SOTHEBYS HOLDINGS INC - 10-Q Quarterly Report

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

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 ý No o.

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

As of August 1, 2003, there were outstanding 45,044,426 shares of Class A Limited Voting Common Stock, par value $0.10 per share, and 16,521,150 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.

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PART I:	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002	2
	Consolidated Balance Sheets at June 30, 2003, December 31, 2002 and June 30, 2002	3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
PART II:	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 6.	Exhibits and Reports on Form 8-K	35
SIGNATURE	36
EXHIBIT INDEX	37
Exhibit 31.1	38
Exhibit 31.2	39
Exhibit 32.1	40
Exhibit 32.2	41

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 Cash, 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.

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.

	Percentage of Annual Auction Sales
	2002		2001		2000
January—March	11	%	13	%	9	%
April—June	38	%	45	%	45	%
July—September	12	%	7	%	7	%
October—December	39	%	35	%	39	%

	100	%	100	%	100	%

For the three and six months ended June 30, 2003 and 2002, revenues for the Company's reportable operating segments are as follows:

For the three and six months ended June 30, 2003 and 2002, profit or (loss) for the Company's reportable operating segments is as follows:

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

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

Accounts receivable primarily relates to the Company's Auction segment. At June 30, 2003, approximately $51 million, or 15%, of the net Accounts Receivable balance was due from one purchaser. In July 2003, the Company collected the entire outstanding receivable balance from the purchaser and paid out the remaining $47 million owed to the consignor.

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 (2) general purpose loans to collectors or dealers secured by property not presently intended for sale. The consignor advance allows a consignor to receive funds shortly after consignment for an auction that will occur several weeks or months in the future, while preserving for the benefit of the consignor the potential of the auction process. The general purpose secured loans allow the Company to establish or enhance a mutually beneficial relationship with dealers and collectors. The loans are generally made with full recourse against the borrower. In certain instances, however, loans are made with recourse limited to the works of art pledged as security for the loan. To the extent that the Company is looking wholly or partially to the collateral for repayment of its loans, repayment can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations where the borrower becomes subject to bankruptcy or insolvency laws, the Company's ability to realize on its collateral may be limited or delayed by the application of such laws. Under certain circumstances, the Company also makes unsecured loans to collectors and dealers. Included in net Notes Receivable and Consignor Advances are unsecured loans totaling $14.6 million, $23.2 million and $14.1 million at June 30, 2003, December 31, 2002 and June 30, 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 June 30, 2003, December 31, 2002 and June 30, 2002, the net total of all such unsecured loans was $10.9 million, $17.0 million and $7.5 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 6.0%, 5.4% and 5.3% at June 30, 2003, December 31, 2002 and June 30, 2002, respectively.

Changes in the Allowance for Credit Losses related to Notes Receivable and Consignor Advances for the six months ended June 30, 2003 and 2002 are as follows:

	2003			2002
	(Thousands of dollars)
Allowance for credit losses at January 1,	$	1,573		$	1,436
Change in loan loss provision		103			—
Write-offs		(537	)		(143	)
Foreign currency exchange rate changes		5			19

Allowance for credit losses at June 30,	$	1,144		$	1,312

Changes in the carrying amount of the Company's Goodwill for the six months ended June 30, 2003, by segment, are as follows:

	Auction		Real Estate		Total
	(Thousands of dollars)
Balance as of January 1, 2003	$	13,215	$	3,338	$	16,553
Foreign currency exchange rate changes		158		—		158

Balance as of June 30, 2003	$	13,373	$	3,338	$	16,711

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.

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

	As of June 30, 2003		As of December 31, 2002		As of June 30, 2002
	(Thousands of dollars)
Term Facility	$	20,000	$	100,000	$	130,000
Revolving Facility		—		—		—

Total	$	20,000	$	100,000	$	130,000

For the three months ended June 30, 2003 and 2002, the weighted average interest rates for borrowings under the Amended and Restated Credit Agreement were approximately 5.1% and 5.2%, respectively. For the six months ended June 30, 2003 and 2002, the weighted average interest rates for any such borrowings were approximately 5.4% and 5.1%, respectively.

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 was in compliance with these financial covenants as of June 30, 2003.

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 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), any redemptions of the Discount Certificates which were distributed in June 2003 as part of the U.S. Antitrust Litigation settlement (see Note 10), payments due under existing employment agreements (see Note 11) and interest payments related to the Company's long-term debt securities, additional funding will be necessary to supplement operating cash flows. Management is currently exploring a long-term extension, amendment or refinancing of the Amended and Restated Credit Agreement. Alternatively, management believes it has other options available for capital resources including, but not limited to, a short-term extension, amendment or refinancing of the Amended and Restated Credit Agreement and the sale of certain assets or operating units. Management currently believes that the Company will secure adequate long-term funding or satisfy its liquidity needs pursuant to one of the other options stated above 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 and six months ended June 30, 2003 and 2002, interest expense consisted of the following:

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

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 to Depreciation and Amortization Expense over the initial 20-year lease term.

As of June 30, 2003, the amount recorded within Properties in the Company's Consolidated Balance Sheets for the York Property capital lease asset was approximately $170.3 million, net of accumulated depreciation of approximately $3.6 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 June 30, 2003 (in thousands of dollars):

2003	$	9,013
2004		18,025
2005		18,025
2006		19,264
2007		19,287
Thereafter		350,383

Total future minimum lease payments		433,997
Less: amount representing interest		261,663

Present value of future minimum lease payments	$	172,334

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 of June 30, 2003 and 2002, the asset and liability, respectively, relating to the Company's forward exchange contracts were not material. As of December 31, 2002, the Company's Consolidated Balance Sheet included $0.4 million recorded within Other Current Assets reflecting the fair value of the Company's forward exchange contracts.

