for the capital lease asset related
to the York Property was approximately $172.4 million, net of accumulated
depreciation of approximately $1.5 million.

The following is a schedule, by year, of the future minimum lease payments
due under the York Property capital lease, together with the present value
of the future minimum lease payments as of March 31, 2003 (in thousands of
dollars):

2003 $ 13,519
2004 18,025
2005 18,025
2006 19,264
2007 19,287
Thereafter 350,383
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Total future minimum lease payments 438,503
Less: amount representing interest 266,141
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Present value of future minimum lease payments $ 172,362
============

8. 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 funded and settled through 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," and are
recorded in the Company's Consolidated Balance Sheets at their fair value.
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 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

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related to the derivatives. For the three months ended March 31, 2003 and
2002, such costs, which are reflected in other income (expense) in the
Company's Consolidated Statements of Operations, were not material to the
Company's results.

The Company's Consolidated Balance Sheets at March 31, 2003 and 2002
include approximately $0.2 million recorded within other current assets
reflecting the fair value of the Company's forward exchange contracts.

9. COMPREHENSIVE LOSS

The Company's comprehensive loss includes the net 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 months ended March 31, 2003 and 2002, comprehensive loss is as
follows:

10. LITIGATION AND SPECIAL CHARGES

For the three months ended March 31, 2003 and 2002, the Company recorded
the following special charges in the Consolidated Statements of Operations
related to the investigation by the Antitrust Division of the United States
Department of Justice (the "DOJ"), other governmental investigations and
the related civil antitrust litigation:

15

On April 10, 2003, the Company and Christie's International, PLC
("Christie's") entered into a settlement agreement with one of the parties
that opted out of the class action settlement in the U.S. Antitrust
Litigation (as defined in Part II, Item 1, "Legal Proceedings"). The
Company's share of this settlement involved an initial payment of $1.6
million, which was funded in April 2003, and a potential additional payment
of up to $0.4 million depending on future developments. During the fourth
quarter of 2002, the Company recorded special charges of $1.75 million
related to this claim. During the first quarter of 2003, the Company
recorded an additional $0.25 million in special charges as a result of the
final settlement agreement. Although there were other opt-outs from the
settlement of the U.S. Antitrust Litigation, no other claims have been
asserted to date.

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 settled by her relinquishment of
vested benefits under the Company's Benefits 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.

The Company's settlement liabilities related to the DOJ investigation,
other governmental investigations and the related civil antitrust
litigation consist of the following:

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The settlement liability for the U.S. Antitrust Litigation relates to the
vendor's commission discount certificates (the "Discount Certificates")
that will be distributed as part of the U.S. Antitrust Litigation
settlement. The Discount Certificates 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 is recorded in the Company's
Consolidated Balance Sheets within the current and long-term settlement
liabilities. 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 balance sheet date. The Discount
Certificates are currently expected to be printed and issued to the class
of plaintiffs in May 2003.

The remaining $33 million payable under the DOJ antitrust fine is due on
the following dates: (a) $6 million due February 6, 2004, (b) $12 million
due February 6, 2005 and (c) $15 million due February 6, 2006.

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On April 7, 2003, pursuant to the settlement agreement for the
International Antitrust Litigation (as defined in Part II, Item 1, "Legal
Proceedings"), the Company deposited $10 million into an escrow account for
the benefit of the members of the class of plaintiffs. The remaining $10
million due under the settlement agreement will be paid upon final court
approval of the settlement. The District Court has scheduled a hearing for
June 2, 2003 to consider certification of the class of plaintiffs and
approval of the settlement.

Amounts charged to the Company's settlement liabilities related to the DOJ
investigation, other governmental investigations and the related civil
antitrust litigation during the three months ended March 31, 2003 were:

11. COMMITMENTS, CONTINGENCIES AND RESTRICTED CASH

LETTERS OF CREDIT - As of March 31, 2003, the Company had outstanding
letters of credit of approximately $5.8 million primarily relating to bank
guarantees on rental obligations.

EMPLOYMENT AGREEMENTS -- In conjunction with its retention programs (see
Note 12), the Company entered into employment agreements with a group of
certain key employees, which expire at various dates in 2003 and 2004. 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 March 31, 2003, excluding incentive bonuses and cash awards in
conjunction with the Company's retention programs, was approximately $1.1
million.

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LEGAL ACTIONS -- 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
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. Under the terms of the settlement
agreement relating to the International Antitrust Litigation (see Note 10),
this claim would be withdrawn upon court approval of the settlement.

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 anti-competitive
activities. Under the terms of the settlement agreement relating to the
International Antitrust Litigation (see Note 10), this action would be
dismissed upon court approval of the settlement. If the settlement is not
approved, it is anticipated that a Statement of Defense will be filed
denying any liability with respect to the claim.

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, results of operations,
financial condition or liquidity.

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LENDING COMMITMENTS -- 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 $9.3 million at
March 31, 2003.

AUCTION GUARANTEES - 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. If the property does not sell, the amount
of the guarantee must be paid, but the Company has the right to recover
such amount through the future sale of the property. Under certain
guarantees, the Company participates in a share of the proceeds if the
property under guarantee sells above a minimum price. In addition, the
Company is obligated under the terms of certain guarantees to fund a
portion of the guaranteed amount prior to the auction.

In the first quarter of 2003, the Company adopted the recognition and
measurement provisions of Financial Accounting Standards Board
Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," for auction guarantees issued or modified
after December 31, 2002.

As of March 31, 2003, the Company had outstanding auction guarantees
totaling approximately $24.4 million, which had a mid-estimate sales
price of approximately $30.4 million. The property under such guarantees
is being offered at auction during the second quarter of 2003. As of
March 31, 2003, approximately $11.3 million of the guaranteed amount had
been funded and is recorded within notes receivable and consignor
advances in the Company's Consolidated Balance Sheets. As of March 31,
2003, the carrying amount of the liability related to the Company's
unfunded auction guarantees was approximately $0.1 million and is
recorded within due to consignors in the Company's Consolidated Balance
Sheets.

As of May 12, 2003, the Company had outstanding guarantees totaling
approximately $12.6 million, which had a mid-estimate sales price of
approximately $15.5 million. The property under such guarantees will be
offered at auction later in the second quarter of 2003. As of May 12,
2003, $11.3 million of the guaranteed amount had been funded.

