SOTHEBYS HOLDINGS INC (Form: 10-Q, Received: 08/08/2005 16:25:47)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2005

Commission File Number 1-9750

Sotheby’s Holdings, Inc.

(Exact name of registrant as specified in its charter)

Michigan
(State or other jurisdiction of
incorporation or organization)

38-2478409
(I.R.S. Employer
Identification No.)

38500 Woodward Avenue, Suite 100
Bloomfield Hills, Michigan		48303
(Address of principal executive offices)		(Zip Code)

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

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

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

As of July 29, 2005, there were outstanding 46,330,942 shares of Class A Limited Voting Common Stock, par value $0.10 per share, and 17,882,727 shares of Class B Common Stock, par value $0.10 per share, of the Registrant. Each share of Class B Common Stock is freely convertible into one share of Class A Limited Voting Common Stock.

TABLE OF CONTENTS

PART I:	FINANCIAL INFORMATION

		PAGE

Item 1.	Financial Statements:

	Consolidated Income Statements for the Three and Six Months Ended June 30, 2005 and 2004	3

	Consolidated Balance Sheets as of June 30, 2005, December 31, 2004 and June 30, 2004	4

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II:	OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 6.	Exhibits and Reports on Form 8-K	37

SIGNATURE		38

EXHIBIT INDEX		39

S OTHEBY’S HOLDINGS, INC.

CONSOLIDATED INCOME STATEMENTS

(UNAUDITED)

(Thousands of dollars, except per share data)

	Three Months Ended						Six Months Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
Revenues:
Auction and related revenues	$	175,558		$	166,166		$	247,733		$	225,019
License fee revenues		448			–			624			45,000
Other revenues		2,250			2,599			3,926			4,172
Total revenues		178,256			168,765			252,283			274,191

Expenses:
Direct costs of services		19,017			18,974			29,246			26,094
Salaries and related costs		53,296			49,568			92,815			88,528
General and administrative expenses		30,584			24,541			57,768			50,198
Depreciation and amortization expense		5,568			5,593			11,214			11,488
Retention costs		–			–			–			285
Net restructuring charges		–			27			–			146
Total expenses		108,465			98,703			191,043			176,739

Operating income		69,791			70,062			61,240			97,452

Interest income		1,630			532			3,239			1,101
Interest expense		(8,000	)		(8,395	)		(16,142	)		(16,805	)
Other (expense) income		(218	)		(249	)		(214	)		391

Income from continuing operations before taxes		63,203			61,950			48,123			82,139
Equity in earnings of investees, net of taxes		130			111			480			273
Income tax expense		20,853			20,972			15,866			27,835
Income from continuing operations		42,480			41,089			32,737			54,577

Discontinued operations (Note 3):
(Loss) income from discontinued operations before taxes		(715	)		2,330			(671	)		39,042
Income tax (benefit) expense		(212	)		942			(190	)		14,422
(Loss) income from discontinued operations		(503	)		1,388			(481	)		24,620

Net income	$	41,977		$	42,477		$	32,256		$	79,197

Basic earnings per share:
Earnings from continuing operations	$	0.68		$	0.67		$	0.52		$	0.89
(Loss) earnings from discontinued operations		(0.01	)		0.02			(0.01	)		0.40
Basic earnings (loss) per share:	$	0.67		$	0.69		$	0.51		$	1.29

Diluted earnings per share:
Earnings from continuing operations	$	0.67		$	0.66		$	0.51		$	0.88
(Loss) earnings from discontinued operations		(0.01	)		0.02			(0.01	)		0.40
Diluted earnings per share:	$	0.66		$	0.68		$	0.50		$	1.27

Weighted average shares outstanding:
Basic		62,841			61,671			62,718			61,630
Diluted		63,783			62,308			63,884			62,188

See accompanying Notes to Consolidated Financial Statements

S OTHEBY’S HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(Thousands of dollars)

	June 30, 2005 (UNAUDITED)			December 31, 2004			June 30, 2004 (UNAUDITED)
A S S E T S
Current Assets:
Cash and cash equivalents		$100,454			$147,023			$127,233
Restricted cash		9,376			12,401			6,423
Short-term investments		106,343			110,000			20,000
Accounts receivable, net of allowance for doubtful accounts of $5,317, $6,172 and $5,261		368,280			410,910			485,135
Notes receivable and consignor advances, net of allowance for credit losses of $1,757, $1,759 and $1,448		45,727			56,716			69,919
Inventory		39,915			34,126			15,021
Deferred income taxes		–			–			6,050
Prepaid expenses and other current assets		57,337			61,079			67,303
Assets held for sale		–			–			699
Total Current Assets		727,432			832,255			797,783