The Company's comprehensive income (loss) includes the net income (loss) for the period, as well as other comprehensive income, which consists of the change in the foreign currency translation adjustment account during the period. For the three and six months ended June 30, 2003 and 2002, comprehensive income (loss) is as follows:

For the three and six months ended June 30, 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:

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"). 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 completion of the settlement of this claim. The amount due by the Company under the settlement has been fully funded. Although there were other opt-outs from the settlement of the U.S. Antitrust Litigation, no other claims have been asserted to date.

For the three and six months ended June 30, 2003, the Company recorded Special Charges of $0.5 million for administrative costs related to the notification of the members of the class of plaintiffs in the International Antitrust Litigation (as defined in Part II, Item 1, "Legal Proceedings").

For the six months ended June 30, 2003, the Company recorded Special Charges of $0.6 million for legal and professional fees related to the investigation by the DOJ, other governmental investigations and the related civil antitrust litigation. For the three and six months ended June 30, 2002, the Company recorded Special Charges of approximately $0.8 million and $1.5 million, respectively, for such legal and professional fees.

In June 2003, the Company distributed vendor's commission discount certificates (the "Discount Certificates") to the class of plaintiffs as part of the U.S. Antitrust Litigation settlement. For the three and six months ended June 30, 2003, the Company recorded Special Charges of $0.1 million for administrative costs related to the printing and issuance of the Discount Certificates.

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, for the six months ended June 30, 2002, the Company recorded in Special Charges a reduction of accrued compensation cost of approximately $2.05 million and a recovery of $1.2 million.

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

The settlement liability for the U.S. Antitrust Litigation relates to the Discount Certificates that were distributed in June 2003 as part of the U.S. Antitrust Litigation settlement. The Discount Certificates will expire on May 14, 2008. However, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. The 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 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.

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 was paid on June 23, 2003 following final court 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 six months ended June 30, 2003 were:

Letters of Credit—As of June 30, 2003, the Company had outstanding letters of credit of approximately $6.3 million primarily relating to bank guarantees of rental obligations.

Employment Agreements—In conjunction with its retention programs (see Note 14), 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 June 30, 2003, excluding incentive bonuses and cash awards in conjunction with the Company's retention programs, was approximately $0.9 million.

Legal Actions—The Company is aware of possible governmental investigations in Italy and India 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 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.

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 $12.3 million at June 30, 2003.

(See Notes 7, 10, 13, 14 and 15 for other commitments. See Notes 10 and 13 for other contingencies.)

In the opinion of management, the contingencies described above and in Notes 10 and 13 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 any cash redemptions of any unused Discount Certificates, which were distributed in June 2003 as part of the U.S. Antitrust Litigation settlement.

Restricted Cash principally consists of amounts or deposits whose use is restricted by either law or contract and primarily includes net auction proceeds owed to consignors in certain jurisdictions,

deposits supporting rental obligations in the United States and Europe and client down payments held by the Real Estate segment that will be disbursed upon the closing of the related real estate sale.

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 guarantees issued or modified after December 31, 2002.

As of June 30, 2003^, the Company had one outstanding auction guarantee totaling approximately $2.2 million, the property relating to which had a mid-estimate sales price of approximately $2.7 million. The property under such guarantee is being offered at auction during the fourth quarter of 2003. As of June 30, 2003, the entire guaranteed amount had been funded and is recorded within Notes Receivable and Consignor Advances in the Company's Consolidated Balance Sheets. As of June 30, 2003, the carrying amount of the liability related to the Company's auction guarantee was not material.

As of August 1, 2003, the Company had outstanding auction guarantees totaling approximately $9.5 million, the property relating to which had a mid-estimate sales price of approximately $11.5 million. The property under such guarantees will be offered at auction in the fourth quarter of 2003 and the second quarter of 2004. As of August 1, 2003, $7.0 million of the guaranteed amount had been funded.

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 $0.4 million remains payable under these programs in January 2004.

Certain employees granted such awards received cash payments of approximately $12.9 million during the six months ended June 30, 2003 and approximately $0.3 million in July 2003.

All amounts related to the retention programs described above are being amortized over the contractual service period. For the three months ended June 30, 2003 and 2002, the Company recognized retention costs of approximately $2.9 million and $6.3 million, respectively. For the six months ended June 30, 2003 and 2002, the Company recognized retention costs of approximately $6.3 million and $12.6 million, respectively.

During the first quarter of 2003, as a result of 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.

The Company recorded the following amounts related to the restructuring plans described below in its Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002:

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 was recorded within Accounts Payable and Accrued Liabilities in the Company's Consolidated Balance Sheets, and all remaining amounts due were paid out in the first quarter of 2003. Amounts charged to the restructuring liability through June 30, 2003 were as follows:

For the three and six months ended June 30, 2002, the Company recorded favorable adjustments of $0.4 million and $0.8 million, respectively, to Net Restructuring Charges principally due to changes in management's original estimates of employee termination benefits and lease and contract termination costs related to the 2000 Restructuring Plan.

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 was recorded within Accounts Payable and Accrued Liabilities in the Company's Consolidated Balance Sheets, and all remaining amounts due were paid out in the second quarter of 2003. Amounts charged to the restructuring liability through June 30, 2003 were as follows:

For the three and six months ended June 30, 2002, the Company recorded favorable adjustments of approximately $0.5 million and $0.8 million, respectively, to Net Restructuring Charges primarily as a result of employee termination benefits that will not be paid principally due to unanticipated employee redeployment and changes in management's original estimates of these costs. Additionally, for the six months ended June 30, 2002, the Company recorded restructuring charges of $0.2 million for employee termination benefits related to the 2001 Restructuring Plan.