In the opinion of management, the contingencies described above and in Note
10 are not currently expected to have a material adverse effect on the
Company's financial condition, liquidity and/or results of operations, with
the possible exception of the cash redemption of any unused Discount
Certificates.

(See Notes 7, 10 and 12 for other commitments and contingencies.)

RESTRICTED CASH - At March 31, 2003, cash and cash equivalents included
restricted cash balances of approximately $6.3 million which relate to
client down payments held by the Real Estate segment that will be disbursed
to the seller upon the closing of the related real estate sale.

At December 31, 2002, cash and cash equivalents included restricted cash
balances of approximately $9.4 million, of which $5.4 million relates to
bank guarantees on rental obligations in the U.S. and

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Europe and $4.0 million relates to the client down payments held by the
Real Estate segment discussed above. In February 2003, the restricted cash
balances covering rental obligations were replaced by letters of credit
under the Company's Amended and Restated Credit Agreement, as discussed
above, and became unrestricted.

At March 31, 2002, cash and cash equivalents included restricted cash
balances of approximately $1.4 million which relate to the client down
payments held by the Real Estate segment discussed above.

12. RETENTION PROGRAMS

In 2001 and 2002, the Company implemented retention programs that provide
cash awards payable to a group of key employees upon fulfillment of
full-time employment through certain dates in 2003 and 2004. An employee
who leaves the Company prior to such dates will, generally, forfeit his or
her right to payment. Up to $0.3 million remains payable under these
programs in July 2003 and up to an additional $0.4 million remains payable
in January 2004.

Certain employees granted such awards received cash payments of
approximately $12.5 million in the first quarter of 2003 and $0.1 million
in April 2003.

All amounts related to the retention programs described above are being
amortized over the contractual service period. For the three months ended
March 31, 2003 and 2002, the Company recorded retention costs of
approximately $3.5 million and $6.3 million, respectively, related to such
programs.

During the first quarter of 2003, as a result of current economic
conditions and the compensation structure for other senior executives, the
Company's Chief Executive Officer declined a $3 million cash award that
would have been due to him on December 31, 2003 under the retention
programs described above.

13. RESTRUCTURING PLANS

The Company recorded the following amounts related to the restructuring
plans described below in its Consolidated Statements of Operations during
the three months ended March 31, 2003 and 2002:

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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
March 31, 2003 were as follows:

In the first quarter of 2002, the Company recorded favorable adjustments of
$0.4 million to net restructuring charges primarily due to a change in
estimate for lease and contract termination costs resulting from the
favorable completion of negotiations with certain vendors.

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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.

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
March 31, 2003 were as follows:

In the first quarter of 2003, the Company recorded an unfavorable
adjustment to net restructuring charges primarily due to changes in
management's original estimates of employee termination benefits and other
costs related to the 2001 Restructuring Plan.

In the first quarter of 2002, the Company recorded restructuring charges of
$0.2 million for employee termination benefits related to the 2001
Restructuring Plan. Also during the first quarter of 2002, the Company
recorded favorable adjustments of $0.4 million to net restructuring charges
as a result of employee termination

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benefits that will not be paid primarily due to unanticipated employee
redeployment and changes in management's original estimates of these costs.

The remaining liability related to the 2001 Restructuring Plan will be
settled during the second quarter of 2003.

2002 RESTRUCTURING PLAN -- In the fourth quarter of 2002, management
approved plans to further restructure the Company's Auction segment, as
well as to carry out additional headcount reductions in certain corporate
departments (the "2002 Restructuring Plan"). The goal of the 2002
Restructuring Plan is to improve profitability through further cost savings
and other strategic actions.

In February 2003, as part of the 2002 Restructuring Plan, the Company and
eBay entered into an agreement pursuant to which separate online auctions
on sothebys.com were discontinued on April 30, 2003. The Company's Internet
activities will now focus on promoting the Company's live auctions through
eBay's Live Auctions Technology, which allows the Company's clients to
follow live auctions via the Internet and place bids online, in real time.
As a result of the restructuring of its strategic alliance with eBay, the
Company recorded restructuring charges of approximately $2.0 million in the
first quarter of 2003 consisting of approximately $1.0 million for employee
termination benefits, $0.5 million for a minimum guaranteed fee owed to
eBay for which the Company will receive no future economic benefit and
approximately $0.5 million for impairment losses related to certain
technology assets. This phase of the 2002 Restructuring Plan will result in
the termination of approximately 30 employees in the Company's Auction
segment.

In March 2003, as part of the 2002 Restructuring Plan, management committed
to the termination in Europe of approximately 40 additional employees in
the Company's Auction segment. As a result, the Company recorded
restructuring charges of $3.7 million in the first quarter of 2003 for
employee termination benefits.

Also, in March 2003, as part of the 2002 Restructuring Plan, the Company
entered into an agreement to outsource the operation of its mainframe
computer systems. In conjunction with the decision to outsource such
operations, management committed to the termination of six employees in the
corporate Information Technology department and, as a result, the Company
recorded restructuring charges of approximately $0.1 million in the first
quarter of 2003 for employee termination benefits.

24

In the first quarter of 2003, the Company recorded a favorable adjustment
of $0.1 million to net restructuring charges due to the reversal of a
portion of the remaining liability for employee termination benefits
related to the 2002 Restructuring Plan.

The liability related to the 2002 Restructuring Plan is recorded within
accounts payable and accrued liabilities in the Company's Consolidated
Balance Sheets. Amounts charged to the restructuring liability through
March 31, 2003 were as follows:

The remaining liability related to the 2002 Restructuring Plan will be
substantially paid out during the second quarter of 2003, with any
remaining amounts paid throughout the remainder of 2003.

14. STOCK-BASED COMPENSATION

The Company accounts for the 1987 Stock Option Plan and 1997 Stock Option
Plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation cost related to stock option grants to employees
has been recognized only to the extent that the fair market value of the
stock exceeds the exercise price of the stock option at the date of the
grant. The following table illustrates the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.

25

15. RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2003, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. This Statement is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003 and should be applied prospectively. The
Company is currently evaluating the impact, if any, that SFAS No. 149
will have on its accounting and financial reporting.