Non-Current Assets:
Notes receivable		47,513			35,575			20,363
Properties, net of accumulated depreciation and amortization of $127,919, $122,318 and $106,095		227,454			238,533			239,086
Goodwill		13,500			13,753			13,504
Investments		26,368			28,343			28,176
Deferred income taxes		71,958			73,182			69,154
Other assets		3,527			3,705			3,620
Total Assets		$1,117,752			$1,225,346			$1,171,686

L I A B I L I T I E S A N D S H A R E H O L D E R S’ E Q U I T Y
Current Liabilities:
Due to consignors		$342,620			$470,946			$457,670
Accounts payable and accrued liabilities		110,270			112,871			98,534
Deferred revenues		4,244			4,799			4,709
Accrued income taxes		13,329			10,153			13,250
Deferred income taxes		5,712			5,462			–
York Property capital lease obligation		753			123			119
Deferred gain on sale of York Property		1,129			1,129			1,129
Settlement liabilities		18,211			14,454			13,531
Liabilities held for sale		–			–			451
Total Current Liabilities		496,268			619,937			589,393

Long-Term Liabilities:
Long-term debt, net of unamortized discount of $341, $383, and $422		99,659			99,617			99,578
Settlement liabilities		45,299			61,085			61,641
York Property capital lease obligation		171,355			172,046			172,108
Deferred gain on sale of York Property		18,809			19,374			19,938
Other liabilities		18,615			17,368			18,320
Total Liabilities		850,005			989,427			960,978

Commitments and contingencies (see Note 9)

Shareholders’ Equity:
Common Stock, $0.10 par value		6,416			6,374			6,310
Authorized shares—125,000,000 of Class A and 75,000,000 of Class B, Issued and outstanding shares—46,330,942, 45,923,612 and 45,287,616 of Class A, and 17,882,727, 17,850,808 and 17,853,548 of Class B at June 30, 2005, December 31, 2004 and June 30, 2004, respectively
Additional paid-in capital		236,619			230,124			222,289
Retained earnings		40,395			8,139			655
Deferred compensation expense		(11,233	)		(10,341	)		(13,948	)
Accumulated other comprehensive (loss) income		(4,450	)		1,623			(4,598	)
Total Shareholders’ Equity		267,747			235,919			210,708
Total Liabilities and Shareholders’ Equity		$1,117,752			$1,225,346			$1,171,686

See accompanying Notes to Consolidated Financial Statements

C ONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Thousand of dollars)

Six Months Ended June 30	2005		2004

Operating Activities:
Net income*	$32,256		$	79,197

Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation and amortization expense	11,214		11,488
Gain on sale of discontinued operations (Note 3)	–		(32,293		)
Equity in earnings of investees	(480	)	(273		)
Deferred income tax	4,356		27,844
Tax benefit of stock option exercises	–		224
Restricted stock compensation expense	4,427		2,369
Asset provisions	3,093		1,797
Amortization of discount related to antitrust matters	2,048		2,465
Other	623		588

Changes in assets and liabilities:
Decrease (increase) in accounts receivable	35,167		(253,248		)
(Increase) decrease in inventory	(9,644	)	2,142
Decrease (increase) in prepaid expenses and other current assets	507		(20,925		)
Decrease (increase) in other long-term assets	36		(564		)
Funding of settlement liabilities	(14,330	)	(8,457		)
(Decrease) increase in due to consignors	(122,029	)	202,650
Increase (decrease) in accrued income taxes and deferred income tax liabilities	68		(2,075		)
Increase in accounts payable and accrued liabilities and other liabilities	1,594		15,941
Adjustments related to discontinued operations (Note 3)	–		3,306
Net cash (used) provided by operating activities	(51,094	)	32,176

Investing Activities:
Funding of notes receivable and consignor advances	(94,063	)	(89,702		)
Collections of notes receivable and consignor advances	90,576		104,497
Purchases of short-term investments	(297,618	)	(25,000		)
Proceeds from maturities of short-term investments	301,275		5,000
Capital expenditures	(4,356	)	(4,998		)
Proceeds from sale of discontinued operations (Note 3)	–		53,863
Distributions from equity investees	2,713		877
Decrease in restricted cash	3,550		1,261
Adjustments related to discontinued operations (Note 3)	–		1,008
Net cash provided by investing activities	2,077		46,806