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 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 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.

For the three and six months ended June 30, 2003, the Company recorded restructuring charges of approximately $0.3 million for other costs related to the 2002 Restructuring Plan. Such costs, which were expensed as incurred, primarily included fees for legal and other professional services related to the 2002 Restructuring Plan.

For the three and six months ended June 30, 2003, the Company recorded favorable adjustments of $0.7 million and $0.8 million, respectively, to Net Restructuring Charges principally due to changes in management's original estimates of 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 June 30, 2003 were as follows:

The remaining liability related to the 2002 Restructuring Plan will be substantially paid out during the remainder of 2003.

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 income (loss) and earnings (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.

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. SFAS No. 149 has no impact on the Company's current accounting and financial reporting.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which addresses how an issuer classifies and measures financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective for the first interim period beginning after June 15, 2003. SFAS No. 150 has no impact on the Company's current accounting and financial reporting.

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. 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 and six months ended June 30, 2003 and 2002—For the three months ended June 30, 2003, the aggregate hammer price of property sold at auction by the Company ("Auction Sales"), which includes buyer's premium, totaled $580.1 million, a decrease of $103.9 million, or 15%, when compared to the same period in 2002. For the three months ended June 30, 2003, the favorable impact of foreign currency translations on worldwide Auction Sales was approximately $37.3 million. Excluding the impact of favorable foreign currency translations, Auction Sales decreased $141.2 million, or 21%, to $542.8 million. This decrease in worldwide Auction Sales reflects a 24% decrease in the number of lots sold in the second quarter of 2003 as compared to the same period in 2002, partially offset by a 4% increase in the average selling price per lot sold. The lower level of worldwide Auction Sales in the second quarter of 2003 was primarily due to an $85.7 million, or 41%, decrease in results from the spring Impressionist and Contemporary sales in New York and a $20.5 million, or 41%, decline in Auction Sales attributable to single-owner collections, both in part attributable to economic uncertainties related to the build up to the war in Iraq. Also unfavorably impacting the comparison of Auction Sales to the prior year was the discontinuation on April 30, 2003 of separate online auctions on sothebys.com as part of the 2002 Restructuring Plan, which resulted in a $10.8 million decrease in Auction Sales (see Note 15 of Notes to Consolidated Financial Statements under Part I, Item 1, "Financial Statements").

For the six months ended June 30, 2003, Auction Sales totaled $781.0 million, a decrease of $93.0 million, or 11%, when compared to the same period in 2002. For the six months ended June 30, 2003, the favorable impact of foreign currency translations on worldwide Auction Sales was approximately $50.9 million. Excluding the impact of favorable foreign currency translations, Auction Sales decreased $143.9 million, or 16%, to $730.1 million. This decrease in worldwide Auction Sales reflects a 19% decrease in the number of lots sold in the first six months of 2003 as compared to the same period in 2002, partially offset by a 3% increase in the average selling price per lot sold. The lower level of worldwide Auction Sales for the six months ended June 30, 2003 was primarily due to the decrease in spring Impressionist and Contemporary sales, as discussed above, and a $47.6 million, or 51%, decline in Auction Sales attributable to single-owner collections, both in part attributable to economic uncertainties related to the build up to the war in Iraq. Also unfavorably impacting the comparison of Auction Sales to the prior year was the discontinuation on April 30, 2003 of separate online auctions on sothebys.com, as discussed above, which resulted in a $13.2 million decrease in Auction Sales. These unfavorable variances were partially offset by improved results from the winter Impressionist and Contemporary sales in London.

Management is encouraged by the level of consignments for the upcoming fall auction season, which appears to be due in part to the offering in the fall of property withheld from the spring auction season as a result of economic uncertainties related to the build up to the war in Iraq. This improved level of consignments could have a favorable impact on Auction Sales, buyer's premium revenues and seller's commission revenues during the second half of 2003 when compared to the first six months of the year. (See statement on Forward Looking Statements.)

Results of Operations for the three and six months ended June 30, 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 decreased $4.9 million, or 4%, to $107.6 million and $2.4 million, or 2%, to $145.7 million for the three and six months ended June 30, 2003, respectively, when compared to the same periods in 2002. For the three and six months ended June 30, 2003 and 2002, the favorable impact of foreign currency translations on auction and related revenues was $7.4 million and $10.2 million, respectively. Excluding the impact of favorable foreign currency translations, auction and related revenues decreased $12.3 million, or 11%, to $100.2 million and $12.6 million, or 9%, to $135.5 million, respectively, for those periods. These decreases were principally due to lower auction commission revenues primarily resulting from decreased Auction Sales, as discussed above, partially offset by improved commission margins resulting from the new buyer's premium rate structure that became effective in January 2003, reduced shared and introductory auction commissions and a favorable change in sales mix. Also unfavorably impacting the comparison to the prior periods was a significant decrease in revenues from principal activities mainly due to a lower level of auction guarantees, as well as a decline in private treaty revenues.

Other revenues consist primarily of revenues from the Company's Real Estate and Finance segments. Other revenues decreased $3.1 million, or 21%, to $11.5 million for the three months ended June 30, 2003, when compared to the same period in 2002. This decrease was principally due to a $2.3 million, or 20%, decline in revenues from the Real Estate segment primarily resulting from a 13% decline in sales volume, as well as decreased commission retention rates due to a greater proportion of sales completed by senior agents who earn a higher share of the gross commission. Also unfavorably impacting the comparison of other revenues to the prior year was a $0.6 million, or 40%, decrease in revenues from the Company's art education activities. For the three months ended June 30, 2003, other revenues were not materially affected by the translation to U.S. Dollars.