26

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

SEASONALITY - The worldwide art auction market has 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
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 Results of Operations are financial
measures presented in accordance with GAAP and also on a non-GAAP basis. In
particular, 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 the use of
this non-GAAP financial measure provides investors with a more meaningful
discussion and analysis of material fluctuations in the Company's operating
results. Additionally, management utilizes this non-GAAP financial measure in
analyzing its operating results.

AUCTION SALES FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 - The aggregate
hammer price of property sold at auction by the Company ("Auction Sales"), which
includes buyer's premium, totaled $200.9 million during the first quarter of
2003, an increase of $10.9 million, or 6%, when compared to the same period in
2002. During the first quarter of 2003, the favorable impact of foreign currency
translations on worldwide Auction Sales was approximately $13.6 million.
Excluding the impact of favorable foreign currency translations, Auction Sales
decreased $2.7 million, or 1%. This decrease in worldwide Auction Sales reflects
a 22% decrease in the number of lots sold in the first quarter of 2003 as
compared to the same period in 2002, partially offset by a 26% increase in the
average selling price per lot sold.

The following is a geographical breakdown of the Company's Auction Sales for the
first quarter of 2003 and 2002:

27

Auction Sales in North America decreased $4.6 million, or 5%, during the first
quarter of 2003, when compared to the same period in 2002. This decrease was
primarily due to a $16.9 million, or 65%, decline in Auction Sales attributable
to single-owner collections. Specifically, results for the first quarter of 2002
included $12.6 million in Auction Sales attributable to The Collection of
Mr. and Mrs. Lammot du Pont Copeland for which no comparable collection was
offered at auction in the first quarter of 2003. The decline in first quarter
single-owner Auction Sales for North America was partially offset by a $14.4
million, or 43%, improvement in sales of Old Master Paintings, which was
principally the result of the sale of Andrea Mantegna's "Descent into Limbo" for
$28.6 million.

Auction Sales in Europe increased $15.5 million, or 17%, during the first
quarter of 2003, when compared to the same period in 2002. During the first
quarter of 2003, the favorable impact of foreign currency translations on
Auction Sales in Europe was approximately $13.6 million. Excluding the impact of
favorable foreign currency translations, Auction Sales in Europe increased $1.9
million, or 2%, primarily due to improved results from the winter Impressionist
and Contemporary sales in London, partially offset by a 45% decrease in Auction
Sales attributable to single-owner collections. Significantly, Auction Sales for
the first quarter of 2002 included $12.8 million in single-owner sales
attributable to the Company's Paris salesroom, where there were no single-owner
sales during the first quarter of 2003.

The current economic environment, uncertainies related to the war in Iraq and
the health crisis in Asia resulting from SARS during the Company's spring
property gathering season have had an unfavorable impact on auction
consignments for the Company's spring sales, and will therefore, negatively
impact Auction Sales, buyer's premium revenues and seller's commission
revenues during the second quarter of 2003. (See statement on Forward Looking
Statements.)

28

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 - Note
3 of Notes to Consolidated Financial Statements ("Segment Reporting") should be
read in conjunction with this discussion.

Effective January 2003, the Company increased its buyer's premium for auction
sales in its major salesrooms worldwide. The buyer's premium is now generally
20% of the hammer (sale) price on the first $100,000 and 12% of any remaining
amount over $100,000. Previously, the buyer's premium was generally 19.5% of the
hammer (sale) price up to $100,000 and 10% of any remaining amount over
$100,000.

Auction and related revenues increased $2.5 million, or 7%, in the first quarter
of 2003, when compared to the same period in 2002. During the first quarter of
2003, the favorable impact of foreign currency translations on auction and
related revenues was $2.8 million. Excluding the impact of favorable foreign
currency translations, auction and related revenues decreased $0.3 million, or
1%. This decrease was primarily due to a $2.1 million decline in revenues from
principal activities, partially offset by a $1.9 million increase in buyer's
premium revenues. The decrease in revenues from principal activities was
significantly influenced by a material principal transaction completed in the
first quarter of 2002 for which there was no comparable event in the current
year. The increase in buyer's premium revenues was principally due to
incremental revenues associated with the new buyer's premium rate structure that
became effective in January 2003, partially offset by the slight decrease in
worldwide Auction Sales.

Other revenues consist primarily of revenues from the Company's Real Estate and
Finance segments. Other revenues decreased $0.3 million, or 3%, in the first
quarter of 2003 when compared to the same period in 2002. During the first
quarter of 2003, the favorable impact of foreign currency translations on other
revenues was approximately $0.2 million. Excluding the impact of favorable
foreign currency translations, other revenues decreased $0.5 million, or 5%.
This decrease was primarily due to a $0.7 million, or 10%, decline in revenues
from the Real Estate segment, partially offset by a $0.2 million, or 34%,
increase in revenues from the Company's art education activities. The decline in
Real Estate revenues was primarily due to decreased commission retention rates,
as well as a 3% decrease in sales volume. The decrease in commission retention
rates was principally the result of the increased involvement of co-brokers for
certain transactions, as well as a greater proportion of sales completed by
senior agents who earn a higher share of the gross commission.

29

Management currently believes that the current economic environment may
adversely affect an already softening luxury real estate market, and may
therefore, negatively impact Real Estate segment revenues during the second
quarter of 2003.

Direct costs of services (consisting largely of corporate marketing and sale
marketing expenses, as well as catalogue production and distribution costs)
decreased $1.4 million, or 15%, in the first quarter of 2003, when compared to
the same period in 2002. During the first quarter of 2003, the unfavorable
impact of foreign currency translations on direct costs was approximately $0.4
million. Excluding the impact of unfavorable foreign currency translations,
direct costs decreased $1.8 million, or 20%. This decrease was largely due to
savings in marketing expenses and sale promotion costs principally due to
management's efforts to reduce such costs. Additionally, results for the first
quarter of 2003 reflect savings in catalogue production costs primarily
resulting from the Company's use of digital photography and other catalogue
savings initiatives, which were gradually implemented throughout 2002. Also
favorably impacting the comparison of catalogue production costs to the prior
year is a 22% decrease in the number of lots sold at auction, as discussed
above.