Financing Activities:
Proceeds from credit facility borrowings	–		65,000
Repayments of credit facility borrowings	–		(85,000		)
Decrease in York Property capital lease obligation	(61	)	(55		)
Proceeds from exercise of stock options	2,822		2,676
Net cash provided (used) by financing activities	2,761		(17,379		)

Impact of consolidating variable interest entity	268		487
Effect of exchange rate changes on cash and cash equivalents	(581	)	(260		)

(Decrease) increase in cash and cash equivalents	(46,569	)	61,830
Cash and cash equivalents at beginning of period	147,023		65,403
Cash and cash equivalents at end of period	$100,454		$127,233

Cash and cash equivalents at end of period:
Continuing operations	$100,454		$127,233
Discontinued Operations	–		–
	$100,454		$127,233

*Net (loss) income from discontinued operations (Note 3)	($481	)	$24,620

See accompanying Notes to Consolidated Financial Statements

SOTHEBY’S HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	Basis of Presentation

The Consolidated Financial Statements included herein have been prepared by Sotheby’s Holdings, Inc. (together with its subsidiaries, the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2004.

Auction Rate Securities — In connection with the preparation of the Company’s Form 10-K for the year ended December 31, 2004, management concluded that it was appropriate to classify its investments in Auction Rate Securities (“ARS”) as Short-Term Investments in its Consolidated Balance Sheets. ARS are typically backed by long-term, variable-rate debt instruments whose interest rates are reset at predetermined short-term intervals through a Dutch auction process. Previously, ARS were classified as Cash and Cash Equivalents in the Consolidated Balance Sheets. Accordingly, the Company has reclassified $20 million in ARS to Short-Term Investments from Cash and Cash Equivalents in the June 30, 2004 Consolidated Balance Sheet. As of June 30, 2005 and December 31, 2004, the Company held $106 million and $110 million, respectively, of ARS that are classified as Short-Term Investments.

The Company has also made corresponding adjustments to the Consolidated Statement of Cash Flows for the six months ended June 30, 2004, to reflect gross purchases of $25 million and proceeds of $5 million collected from the maturity of ARS as Investing Activities rather than as a component of Cash and Cash Equivalents. This change in classification does not affect previously reported cash flows from Operations or from Financing activities in the Company’s previously reported Consolidated Statements of Cash Flows. This reclassification also does not affect the Company’s previously reported Consolidated Income Statements for any period.

Special Charges — Prior to the first quarter of 2005, expenses related to the investigation by the Antitrust Division of the United States Department of Justice (the “DOJ”), other governmental investigations and the related civil litigation were classified as Special Charges in the Consolidated Income Statements. Beginning in the first quarter of 2005, such expenses, consisting principally of settlement administration costs and legal fees, are classified within General and Administrative Expenses for all periods presented as they are no longer significant to the Company’s results. For the three and six months ended June 30, 2004, the amounts previously presented as Special Charges were $0.8 million and $1.3 million, respectively. For the three and six months ended June 30, 2005, antitrust related expenses included in General and Administrative Expenses were $0.2 million and $0.5 million, respectively.

Discontinued Operations — In the fourth quarter of 2003 and at various points during 2004, the components of the Company’s former Real Estate segment qualified for treatment as discontinued operations. Accordingly, its related operating results are reported as discontinued operations in the Consolidated Income Statements, and any assets and liabilities to be sold are classified as held for sale in the Consolidated Balance Sheets. (See Note 3 for more detailed information related to Discontinued Operations.)

Earnings from Equity Method Investees — Prior to the fourth quarter of 2004, the Company’s share of earnings from equity method investments was presented on a pre-tax basis within Auction and Related Revenues in the Consolidated Income Statements. Beginning in the fourth quarter of 2004, such amounts are presented net of taxes in the Consolidated Income Statements as a separate line below Income from Continuing Operations Before Taxes. Prior year amounts in the Consolidated Income Statements and in Note 4 below have been adjusted to conform to the current period presentation.