Other revenues decreased $3.4 million, or 14%, to $20.9 million for the six months ended June 30, 2003, when compared to the same period in 2002. This decrease was principally due to a $2.9 million, or 16%, decline in revenues from the Real Estate segment primarily resulting from a 9% decline in sales volume, as well as lower commission retention rates, as discussed above. Also unfavorably impacting the comparison of other revenues to the prior year was a $0.3 million, or 13%, decrease in revenues from the Company's art education activities. For the six months ended June 30, 2003, other revenues were not materially affected by the translation to U.S. Dollars.

Management is currently seeing an improvement in the real estate market, with real estate properties under contract at the end of the second quarter of 2003 at a thirteen-month high, which could have a favorable impact on revenues from the Real Estate segment during the second half of 2003 when compared to the first six months of the year. (See statement on Forward Looking Statements.)

Direct costs of services (consisting largely of corporate marketing and sale marketing expenses, as well as catalogue production and distribution costs) decreased $3.0 million, or 16%, to $16.2 million and $4.4 million, or 15%, to $24.1 million for the three and six months ended June 30, 2003, respectively, when compared to the same periods in 2002. For the three and six months ended June 30, 2003, the unfavorable impact of foreign currency translations on direct costs was approximately $1.1 million and $1.6 million, respectively. Excluding the impact of unfavorable foreign currency translations, direct costs decreased $4.1 million, or 22%, to $15.1 million and $6.0 million, or 21%, to $22.5 million for the three and six months ended June 30, 2003, respectively. These decreases were largely due to lower catalogue production and mailing costs primarily resulting from the decrease in the number of lots sold at auction, the Company's use of digital photography, and other catalogue savings initiatives, which were gradually implemented throughout 2002. Also favorably impacting the comparison of direct costs to the prior periods was the significant decrease in single-owner Auction Sales, which are typically more expensive due to higher promotion and exhibition costs. Additionally, the Company achieved savings in marketing expenses and other direct costs principally as a result of management's efforts to reduce discretionary spending.

Salaries and related costs, which totaled $38.6 million for the three months ended June 30, 2003, were relatively unchanged when compared to the same period in 2002. For the six months ended June 30, 2003, salaries and related costs increased $0.7 million, or 1%, to $74.7 million when compared to the same period in the prior year. The unfavorable impact of foreign currency translations on salaries and related costs was approximately $2.2 million and $4.4 million for the three and six months ended June 30, 2003, respectively. Excluding the impact of unfavorable foreign currency translations, salaries and related costs decreased $2.2 million, or 6%, to $36.4 million and $3.7 million, or 5%, to $70.3 million, respectively, for those periods. These decreases were largely due to savings achieved in the Auction segment as a result of the Company's restructuring plans (as discussed below and in Note 15 of Notes to Consolidated Financial Statements under Part I, Item 1, "Financial Statements") and management's other cost containment efforts. Also favorably impacting the comparison to the prior periods were reductions of $1.4 million and $1.7 million in incentive bonus costs for the three and six months ended June 30, 2003, respectively. These favorable variances were partially offset by increases of $0.4 million and $0.8 million in costs related to the Company's pension plan for employees in the United Kingdom ("U.K.") for the three and six months ended June 30, 2003, respectively, as well as an accrual of $0.7 million in the second quarter of 2003 for one-time payments to a group of key employees.

General and administrative expenses increased $0.3 million, or 1%, to $24.7 million and $1.2 million, or 3%, to $48.5 million for the three and six months ended June 30, 2003, respectively, when compared to the same periods in 2002. For the three and six months ended June 30, 2003, the unfavorable impact of foreign currency translations on general and administrative expenses was approximately $1.3 million and $2.6 million, respectively. Excluding the impact of unfavorable foreign currency translations, for the three and six months ended June 30, 2003, general and administrative expenses decreased $1.0 million, or 4%, to $23.4 million and $1.4 million, or 3%, to $45.9 million, respectively. These decreases were largely due to savings of $1.3 million and $2.0 million achieved in travel and entertainment expenses for the three and six months ended June 30, 2003, respectively, as a result of the Company's restructuring plans (as discussed below and in Note 15 of Notes to Consolidated Financial Statements under Part I, Item 1, "Financial Statements") and management's other efforts to reduce discretionary spending. Also favorably impacting the comparison to the prior periods was the reversal in the second quarter of 2003 of a $0.5 million liability that was no longer required due to a favorable settlement, as well as savings achieved in computer systems maintenance expenses and telecommunication costs. These favorable variances were partially offset by increased professional fees, as well as higher facility related expenses and insurance costs. Also unfavorably influencing the comparison to the prior year was less favorable bad debt experience in the second quarter of 2003 principally as a result of the reversal in the second quarter of 2002 of a $1.1 million

bad debt accrual that was no longer necessary due to the collection of the related client receivable balance, for which there was no comparable event in the current period.

Depreciation and amortization expense increased $0.9 million, or 14%, to $6.8 million and $1.9 million, or 16%, to $13.6 million for the three and six months ended June 30, 2003, respectively, when compared to the same periods in 2002. For the three and six months ended June 30, 2003, the unfavorable impact of foreign currency translations on depreciation and amortization expense was approximately $0.2 million and $0.4 million, respectively. Excluding the impact of unfavorable foreign currency translations, depreciation and amortization expense increased $0.7 million, or 11%, to $6.6 million and $1.5 million, or 13%, to $13.2 million for the three and six months ended June 30, 2003, respectively. These increases were 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 June 30, 2003 and 2002, the Company recognized expense of approximately $2.9 million and $6.3 million, respectively, related to the retention programs for a group of key employees. For the six months ended June 30, 2003 and 2002, the Company recognized expense of approximately $6.3 million and $12.6 million, respectively, related to such programs.