Salaries and related costs increased $0.6 million, or 2%, in the first quarter
of 2003 when compared to the same period in 2002. During the first quarter of
2003, the unfavorable impact of foreign currency translations on salaries and
related costs was approximately $2.1 million. Excluding the impact of
unfavorable foreign currency translations, salaries and related costs decreased
$1.5 million, or 4%. This decrease was primarily due to savings achieved in the
Auction segment as a result of the Company's restructuring plans (as discussed
below and in Note 13 of Notes to Consolidated Financial Statements under Part I,
Item 1, "Financial Statements") and management's other cost containment efforts.
Additionally, results for the first quarter of 2003 reflect lower incentive
bonus costs in the Real Estate segment principally due to the decrease in sales
volume discussed above. These savings were partially offset by a $1.0 million
increase in employee benefit costs principally due to higher pension and health
benefit expenses.

General and administrative expenses increased $0.9 million, or 4%, in the first
quarter of 2003 as compared to the same period in 2002. During the first quarter
of 2003, the unfavorable impact of foreign currency translations on general and
administrative expenses was approximately $1.3 million. Excluding the impact of
unfavorable foreign currency translations, general and administrative expenses
decreased $0.4

30

million, or 2%. This decrease was largely attributable to favorable bad debt
experience, as well as savings achieved in travel and entertainment expenses as
a result of the Company's restructuring plans (as discussed below and in Note 13
of Notes to Consolidated Financial Statements under Part I, Item 1, "Financial
Statements") and management's other cost containment efforts. These favorable
variances were partially offset by higher insurance costs mostly in the Auction
segment, as well as increased professional fees and facility related costs.

Depreciation and amortization expense increased $1.0 million, or 17%, in the
first quarter of 2003 as compared to the same period in 2002. During the first
quarter of 2003, the unfavorable impact of foreign currency translations on
depreciation and amortization expense was approximately $0.2 million. Excluding
the impact of unfavorable foreign currency translations, depreciation and
amortization expense increased $0.8 million, or 14%. This increase was
principally due to incremental depreciation expense associated with the capital
lease asset recorded in February 2003 in conjunction with a sale-leaseback
transaction involving the Company's headquarters building located at 1334 York
Avenue in New York, New York (the "York Property"). (See "Liquidity and Capital
Resources" below and Note 7 of Notes to Consolidated Financial Statements under
Part I, Item 1, "Financial Statements" for additional information related to the
sale-leaseback transaction.)

RETENTION COSTS - For the three months ended March 31, 2003 and 2002, the
Company recognized expense of approximately $3.5 million and $6.3 million,
respectively, related to the retention programs for a group of key employees.

During the first quarter of 2003, as a result of current economic conditions and
the compensation structure for other senior executives, the Company's Chief
Executive Officer declined a $3 million cash award that would have been due to
him on December 31, 2003 under the retention programs described above.

(See Note 12 of Notes to Consolidated Financial Statements under Part I, Item 1,
"Financial Statements" for additional information on the Company's retention
programs.)

31

RESTRUCTURING PLANS - For the three months ended March 31, 2003 and 2002, the
Company recorded the following amounts related to its restructuring plans:

(See Note 13 of Notes to Consolidated Financial Statements under Part I, Item 1,
"Financial Statements," for detailed information relating to the 2000
Restructuring Plan and the 2001 Restructuring Plan.)

In the fourth quarter of 2002, management approved plans to further restructure
the Company's Auction segment, as well as to carry out additional headcount
reductions in certain corporate departments (the "2002 Restructuring Plan"). The
goal of the 2002 Restructuring Plan is to improve profitability through further
cost savings and other strategic actions, as described below. Total net annual
cost savings resulting from the 2002 Restructuring Plan are expected to be
approximately $17 million. See below for a more detailed discussion of these
cost savings.

In December 2002, the Company committed to the termination of approximately 60
employees as a result of the 2002 Restructuring Plan and recorded restructuring
charges of $4.2 million in the fourth quarter of 2002. These headcount
reductions impact the live auction business of the Company's Auction segment
primarily in North America, as well as certain corporate departments. Estimated
annual savings in salaries and related costs as a result of the headcount
reductions will be approximately $5 million. Substantially all of these savings
are currently expected to be fully realized during 2003.

In February 2003, as part of the 2002 Restructuring Plan, the Company and eBay
entered into an agreement pursuant to which separate online auctions on
sothebys.com were discontinued on April 30, 2003. The Company's Internet
activities will now focus on promoting the Company's live auctions through
eBay's Live Auctions Technology, which allows the Company's clients to follow
live auctions via the Internet and place bids online, in real time. As a result
of the restructuring of its

32

strategic alliance with eBay, the Company recorded restructuring charges of
approximately $2.0 million in the first quarter of 2003 consisting of $1.0
million for employee termination benefits, $0.5 million for a minimum
guaranteed fee owed to eBay for which the Company will receive no future
economic benefit and $0.5 million for impairment losses related to certain
technology assets. These actions will result in estimated net annual cost
savings of approximately $8 million, which are expected to be achieved
principally through lower salaries and related costs resulting from the
termination of approximately 30 employees and through attrition.
Additionally, savings will be achieved in direct costs of services and
general and administrative expenses. A majority of the savings are expected
to be fully realized by the fourth quarter of 2003. The Company also expects
a decrease in auction and related revenues as a result of the discontinuation
of separate online auctions on sothebys.com, which is expected to be
substantially offset by incremental revenues generated by the Company's
efforts, as part of the 2002 Restructuring Plan, to increase Auction Sales of
moderately valued property through the live auction business.

In March 2003, as part of the 2002 Restructuring Plan, management committed to
the termination in Europe of approximately 40 additional employees in the
Company's Auction segment. As a result, the Company recorded restructuring
charges of approximately $3.7 million in the first quarter of 2003 for employee
termination benefits. Estimated annual savings, which will primarily relate to
salaries and related costs, are expected to be approximately $4 million. Such
savings are being initiated during the second quarter of 2003 and are currently
expected to be fully realized by the end of 2003.

Also, in March 2003, as part of the 2002 Restructuring Plan, the Company entered
into an agreement to outsource the operation of its mainframe computer systems.
In conjunction with the decision to outsource such operations, management
committed to the termination of six employees in the corporate Information
Technology department and, as a result, the Company recorded restructuring
charges of approximately $0.1 million in the first quarter of 2003 for employee
termination benefits. These actions will result in estimated net annual cost
savings of approximately $0.3 million. Such savings, which will be achieved
primarily through lower salaries and related costs, are being initiated during
the second quarter of 2003 and are currently expected to be fully realized by
the end of 2003.