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

2.	Seasonality of Business

The worldwide art auction market has two principal selling seasons, spring and fall. Consequently, first and third quarter results of the Auction segment typically reflect lower Aggregate Auction Sales (as defined below) when compared to the second and fourth quarters and, accordingly, a net loss due to the fixed nature of many of the Company’s operating expenses. “Aggregate Auction Sales” represents the hammer price of property sold at auction by the Company plus buyer’s premium.

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

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

3.	Discontinued Operations

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

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

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

As a result of the sale of the real estate brokerage business and affiliate network to Cendant, the Company recognized a pre-tax gain of $32.3 million for the six months ended June 30, 2004, which is recorded within Income from Discontinued Operations Before Taxes in the Consolidated Income Statements.

The $45 million of proceeds allocated to the License Agreement represents a one-time non-refundable upfront license fee received by the Company as consideration for entering into the License Agreement. The Company has no significant future performance obligations associated with the non-refundable upfront license fee. As a result, the Company recognized license fee revenue of $45 million in the first quarter of 2004, which is classified within the continuing operations section of the Consolidated Income Statements. This classification is consistent with how the Company is reporting ongoing license fees earned during the term of the License Agreement, as well as license fee revenue earned in the future from other potential licensing opportunities. The Company incurred transaction costs of $2.1 million related to the consummation of the License Agreement, of which approximately $2 million were incurred in the first quarter of 2004, and were recorded within General and Administrative Expenses in the Consolidated Income Statements.

In the fourth quarter of 2004, the Company committed to a plan to discontinue its real estate brokerage business in Australia and license the Sotheby’s International Realty trademark and certain related trademarks in Australia. Accordingly, its operating results are reported as discontinued operations in the Consolidated Income Statements for all periods presented. The Australia real estate brokerage business, which is the only remaining component of the Company’s former Real Estate segment, is not material to the Company’s results of operations, financial condition or liquidity.

The following is a summary of the results of the Company’s discontinued operations for the three and six months ended June 30, 2005 and 2004:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
	(Thousands of dollars)

Revenues	$	282		$4,449	$	682		$15,318

Expenses:
Direct costs of services		12		303		43		1,012
Salaries and related costs		30		273		75		4,899
General and administrative expenses		956		743		1,237		2,599
Depreciation and amortization expense		2		13		2		26
Total expenses		1,000		1,332		1,357		8,536

Operating (loss) income		(718)		3,117		(675)		6,782

(Loss) gain on sale of discontinued operations		–		(768)		–		32,293
Other income (expense)		3		(19)		4		(33)

(Loss) income from discontinued operations before taxes		(715)		2,330		(671)		39,042
Income tax (benefit) expense		(212)		942		(190)		14,422

(Loss) income from discontinued operations	$	(503)		$1,388	$	(481)		$24,620

According to the terms of the Stock Purchase Agreement related to the sale of SIR, the Company is due to receive amounts collected by Cendant for the closing of real estate transactions subsequent to February 17, 2004 that were under contract prior to that date. For the three months ended June 30, 2005 and 2004, revenues from discontinued operations included $0.2 million and $3.9 million, respectively, of such amounts.

For the six months ended June 30, 2005 and 2004, revenues from discontinued operations included $0.5 million and $8.3 million, respectively, of such amounts.

As of June 30, 2004, Assets Held for Sale were approximately $0.7 million, consisting of Accounts Receivable, and Liabilities Held for Sale were approximately $0.5 million, consisting of Accounts Payable and Accrued Liabilities. Such assets and liabilities relate to the Company’s former real estate brokerage business in the United Kingdom (“U.K.”), which was sold to Cendant in December 2004.

4.	Segment Reporting

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

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

The table below presents revenues for the Company’s operating segments, as well as a reconciliation of segment revenues to total revenues from continuing operations for the three and six months ended June 30, 2005 and 2004:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
	(Thousands of dollars)

Auction	$	175,558	$	166,166	$	247,733	$	225,019
Finance		1,768		1,865		2,976		3,081
All Other		930		734		1,574		1,091

Total segment revenues		178,256		168,765		252,283		229,191

Unallocated amounts:
One-time License fee revenue (see Note 3)*		–		–		–		45,000
Total revenues from continuing operations	$	178,256	$	168,765	$	252,283	$	274,191

Represents a one-time non-refundable upfront license fee related to the consummation of the License Agreement. Ongoing license fees earned during the term of the License Agreement are reflected in All Other.