(See Note 14 of Notes to Consolidated Financial Statements under Part I, Item 1, "Financial Statements" for additional information on the Company's retention programs.)

Restructuring Plans—For the three and six months ended June 30, 2003 and 2002, the Company recorded the following amounts related to its restructuring plans:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003		2002
	(Thousands of dollars)
2000 Restructuring Plan	$	—		$	(440	)	$	—	$	(811	)
2001 Restructuring Plan		9			(450	)		53		(624	)
2002 Restructuring Plan		(459	)		—			5,288		—

Total	$	(450	)	$	(890	)	$	5,341	$	(1,435	)

(See Note 15 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 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 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 $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 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 ultimately 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.

During the first quarter of 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, for the six months ended June 30, 2003, the Company recorded restructuring charges of $3.7 million 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 were initiated during the second quarter of 2003 and are currently expected to be realized by the end of 2003.

Also, in the first quarter of 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, were initiated during the second quarter of 2003 and are currently expected to be realized by the end of 2003.

As a result of the economic environment and its impact on the Company's revenues, which are highly variable from period-to-period (see "Risk Factors Affecting Operating Results and Liquidity" below), as well as 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 in the second half of 2003.

(See Note 15 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—With court approval of the International Antitrust Litigation settlement, the Company has now resolved all antitrust issues raised by the Antitrust Division of the United States Department of Justice and 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 $1.7 million and $3.6 million for the three and six months ended June 30, 2003, respectively, when compared to the same periods in 2002. These increases were primarily due to interest expense resulting from the York Avenue 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). These increases 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 amortization of amendment and arrangement fees.

Income Tax Expense (Benefit)—For the three months ended June 30, 2003 and 2002, the consolidated effective tax rate was approximately 38% and 36%, respectively. For the six months ended June 30, 2003 and 2002, the consolidated effective tax rate was approximately 34% and 36%, respectively. For the six months ended June 30, 2003, the change in the consolidated effective tax rate when compared to the prior year was primarily a result of higher earnings during the current period in lower tax rate jurisdictions.

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.)

Financial Condition as of June 30, 2003—This discussion should be read in conjunction with the Company's Consolidated Statements of Cash Flows (see Part I, Item 1, "Financial Statements.")

For the six months ended June 30, 2003, total cash and cash equivalents decreased approximately $0.3 million primarily due to the factors discussed below.

Net cash used by operations was $97.7 million for the six months ended June 30, 2003 and was largely the result of a net loss from operations, as well as payments made to fund the European Commission fine, the International Antitrust Litigation settlement 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, for the six months ended June 30, 2003, the Company funded approximately $12.9 million in retention payments to a group key employees (see Note 14 of Notes to Consolidated Financial Statements under Part I, Item 1, "Financial Statements") and approximately $5.3 million of severance payments in connection with the Company's restructuring plans (see Note 15 of Notes to Consolidated Financial Statements under Part I, Item 1, "Financial Statements"). Also influencing cash used by operations during the period is a $48.2 million increase in Accounts Receivable partially offset by a $36.5 million increase in Due to Consignors, both principally resulting from June 2003 auction sales. At June 30, 2003, approximately $51 million, or 15%, of the net Accounts Receivable balance was due from one purchaser. In July 2003, the Company collected the entire outstanding receivable balance from the purchaser and paid out the remaining $47 million owed to the consignor (see Note 4 of Notes to Consolidated Financial Statements under Part I, Item 1, "Financial Statements").

Net cash provided by investing activities was $177.8 million for the six months ended June 30, 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.

Net cash used by financing activities was $81.5 million for the six months ended June 30, 2003 and was primarily due to the net repayment of credit facility borrowings.

Commitments as of June 30, 2003—The table below summarizes the Company's material contractual obligations and commitments as of June 30, 2003.

The Discount Certificates that were distributed in June 2003 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 on May 14, 2008. However, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. The 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.

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 $12.3 million as of June 30, 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.

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 was in compliance with these financial covenants as of June 30, 2003.

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 $10.5 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 $3.4 million interest payment due on 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 any redemptions of the Discount Certificates that were distributed in June 2003 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, "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"), any redemptions of the Discount Certificates which were distributed in June 2003 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"), payments due under existing employment agreements (see Note 11 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, additional funding will be necessary to supplement operating cash flows. Management is currently exploring a long-term extension, amendment or refinancing of the Amended and Restated Credit Agreement. Alternatively, management believes it has other options available for capital resources including, but not limited to, a short-term extension, amendment or refinancing of the Amended and Restated Credit Agreement and the sale of certain assets or operating units. Management currently believes that the Company will secure adequate long-term funding or satisfy its liquidity needs pursuant to one of the other options stated above 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—See Note 8 of Notes to Consolidated Financial Statements under Part I, Item 1, "Financial Statements" for information on derivatives.

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:

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.

Future Impact of Recently Issued Accounting Standards—In April 2003, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("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. SFAS No. 149 has no impact on the Company's current accounting and financial reporting.

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 June 30, 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 $2.9 million. Excluding the potential impact of this hypothetical strengthening or weakening of the United States dollar, the market risk of the Company's financial instruments has not changed significantly as of June 30, 2003 from that set forth in the Company's Form 10-K for the year ended December 31, 2002.