33

In the first quarter of 2003, the Company recorded a favorable adjustment of
$0.1 million to net restructuring charges due to the reversal of a portion of
the remaining liability for employee termination benefits related to the 2002
Restructuring Plan.

As a result of the current economic environment and management's continued focus
on improving profitability, the Company is continuing to assess all aspects of
its business and is developing plans to improve profitability through further
cost reductions and other strategic actions. As a result, the Company may record
additional restructuring charges later in 2003.

(See Note 13 of Notes to Consolidated Financial Statements under Part I, Item 1,
"Financial Statements," for additional information relating to the 2002
Restructuring Plan.)

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

SPECIAL CHARGES - Subject to court approval and implementation of the
International Antitrust Litigation settlement, the Company will have resolved
all antitrust issues raised by the Antitrust Division of the United States
Department of Justice, the European Commission and all related pending or
threatened civil litigation.

See Note 10 of Notes to Consolidated Financial Statements
under Part I, Item 1, "Financial Statements," for information on special charges
related to the investigation by the Antitrust Division of the United States
Department of Justice, other governmental investigations and the related civil
antitrust litigation.

NET INTEREST EXPENSE - Net interest expense increased $1.9 million, or 41%, in
the first quarter of 2003 when compared to the same period in 2002. This
increase was primarily due to incremental interest expense resulting from the
capital lease obligation recorded in February 2003 in conjunction with a
sale-leaseback transaction involving the York Property. (See "Liquidity and
Capital Resources" below and Note 7 of Notes to Consolidated Financial
Statements under Part I, Item 1, "Financial Statements" for additional
information related to the sale-leaseback transaction.) Also unfavorably
impacting the comparison to the prior year was decreased interest income
primarily due to decreased cash balances and lower interest rates. These
unfavorable variances were partially offset by a reduction in interest expense
associated with the Company's credit facility as a result of decreased average
outstanding borrowings and lower interest rates, as well as lower amortization
of amendment and arrangement fees.

(See Note 6 of Notes to Consolidated Financial Statements under Part I, Item 1,
"Financial Statements" for additional information related to interest expense
for the three months ended March 31, 2003 and 2002.)

34

INCOME TAX BENEFIT - The consolidated effective tax benefit rate was 36% for the
three months ended March 31, 2003 and 2002.

OTHER MATTERS - In February 2003, the Compensation Committee of the Board of
Directors approved a one-time exchange offer of cash or restricted stock under
the Company's restricted stock plan for stock options to eligible employees that
hold certain stock options with an exercise price above $18 under the Company's
1987 and 1997 Stock Option Plans (the "Exchange Offer"). The restricted stock
plan was approved by a vote of shareholders on April 29, 2003. The Company is
currently considering when it would be most appropriate to proceed with the
Exchange Offer.

If and when the Company proceeds with the Exchange Offer, the determination
as to whether an individual can receive restricted stock or cash will be
dependent upon the number of underlying eligible options that each employee
holds. The amount of restricted stock that could be issued or cash that could
be paid to each employee under the Exchange Offer will be calculated using a
discounted option pricing valuation model based on the number of eligible
options held. Assuming that the Exchange Offer proceeds and all employees
accept the Exchange Offer, the total amount of options to be cancelled is
estimated to be approximately 7.7 million. The number of shares of restricted
stock that would be issued, assuming that all eligible employees accept the
Exchange Offer, is estimated to be approximately 1.1 million shares. These
shares would be issued upon acceptance of the Exchange Offer at the market
price of the Company's Class A Common Stock at that time and would be
expensed over a four-year vesting period. The total amount of the
compensation expense related to the restricted stock issuance, assuming that
the Exchange Offer proceeds and all eligible employees accept the Exchange
Offer, is expected to be in the range of $10 million. Assuming that the
Exchange Offer proceeds and all eligible employees accept the Exchange Offer
for cash, the cash payment is expected to be in the range of $1.5 million,
which would be expensed in full upon acceptance. A number of variables can
impact the total amount of compensation expense related to the Exchange
Offer, including the number of shares issued and the market price of the
Company's Class A Common Stock at the date of issuance, as well as the number
of employees who accept the Exchange Offer.

(With respect to all statements made herein regarding the Exchange Offer, see
statement on Forward Looking Statements.)

35

FINANCIAL CONDITION AS OF MARCH 31, 2003 -- This discussion should be read in
conjunction with the Company's Consolidated Statements of Cash Flows (see Part
I, Item 1, "Financial Statements.")

During the first quarter of 2003, total cash and cash equivalents decreased
$48.3 million primarily due to the factors discussed below.

Net cash used by operations was $131.8 million during the first quarter of
2003 and was largely the result of a net loss from operations, as well as the
funding in February 2003 of the European Commission fine and a portion of the
fine payable to the United States Department of Justice (see Note 10 of Notes
to Consolidated Financial Statements under Part I, Item 1, "Financial
Statements"). Additionally, during the first quarter of 2003, the Company
funded approximately $12.5 million in retention payments to a group key
employees (see Note 12 of Notes to Consolidated Financial Statements under
Part I, Item 1, "Financial Statements") and approximately $2.9 million in
severance payments in connection with the Company's restructuring plans (see
Note 13 of Notes to Consolidated Financial Statements under Part I, Item 1,
"Financial Statements"). Also influencing cash used by operations during the
period is a $155.8 decrease in the amount due to consignors partially offset
by a $134.1 million decrease in accounts receivable, both principally
resulting from the settlement of Auction Sales occurring in the fourth
quarter of 2002.

Net cash provided by investing activities was $157.6 million during the first
quarter of 2003 and was primarily due to the $167.1 million in net cash proceeds
received from the York Property sale-leaseback transaction (see Note 7 of Notes
to Consolidated Financial Statements under Part I, Item 1, "Financial
Statements"), as well as the collection of maturing client loans. These cash
inflows from investing activities during the period were partially offset by the
funding of new client loans and auction guarantees.