The table below presents income before taxes for the Company’s operating segments, as well as a reconciliation of segment Income Before Taxes to Income from Continuing Operations Before Taxes for the three and six months ended June 30, 2005 and 2004:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
	(Thousands of dollars)

Auction	$	64,937	$	64,066	$	52,275	$	44,100
Finance		(545)		269		(1,167)		–
All Other		212		(101)		262		(219)
Segment income before taxes		64,604		64,234		51,370		43,881

Unallocated amounts:
One-time license fee revenue (see Note 3)		–		–		–		45,000
License Agreement transaction costs (see Note 3)**		–		(96)		–		(2,142)
Antitrust related expenses (see Note 1)		(212)		(772)		(461)		(1,284)
Amortization of discount - DOJ antitrust fine (see Note 11)		(294)		(506)		(658)		(1,038)
Amortization of discount - Discount Certificates (see Note 11)		(694)		(712)		(1,390)		(1,427)
Retention costs		–		–		–		(285)
Net restructuring charges		–		(27)		–		(146)
Equity in earnings of investees***		(201)		(171)		(738)		(420)
Income from continuing operations before taxes	$	63,203	$	61,950	$	48,123	$	82,139

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

***

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

The table below presents assets for the Company’s operating segments, as well as a reconciliation of segment assets to consolidated assets as of June 30, 2005, December 31, 2004 and June 30, 2004:

			June 30, 2005		December 31, 2004		June 30, 2004
			(Thousands of dollars)

		Auction	$	947,795	$	1,064,091	$	1,016,282
		Finance		97,291		86,601		77,736
		All Other		708		1,472		1,765
		Total segment assets		1,045,794		1,152,164		1,095,783
		Unallocated amounts:
		Deferred tax assets		71,958		73,182		75,204
		Assets held for sale (see Note 3)		–		–		699
		Consolidated Assets	$	1,117,752	$	1,225,346	$	1,171,686
5.	Notes Receivable and Consignor Advances

The Company’s Finance segment provides certain collectors and dealers with financing generally secured by works of art that the Company either has in its possession or permits the borrower to possess. The Company’s general policy is to make secured loans at loan to value ratios (principal loan amount divided by the low auction estimate of the collateral) of 50% or lower. The Company will also lend at loan to value ratios higher than 50%. All of the Company’s loans are variable interest rate loans.

The Company generally makes two types of secured loans: (1) advances secured by consigned property to borrowers who are contractually committed, in the near term, to sell the property at auction (a “consignor advance”); and (2) general purpose term loans to collectors or dealers secured by property not presently intended for sale (a “term loan”). The consignor advance allows a consignor to receive funds shortly after consignment for an auction that will occur several weeks or months in the future, while preserving for the benefit of the consignor the potential of the auction process. Term loans allow the Company to establish or enhance mutually beneficial relationships with dealers and collectors. Term loans are generally made with full recourse against the borrower. In certain instances, however, term loans are made with recourse limited to the works of art pledged as security for the loan. To the extent that the Company is looking wholly or partially to the collateral for repayment of its loans, repayment can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations where the borrower becomes subject to bankruptcy or insolvency laws, the Company’s ability to realize on its collateral may be limited or delayed by the application of such laws. Under certain circumstances, the Company also makes unsecured loans to collectors and dealers. Included in gross Notes Receivable and Consignor Advances are unsecured loans totaling $4.1 million, $6 million and $5.4 million at June 30, 2005, December 31, 2004 and June 30, 2004, respectively.

In certain situations, the Company also finances the purchase of works of art by certain art dealers through unsecured loans. The property purchased pursuant to such unsecured loans is sold by the dealer or at auction with any profit or loss shared by the Company and the dealer. Interest income related to such unsecured loans is reflected in the results of the Finance segment, while the Company’s share of any profit or loss is reflected in the results of the Auction segment. The total of all such unsecured loans was $3.6 million, $5.4 million and $4.7 million at June 30, 2005, December 31, 2004 and June 30, 2004, respectively. These amounts are included in the total unsecured loan balances provided in the previous paragraph.

At June 30, 2005, three term loans totaling $37 million comprised approximately 20%, 10% and 10%, respectively, of the net Notes Receivable and Consignor Advances balance.