At June 30, 2003, the Company had $82.4 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. As of June 30, 2003, the asset relating to the Company's forward exchange contracts was not material. 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.

As of June 30, 2003, 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 Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of June 30, 2003. There has been no change in the Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the Company's fiscal quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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 European Commission also conducted an investigation regarding anti-competitive practices by the Company and Christie's in the European Union and on October 30, 2002, issued a decision pursuant to which it imposed a fine of approximately $20.1 million on the Company, which was paid on February 5, 2003. The Canadian Competition Bureau is also conducting an investigation regarding commissions charged by the Company and Christie's for auction services.

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"). Also, a number of shareholder derivative suits were filed against the directors of the Company based on allegations related to the foregoing lawsuits and investigations. And a number of indirect purchaser class action lawsuits were filed against the Company in California courts alleging violations of antitrust laws of the State of California. The U.S. Antitrust Litigation, the Shareholder Litigation, all of the shareholder derivative suits and all of the indirect purchaser class action lawsuits 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 deposited into an escrow account for the benefit of members of the class (a) $206 million in cash and (b) vendor's commission discount certificates with a face value of $62.5 million, most of which amounts have now been distributed to members of the class. The court determined that the $62.5 million face value of the vendor's commission discount certificates 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 through May 15, 2008 and are redeemable for cash at any time between May 15, 2007 and May 14, 2008.

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 was $2 million, which has been funded. 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. and Christie's, alleging violations of the federal antitrust laws and international law, on behalf of purchasers and sellers in auctions conducted outside the U.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 March 10, 2003, the Company and Christie's agreed, subject to court approval, to settle the International Antitrust Litigation, and this settlement was approved by the District Court by order filed June 12, 2003. The time to appeal the District Court's order has expired. Under the settlement agreement (the "International Settlement Agreement"), $20 million has been paid by each of the Company and Christie's into an escrow account for the benefit of members of the class. 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 Company entered into the International Settlement 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 the commissions charged to such sellers. Pursuant to the International Settlement Agreement, the law firm has agreed on behalf of its clients to withdraw this claim and be bound by the terms of the International Settlement Agreement.

In Canada, a purported class action was 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. Pursuant to the terms of the International Settlement Agreement, this action was dismissed on June 17, 2003.

With court approval of the International Antitrust Litigation settlement, the Company has now resolved all antitrust issues raised by the DOJ and the European Commission and all related pending or threatened civil litigation.

The Company is also aware of possible governmental investigations in Italy and India 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 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.")

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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.

Michigan (State or other jurisdiction of incorporation or organization)		38-2478409 (IRS Employer Identification No.)
38500 Woodward Avenue, Suite 100 Bloomfield Hills, Michigan (Address of principal executive offices)		48304 (Zip Code)
Registrant's telephone number, including area code: (248) 646-2400

			For the Three Months Ended June 30,						For the Six Months Ended June 30,
			2003			2002			2003			2002
			(Thousands of dollars, except per share data)
Revenues:
	Auction and related revenues		$	107,580		$	112,529		$	145,713		$	148,140
	Other revenues			11,454			14,519			20,942			24,339

		Total revenues		119,034			127,048			166,655			172,479

Expenses:
	Direct costs of services			16,164			19,213			24,088			28,497
	Salaries and related costs			38,647			38,592			74,712			74,052
	General and administrative expenses			24,712			24,429			48,530			47,300
	Depreciation and amortization expense			6,794			5,936			13,595			11,732
	Retention costs			2,865			6,299			6,344			12,550
	Net restructuring charges			(450	)		(890	)		5,341			(1,435	)
	Special charges			593			791			1,376			(1,719	)

		Total expenses		89,325			94,370			173,986			170,977

Operating income (loss)				29,709			32,678			(7,331	)		1,502
Interest income				1,056			790			1,629			1,910
Interest expense				(7,884	)		(5,931	)		(15,021	)		(11,700	)
Other (expense) income				(65	)		361			383			84

Income (loss) before taxes				22,816			27,898			(20,340	)		(8,204	)
Income tax provision (benefit)				8,620			10,043			(6,916	)		(2,954	)

Net income (loss)			$	14,196		$	17,855		$	(13,424	)	$	(5,250	)

Basic and diluted earnings (loss) per share			$	0.23		$	0.29		$	(0.22	)	$	(0.09	)

Basic weighted average shares outstanding (in millions)				61.6			61.5			61.5			61.4

Diluted weighted average shares outstanding (in millions)				61.6			61.7			61.5			61.4

			June 30, 2003 (UNAUDITED)			December 31, 2002			June 30, 2002 (UNAUDITED)
			(Thousands of dollars)
ASSETS:
Current Assets:
	Cash and cash equivalents		$	48,462		$	48,719		$	57,381
	Restricted cash			13,541			13,968			8,847
	Accounts receivable, net of allowance for doubtful accounts of $7,019, $8,073 and $7,927			330,792			276,729			321,979
	Notes receivable and consignor advances, net of allowance for credit losses of $1,144, $1,573 and $1,312			57,477			51,264			38,428
	Inventory, net			12,111			13,690			7,175
	Deferred income taxes			11,536			11,980			32,759
	Prepaid expenses and other current assets			42,686			41,518			32,911

		Total Current Assets		516,605			457,868			499,480

Non-Current Assets:
	Notes receivable			24,058			44,016			47,350
	Properties, less allowance for depreciation and amortization of $93,193, $91,259 and $99,810			263,471			240,796			245,038
	Goodwill			16,711			16,553			17,340
	Investments			30,751			31,217			31,242
	Deferred income taxes			92,491			83,954			52,116
	Other assets			1,963			1,301			1,744