Net cash used by financing activities was $76.5 million during the first quarter
of 2003 and was primarily due to the net repayment of credit facility
borrowings.

36

COMMITMENTS AS OF MARCH 31, 2003 -- The table below summarizes the Company's
material contractual obligations and commitments as of March 31, 2003.

(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 under Part I, Item 1,
"Financial Statements."

(2) Represents the aggregate outstanding principal and semi-annual interest
payments due on the Company's long-term debt. (See Note 6 of Notes to
Consolidated Financial Statements under Part I, Item 1, "Financial
Statements.")

(3) Represents rental payments due under the capital lease obligation for the
York Property, as discussed below and in Note 7 of Notes to Consolidated
Financial Statements under Part I, Item 1, "Financial Statements."

(4) See Part II, Item 1, "Legal Proceedings" and Note 10 of Notes to
Consolidated Financial Statements under Part I, Item 1, "Financial
Statements."

37

On April 7, 2003, pursuant to the settlement agreement for the
International Antitrust Litigation, the Company deposited $10 million into
an escrow account for the benefit of the members of the class of
plaintiffs.

(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). The amount disclosed in the commitments chart above consists
of approximately $24.4 million in gross auction guarantees less prefunded
amounts. (See Note 11 of Notes to Consolidated Financial Statements under
Part I, Item 1, "Financial Statements.")

(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 11 of Notes to Consolidated Financial Statements under Part I,
Item 1, "Financial Statements.")

The Discount Certificates to be distributed as part of the U.S. Antitrust
Litigation (see Part II, Item 1, "Legal Proceedings," and Note 10 of Notes to
Consolidated Financial Statements under Part I, Item 1, "Financial Statements")
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 four years
after the date they are first issued. 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
is recorded in the Company's Consolidated Balance Sheets within current and
long-term settlement liabilities. The Discount Certificates are currently
expected to be printed and issued to the class of plaintiffs in May 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 $9.3 million as of March 31, 2003. (See
Notes 4 and 11 of Notes to Consolidated Financial Statements under Part I, Item
1, "Financial Statements.")

CONTINGENCIES -- See Note 11 of Notes to Consolidated Financial Statements under
Part I, Item 1, "Financial Statements" for information on contingencies.

38

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

On February 7, 2003, the Company completed the sale of the York Property to an
affiliate of RFR Holding LLC ("RFR") for $175 million in cash. Net cash proceeds
of approximately $167 million, after deducting taxes and fees related to the
transaction, were used in part to refinance $100 million in outstanding
borrowings under the senior secured term facility (the "Term Facility") of the
Company's existing credit agreement (the "Amended and Restated Credit
Agreement"). The Company then leased the York Property back from RFR for an
initial 20-year term, with options to extend the lease for two additional
10-year terms. Rental payments during the initial term are approximately $18
million per year, escalating 7% every three years during the term of the lease.
(See Note 7 of Notes to Consolidated Financial Statements under Part I, Item 1,
"Financial Statements".)

Also on February 7, 2003, the Company extended the maturity date of the Amended
and Restated Credit Agreement from February 11, 2003 to February 6, 2004. The
new borrowing capacity under the Amended and Restated Credit Agreement is $75
million, which includes a $20 million loan under the Term Facility and $55
million available under a senior secured revolving credit facility (the
"Revolving Facility"). The Company paid amendment and arrangement fees of $1.7
million in connection with the extension of the Amended and Restated Credit
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. 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: (i) LIBOR plus 3.5% or
(ii) the Prime Rate plus 2.5%, as selected by the Company. 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 is in compliance
with these financial covenants.

39

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 6, 2004.
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 and capital expenditures, as well
as the aggregate monthly rent payments due under the Company's short-term
operating lease obligations, the $13.5 million in aggregate monthly rent
payments due under the capital lease obligation for the York Property (see Note
7 of Notes to Consolidated Financial Statements under Part I, Item 1, "Financial
Statements"), the remaining $10 million due under the settlement agreement
related to the International Antitrust Litigation (see Part II, Item 1, "Legal
Proceedings" and Note 10 of Notes to Consolidated Financial Statements under
Part I, Item 1, "Financial Statements"), the $6.9 million in total interest
payments due on August 1, 2003 and February 1, 2004 related to the Company's
long-term debt securities (see Note 6 of Notes to Consolidated Financial
Statements under Part I, Item 1, "Financial Statements"), the $6.0 million
payment due on February 6, 2004 under the Company's DOJ antitrust fine (see Part
II, Item 1, "Legal Proceedings" and Note 10 of Notes to Consolidated Financial
Statements under Part I, Item 1, "Financial Statements") and the redemption of
any Discount Certificates to be distributed as part of the U.S. Antitrust
Litigation settlement (see Part II, Item 1, "Legal Proceedings" and Note 10 of
Notes to Consolidated Financial Statements under Part I, Item 1, "Financial
Statements").

As discussed above, the Amended and Restated Credit Agreement is available
through February 6, 2004. On this date, the Amended and Restated Credit
Agreement 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 subsequent to February 6, 2004, as well as to
fund the long-term commitments detailed above including the aggregate monthly
rent payments due under the York Property capital lease obligation (see Note 7
of Notes to Consolidated Financial Statements under Part I, Item 1,

40

"Financial Statements"), the aggregate monthly rent payments due under the
Company's operating lease obligations, the remaining payments due under the
Company's DOJ antitrust fine (see Part II, Item 1, "Legal Proceedings" and Note
10 of Notes to Consolidated Financial Statements under Part I, Item 1,
"Financial Statements"), the redemption of any Discount Certificates to be
distributed as part of the U.S. Antitrust Litigation settlement (see Part II,
Item 1, "Legal Proceedings" and Note 10 of Notes to Consolidated Financial
Statements under Part I, Item 1, "Financial Statements") and interest payments
related to the Company's long-term debt securities, an extension, amendment or
refinancing of the Amended and Restated Credit Agreement will be necessary to
supplement operating cash flows. Management currently believes that the Company
will secure adequate long-term funding prior to the expiration of the Amended
and Restated Credit Agreement. If the Company were unable to secure such
funding, this would have a material adverse effect on the Company's business,
results of operations, financial condition and/or ability to operate.

DERIVATIVES -- 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 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 short-term 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 Statement of Financial
Accounting Standards ("SFAS") No. 133 and are recorded on the Company's
Consolidated Balance Sheets at their fair value. 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
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 months ended March 31, 2003 and 2002, 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 March 31, 2003 and 2002 includes
approximately $0.2 million recorded within other current assets reflecting the
fair value of the Company's forward exchange contracts.

(See Note 8 of Notes to Consolidated Financial Statements under Part I, Item 1,
"Financial Statements.")

FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In April 2003, the
Financial Accounting Standards Board (the "FASB") issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. This Statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003 and should be applied prospectively. The Company
is currently evaluating the impact, if any, that SFAS No. 149 will have on its
accounting and financial reporting.

41

RISK FACTORS AFFECTING OPERATING RESULTS AND LIQUIDITY -- Operating results
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, many of which are not within the Company's control. These factors,
which are not ranked in any particular order, include:

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

(2) Interest rates, particularly with respect to the Finance segment's client
loan portfolio and the Company's credit facility borrowings;

(3) The impact of political conditions in various nations on the international
economy and financial markets;

(4) Government laws and regulations, which the Company is subject to including,
but not limited to, import and export regulations and value added sales
taxes;

(5) The effects of market risk;

(6) The seasonality of the Company's auction business;

(7) Competition with other auctioneers and art dealers, specifically in
relation to the following factors: (a) the level of expertise of the dealer
or auction house with respect to the property, (b) the extent of the prior
relationship, if any, between the seller and the firm, (c) the reputation
and historic level of achievement by a firm in attaining high sale prices
in the property's specialized category, (d) the breadth of staff expertise,
(e) the desire for privacy on the part of sellers and buyers, (f) the
amount of cash offered by a dealer, auction house or other purchaser to
purchase the property outright compared with the estimates, guarantees or
other financial options offered by the Company, (g) the time that will
elapse before the seller will receive sale proceeds, (h) the desirability
of a public auction in order to achieve the maximum possible price, (i) the
amount of commission proposed by dealers or auction houses to sell a work
on consignment, (j) the cost, style and extent of presale marketing and
promotion to be undertaken by a firm, (k) recommendations by third parties
consulted by the seller, (l) personal interaction between the seller and
the firm's staff and (m) the availability and extent of

42

related services, such as tax or insurance appraisal and short-term
financing;

(8) The amount of quality property being consigned to art auction houses (and,
in particular, the number of single-owner sale consignments), as well as
the ability of the Company to sell such property;

(9) The demand for fine arts, antiques and collectibles;

(10) The success of the Company in attracting and retaining qualified personnel,
who, as a result of their relationships with certain potential sellers, are
often instrumental in obtaining high quality and valuable property for
sale;

(11) The demand for art-related financing;

(12) The supply and demand for luxury residential real estate;

(13) The Company's ability to obtain an extension, amendment or refinancing
of the Amended and Restated Credit Agreement subsequent to February 6,
2004;

(14) The restrictive covenants in the Company's bank credit facilities and
senior unsecured debt, which could adversely affect the Company's business
by limiting its flexibility;

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

(16) The impact of the current economic environment, uncertainties related to
the war in Iraq and the health crisis in Asia resulting from SARS during
the Company's spring property gathering season;

(17) The impact of the current economic environment on an already softening
luxury real estate market;

(18) The impact of a decline in the equity markets or a decrease in interest
rates during 2003 on the Company's plan assets and obligations related to
its U.K. defined benefit pension plan;

(19) The unfavorable trend in pension costs related to the Company's U.K.
defined benefit pension plan;

(20) The ability of the Company to support the realization of its deferred tax
assets;

(21) Market acceptance of the increase in the Company's buyer's premium rate
structure for auction sales in its major salesrooms worldwide; and

(22) Court approval of the settlement agreement related to the International
Antitrust Litigation.

43

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 factors listed under "Risk Factors Affecting Operating Results
and Liquidity" above, which are not ranked in any particular order.

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, credit facility borrowings and long-term debt.
At March 31, 2003, 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 $2.0 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 March 31, 2003 from that set forth in the Company's Form
10-K for the year ended December 31, 2002.

At March 31, 2003, the Company had $73.2 million of notional value forward
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 March 31, 2003 includes an asset of
approximately $0.2 million recorded within other current assets reflecting
the fair value of the Company's forward exchange contracts. See Note 8 of
Notes to Consolidated Financial Statements under Part I, Item 1, "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.

44

ITEM 4: CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to the Company
required to be included in the Company's periodic filings with the SEC. There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation.

45

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 ("Christie's"). 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 $12
million of the fine payable to the DOJ, and the remaining $33 million of the
fine is payable as follows: (a) $6 million due February 6, 2004, (b) $12 million
due February 6, 2005 and (c) $15 million due February 6, 2006. The Canadian
Competition Bureau is also conducting an investigation regarding commissions
charged by the Company and Christie's for auction services.

The European Commission also conducted an investigation regarding
anti-competitive practices by the Company and Christie's beginning in January
2000. On October 30, 2002, the European Commission issued a decision in which it
determined that the Company and Christie's had breached the competition
provisions of the Treaty Establishing the European Community by agreeing to fix
selling commissions and other trading terms in connection with auctions held in
the European Union. Pursuant to this decision, the European Commission imposed a
fine of approximately $20.1 million on the Company, which was paid on February
5, 2003.

A number of private civil actions, styled as class actions, were also filed
against the Company alleging violations of federal and state antitrust laws
based upon alleged agreements between the Company and Christie's regarding
commissions charged to purchasers and sellers of property in the U.S. and
elsewhere, including actions alleging violations of federal antitrust laws in
connection with auctions in the U.S. (the "U.S. Antitrust Litigation"). 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 Company
based on allegations related to the foregoing lawsuits and

46

investigations. The U.S. Antitrust Litigation, 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
or reserved for.

Under the settlement agreement relating to the U.S. Antitrust Litigation, 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 satisfy consignment charges
involving vendor's commission, risk of loss and/or catalogue illustration 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.