		Total Assets	$	946,050		$	875,705		$	894,310

LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Current Liabilities:
	Due to consignors		$	311,539		$	274,327		$	270,973
	Credit facility borrowings			20,000			—			130,000
	Accounts payable and accrued liabilities			84,787			106,640			94,361
	Deferred revenues			5,472			5,961			5,147
	Accrued income taxes			5,822			5,459			9,317
	York Property capital lease obligation			107			—			—
	Deferred gain on sale of York Property			1,129			—			—
	Settlement liabilities			16,795			55,542			3,498

		Total Current Liabilities		445,651			447,929			513,296

Long-Term Liabilities:
	Credit facility borrowings			—			100,000			—
	Long-term debt, net of unamortized discount of $498, $534 and $569			99,502			99,466			99,431
	Settlement liabilities			61,642			70,804			78,438
	York Property capital lease obligation			172,227			—			—
	Deferred gain on sale of York Property			21,087			—			—
	Other liabilities			17,091			17,138			15,635

		Total Liabilities		817,200			735,337			706,800

Shareholders' Equity:
	Common Stock, $0.10 par value Authorized shares—125,000,000 of Class A and 75,000,000 of Class B; Issued and outstanding shares — 45,014,513, 44,981,703 and 44,930,877 of Class A and 16,549,650 of Class B, at June 30, 2003, December 31, 2002 and June 30, 2002, respectively			6,154			6,153			6,148
	Additional paid-in capital			202,521			202,406			202,102
	Accumulated deficit			(71,309	)		(57,884	)		(8,380	)
	Accumulated other comprehensive loss			(8,516	)		(10,307	)		(12,360	)

		Total Shareholders' Equity		128,850			140,368			187,510

		Total Liabilities and Shareholders' Equity	$	946,050		$	875,705		$	894,310

			For the Six Months Ended June 30,
			2003			2002
			(Thousands of dollars)
Operating Activities:
Net loss			$	(13,424	)	$	(5,250	)
Adjustments to reconcile net loss to net cash used by operating activities:
	Depreciation and amortization expense			13,595			11,732
	Deferred income taxes			(8,082	)		2,375
	Tax benefit of stock option exercises			—			70
	Asset provisions			(976	)		(854	)
	Asset write-offs			603			—
	Other			1,334			991
Changes in assets and liabilities:
	Decrease (increase) in restricted cash			427			(3,948	)
	Increase in accounts receivable			(48,155	)		(88,698	)
	Decrease in inventory			1,314			4,354
	(Increase) decrease in prepaid expenses and other current assets			(2,391	)		581
	(Increase) decrease in goodwill and other long-term assets			(589	)		514
	Decrease in short-term and long-term settlement liabilities			(49,733	)		(3,000	)
	Increase in due to consignors			36,460			62,738
	Increase (decrease) in accrued income taxes			131			(4,435	)
	Decrease in accounts payable and accrued liabilities and other liabilities			(28,258	)		(37,265	)

		Net cash used by operating activities		(97,744	)		(60,095	)

Investing Activities:
	Funding of notes receivable and consignor advances			(38,840	)		(61,951	)
	Collections of notes receivable and consignor advances			53,489			78,452
	Capital expenditures			(4,399	)		(6,605	)
	Proceeds from York Property sale-leaseback			167,054			—
	Decrease in investments			475			1,268

		Net cash provided by investing activities		177,779			11,164

Financing Activities:
	Proceeds from credit facility borrowings			107,000			20,000
	Repayments of credit facility borrowings			(187,000	)		(20,000	)
	Decrease in York Property capital lease obligation			(1,532	)		—
	Proceeds from exercise of stock options			—			2,192

		Net cash (used) provided by financing activities		(81,532	)		2,192

Effect of exchange rate changes on cash				1,240			1,433

Decrease in cash and cash equivalents				(257	)		(45,306	)
Cash and cash equivalents at beginning of period				48,719			102,687

Cash and cash equivalents at end of period			$	48,462		$	57,381

Supplemental Cash Flow Information:
Income tax payments (refunds)			$	2,007		$	(278	)

Interest paid			$	13,500		$	7,110

Non-Cash Activities:
York Property capital lease asset and obligation			$	173,866		$	—

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
			(Thousands of dollars)
Auction	$	107,580	$	112,529	$	145,713	$	148,140
Real Estate		9,081		11,371		15,860		18,807
Finance		1,290		1,419		2,777		2,864
Other		1,083		1,729		2,305		2,668

Total	$	119,034	$	127,048	$	166,655	$	172,479

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended June 30, 2003

	As of June 30, 2003		As of December 31, 2002		As of June 30, 2002
	(Thousands of dollars)
Auction	$	731,660	$	646,099	$	696,442
Real Estate		24,918		28,332		21,348
Finance		84,595		102,676		89,575
Other		850		2,664		2,070

Total	$	842,023	$	779,771	$	809,435

	As of June 30, 2003		As of December 31, 2002		As of June 30, 2002
	(Thousands of dollars)
Total assets for reportable segments	$	841,173	$	777,107	$	807,365
Other assets		850		2,664		2,070
Unallocated amounts		104,027		95,934		84,875

Consolidated assets	$	946,050	$	875,705	$	894,310

	As of June 30, 2003		As of December 31, 2002		As of June 30, 2002
	(Thousands of dollars)
Current:
European Commission fine	$	—	$	21,350	$	—
International Antitrust Litigation		—		20,000		—
U.S. Antitrust Litigation		13,000		8,800		—
DOJ antitrust fine (net of unamortized discount of $2,205, $2,358 and $2,502)		3,795		3,642		3,498
U.S. Antitrust Litigation opt out claim		—		1,750		—