One of the parties that opted out of the class action settlement in the U.S.
Antitrust Litigation threatened to commence a lawsuit against the Company and
Christie's alleging antitrust violations and seeking approximately $20 million
in damages. This claim was settled on April 10, 2003. The Company's share of
this settlement involved an initial payment of $1.6 million, which has been
funded, and a potential additional payment of up to $0.4 million depending on
future developments. Although there were other opt-outs from the settlement of
the U.S. Antitrust Litigation, no other claims have been asserted to date. (See
Note 10 of Notes to Consolidated Financial Statements under Part I, Item 1,
"Financial Statements.")

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

47

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
have filed a petition for certiorari seeking review of the Court of Appeals'
decision by the U.S. Supreme Court. On March 10, 2003, the Company and
Christie's agreed, subject to court approval, to pay $20 million each to settle
the International Antitrust Litigation. Under the settlement agreement (the
"International Settlement Agreement"), $10 million was paid by the Company into
an escrow account for the benefit of members of the class on April 7, 2003, and
an additional $10 million will be payable by the Company upon final court
approval of the settlement. The International Settlement Agreement also provides
for the claim made by a law firm in the United Kingdom ("U.K.") described below
to be withdrawn and for the purported class action in Canada described below to
be dismissed. Also, purchasers and sellers who participate in the settlement
must agree not to pursue similar claims against Sotheby's and Christie's in
jurisdictions outside the U.S. The District Court has scheduled a hearing for
June 2, 2003 to consider certification of the class of plaintiffs and approval
of the settlement. The Company entered into the International Settlement
Agreement without any admission of liability. (See Note 10 of Notes to
Consolidated Financial Statements under Part I, Item 1, "Financial Statements.")

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 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 sought, among other things,

48

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. This
settlement was approved by the court on April 4, 2003, and the settlement amount
has been fully funded. 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 certain 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 other related investigations, as well as the 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 proceedings.

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
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. Under the terms of the International Settlement
Agreement, this claim would be withdrawn upon court approval of the settlement.
(See Note 11 of Notes to Consolidated Financial Statements under Part I, Item 1,
"Financial Statements.")

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 anti-competitive activities. Under the terms of the
International Settlement Agreement, this action would be dismissed upon court
approval of the settlement. If the settlement is not approved, it is anticipated
that a Statement of Defense will be filed denying any liability with respect to
the claim.

49

Subject to court approval and implementation of the International Antitrust
Litigation settlement, the Company will have resolved all antitrust issues
raised by the DOJ, the European Commission and all related pending or
threatened civil litigation.

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, results of operations, financial condition or
liquidity. (See statement on Forward Looking Statements.)

(See Note 11 of Notes to Consolidated Financial Statements under Part I, Item
1, "Financial Statements.")

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On April 29, 2003, the Company held its annual meeting of shareholders. The
matters on which the shareholders voted were:

(i) The election of three directors by the holders of the Company's Class A
Common Stock;

(ii) The election of nine directors by the holders of the Company's Class B
Common Stock;

(iii) The approval of the adoption of the Company's 2003 Restricted Stock Plan;

(iv) The ratification of the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the year ended December 31, 2003; and

(v) The shareholder proposal recommending that the Board of Directors retain
an investment banker to develop a recapitalization plan to eliminate the
Company's dual class voting structure.

50

The results of the voting are shown below:

(i) ELECTION OF CLASS A DIRECTORS

(ii) ELECTION OF CLASS B DIRECTORS

(iii) ADOPTION OF 2003 RESTRICTED STOCK PLAN

193,768,202 Votes were cast;
171,463,133 Votes were cast for the resolution;
21,674,617 Votes were cast against the resolution; and
630,452 Votes abstained

(iv) RATIFICATION OF INDEPENDENT AUDITORS

193,768,200 Votes were cast;
192,686,841 Votes were cast for the resolution;
1,043,502 Votes were cast against the resolution; and
37,857 Votes abstained

(v) SHAREHOLDER PROPOSAL RECOMMENDING THAT THE BOARD OF DIRECTORS RETAIN AN
INVESTMENT BANKER TO DEVELOP A RECAPITALIZATION PLAN TO ELIMINATE THE
COMPANY'S DUAL CLASS VOTING STRUCTURE

193,768,196 Votes were cast;
21,931,404 Votes were cast for the resolution;
171,814,416 Votes were cast against the resolution; and
22,376 Votes abstained

51

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10(a) Purchase and Sale Agreement between SIBS, LLC, as Seller and RFR
Holding Corp., as Purchaser; Dated: As of December 16, 2002;
Property: 1334 York Avenue, New York, New York 10021

10(b) Lease between 1334 York Avenue L.P., "Landlord," and Sotheby's,
Inc., "Tenant," February 7, 2003; Premises: 1334 York Avenue, New
York, New York

10(c) Amended and Restated Credit Agreement, Dated as of February 7,
2003, Among Sotheby's Holdings, Inc., Sotheby's Inc., Oatshare
Limited, Sotheby's, Sotheby's Global Trading GmbH; The Lenders
Named Herein and JPMorgan Chase Bank, as Administrative Agent,
Collateral Agent and Issuing Bank

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

99(b) Certification of Chief Financial Officer 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

(i) On February 14, 2003, the Company reported on Form 8-K the
sale-leaseback transaction involving its headquarters building
located at 1334 York Avenue, New York, New York.

52

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

SOTHEBY'S HOLDINGS, INC.

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

Date: May 14, 2003
------------

53

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, William F. Ruprecht, President and Chief Executive Officer of Sotheby's
Holdings, Inc. (the "Company"), certify that:

(1) I have reviewed this quarterly report on Form 10-Q of the Company;

(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report;

(4) The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this quarterly report is being prepared;

(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

54

(5) The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors:

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and

(6) The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

/s/ William F. Ruprecht
-----------------------------------

William F. Ruprecht
President and
Chief Executive Officer
Sotheby's Holdings, Inc.
May 14, 2003

55

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, William S. Sheridan, Executive Vice President and Chief Financial Officer of
Sotheby's Holdings, Inc. (the "Company"), certify that:

(1) I have reviewed this quarterly report on Form 10-Q of the Company;

(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report;

(4) The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
we have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this quarterly report is being prepared;

(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

56

(5) The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors:

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and

(6) The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

/s/ William S. Sheridan
-----------------------------------

William S. Sheridan
Executive Vice President and
Chief Financial Officer
Sotheby's Holdings, Inc.
May 14, 2003

57

EXHIBIT INDEX