Sub-total		16,795		55,542		3,498

Long-term:
U.S. Antitrust Litigation		37,000		41,200		50,000
DOJ antitrust fine (net of unamortized discount of $2,358, $3,396 and $4,562)		24,642		29,604		28,438

Sub-total		61,642		70,804		78,438

Total	$	78,437	$	126,346	$	81,936

	U.S. Antitrust Litigation		DOJ Antitrust Fine (net)			European Commission Fine			International Antitrust Litigation			U.S. Antitrust Litigation Opt Out Claim			Total
	(Thousands of dollars)
Liability at January 1, 2003	$	50,000	$	33,246		$	21,350		$	20,000		$	1,750		$	126,346
Special charges		—		—			—			—			250			250
Amortization of discount		—		1,191			—			—			—			1,191
Foreign currency exchange rate changes		—		—			633			—			—			633
Cash payments		—		(6,000	)		(21,983	)		(20,000	)		(2,000	)		(49,983	)

Liability at June 30, 2003	$	50,000	$	28,437		$	—		$	—		$	—		$	78,437

2000 Restructuring Plan	Employee Termination Benefits			Lease and Contract Termination Costs			Asset Provisions			Other Costs			Total
	(Thousands of dollars)
Restructuring Charges	$	7,127		$	1,117		$	3,844		$	546		$	12,634
Asset write-offs		—			—			(3,844	)		—			(3,844	)

Liability at December 31, 2000		7,127			1,117			—			546			8,790
Cash payments		(5,423	)		(334	)		—			(246	)		(6,003	)
Adjustments to liability		(589	)		(42	)		—			(99	)		(730	)

Liability at December 31, 2001		1,115			741			—			201			2,057
Cash payments		(411	)		(363	)		—			(179	)		(953	)
Adjustments to liability		(624	)		(371	)		—			(22	)		(1,017	)

Liability at December 31, 2002		80			7			—			—			87
Cash payments		(80	)		(7	)		—			—			(87	)

Liability at June 30, 2003	$	—		$	—		$	—		$	—		$	—

2001 Restructuring Plan	Employee Termination Benefits			Contract Termination Costs			Asset Provisions			Other Costs			Total
	(Thousands of dollars)
Restructuring Charges	$	6,048		$	5,385		$	6,327		$	449		$	18,209
Cash payments		(1,229	)		(5,235	)		—			(160	)		(6,624	)
Asset write-offs		—			—			(5,890	)		—			(5,890	)
Adjustments to liability		(187	)		(100	)		—			—			(287	)
Foreign currency exchange rate changes		(35	)		—			—			(4	)		(39	)

Liability at December 31, 2001		4,597			50			437			285			5,369
Restructuring Charges		210			—			—			—			210
Cash payments		(2,794	)		—			—			(137	)		(2,931	)
Asset write-offs		—			—			(437	)		—			(437	)
Adjustments to liability		(1,252	)		(50	)		—			(89	)		(1,391	)
Foreign currency exchange rate changes		106			—			—			7			113

Liability at December 31, 2002		867			—			—			66			933
Cash payments		(952	)		—			—			(35	)		(987	)
Adjustments to liability		84			—			—			(31	)		53
Foreign currency exchange rate changes		1			—			—			—			1

Liability at June 30, 2003	$	—		$	—		$	—		$	—		$	—

2002 Restructuring Plan	Employee Termination Benefits			Lease and Contract Termination Costs			Asset Provisions			Other Costs			Total
	(Thousands of dollars)
Restructuring Charges	$	4,007		$	124		$	—		$	50		$	4,181
Cash payments		(46	)		—			—			—			(46	)
Foreign currency exchange rate changes		8			—			—			—			8

Liability at December 31, 2002		3,969			124			—			50			4,143
Restructuring Charges		4,828			500			495			255			6,078
Cash payments		(4,289	)		(121	)		—			(278	)		(4,688	)
Asset write-offs		—			—			(495	)		—			(495	)
Adjustments to liability		(787	)		(3	)		—			—			(790	)
Foreign currency exchange rate changes		161			—			—			—			161

Liability at June 30, 2003	$	3,882		$	500		$	—		$	27		$	4,409

				Payments Due by Period
				Total		Less than One Year		1 to 3 Years		3 to 5 Years		After 5 Years
				(Thousands of dollars)
Principal payments on borrowings:
	Amended and Restated Credit Agreement (1)			$	20,000	$	20,000	$	—	$	—	$	—
	Long-term debt (2)				100,000		—		—		—		100,000

		Sub-total			120,000		20,000		—		—		100,000

Interest payments on borrowings:
	Amended and Restated Credit Agreement (1)				586		586		—		—		—
	Long-term debt (2)				40,678		6,875		13,750		13,750		6,303

		Sub-total			41,264		7,461		13,750		13,750		6,303

Other commitments:
	York Property capital lease obligation (3)				433,997		18,025		36,658		38,574		340,740
	Operating lease obligations				131,102		16,938		29,194		25,968		59,002
	DOJ antitrust fine (4)				33,000		6,000		27,000		—		—
	Employment agreements (5)				876		793		83		—		—

		Sub-total			598,975		41,756		92,935		64,542		399,742

			Total	$	760,239	$	69,217	$	106,685	$	78,292	$	506,045

		SOTHEBY'S HOLDINGS, INC.
		By:	/s/ MICHAEL L. GILLIS Michael L. Gillis Senior Vice President, Controller and Chief Accounting Officer
		Date: August 7, 2003