The weighted average interest rates charged on Notes Receivable and Consignor Advances were 6.5% and 7.7% for the three months ended June 30, 2005 and 2004, respectively. The higher weighted average interest rate for the three months ended June 30, 2004 is principally due to $1 million in interest income recognized in the second quarter of 2004 as a result of the collection of a disputed client loan for which there was no comparable event in the current year. The weighted average interest rates charged on Notes Receivable and Consignor Advances were 6.2% and 6.1% for the six months ended June 30, 2005 and 2004, respectively.

Changes in the Allowance for Credit Losses relating to Notes Receivable and Consignor Advances for the six months ended June 30, 2005 and 2004 were as follows:

	Six Months Ended June 30,
	2005		2004
	(Thousands of dollars)
Allowance for credit losses at January 1	$	1,759	$	1,600
Change in loan loss provision		27		(49)
Write-offs		–		(103)
Foreign currency exchange rate changes		(29)		–
Allowance for credit losses at June 30	$	1,757	$	1,448

6.	Goodwill

Goodwill is entirely attributable to the Auction segment. For the six months ended June 30, 2005 and 2004, changes in the carrying value of Goodwill were as follows:

	Six Months Ended June 30,
	2005		2004
	(Thousands of dollars)
Balance as of January 1	$	13,753	$	13,565
Foreign currency exchange rate changes		(253)		(61)
Balance as of June 30	$	13,500	$	13,504

7.	Credit Arrangements

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

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

At the option of the Company, borrowings under the GE Capital Credit Agreement generally bear interest equal to: (i) 1.25% plus the higher of the Prime Rate or the Federal Funds Rate plus 0.5%, or (ii) LIBOR plus 2.5%. Pursuant to the GE Capital Credit Agreement, on a quarterly basis, the applicable interest rate charged for borrowings is adjusted up or down depending on the Company’s performance under a quarterly fixed charge coverage ratio test.

For the three and six months ended June 30, 2005 and 2004, the Company had no outstanding borrowings under the GE Capital Credit Agreement. For the six months ended June 30, 2004, the weighted average interest rate charged on outstanding short-term borrowings under the Company’s previous senior secured credit facility, which were fully repaid on March 4, 2004, was approximately 6.2%.

Senior Unsecured Debt — In February 1999, the Company issued a tranche of long-term debt securities (the “Notes”), pursuant to the Company’s $200 million shelf registration with the Securities and Exchange Commission, for an aggregate offering price of $100 million. The ten-year Notes have an effective interest rate of 6.98% payable semi-annually in February and August.

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

Interest Expense — For the three and six months ended June 30, 2005 and 2004, interest expense related to the Company’s continuing operations consisted of the following:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
	(Thousands of dollars)
Credit Facility Borrowings:
Interest expense on outstanding borrowings	$	–	$	–	$	–	$	298
Amortization of amendment and arrangement fees		250		375		500		615
Commitment fees		253		250		503		351
Sub-total		503		625		1,003		1,264

Interest expense on York Property capital lease obligation		4,475		4,478		8,951		8,957
Interest expense on long-term debt		1,740		1,738		3,479		3,476
Amortization of discount - DOJ antitrust fine (see Note 11)		294		506		658		1,038
Amortization of discount - Discount Certificates (see Note 11)		694		712		1,390		1,427
Other interest expense		294		336		661		643
Total	$	8,000	$	8,395	$	16,142	$	16,805

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

8.	Defined Benefit Pension Plan

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

For the three and six months ended June 30, 2005 and 2004, the components of net periodic pension cost were:

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(Thousands of dollars)
Service cost		$1,600			$1,662			$3,229			$3,334
Interest cost		3,194			2,786			6,446			5,588
Expected return on plan assets		(4,226	)		(4,104	)		(8,384	)		(8,232	)
Amortization of prior service cost		68			66			137			133
Amortization of actuarial loss		532			261			1,073			524
Sub-total		1,168			671			2,501			1,347
Special termination benefits		–			–			–			13		*
Net periodic pension cost		$1,168			$671			$2,501			$1,360

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

The Company expects to contribute approximately $18 million to the U.K. Plan in 2005, including a $15 million discretionary contribution made in May 2005.

9.	Commitments and Contingencies

Employment Agreements — The Company has employment agreements with a number of employees, which expire in June 2006 and July 2008. Such agreements provide, among other benefits, for minimum salary levels, as well as incentive bonuses which are payable only if specified Company and individual goals are attained. The aggregate commitment for salaries related to these employment agreements, excluding incentive bonuses, was originally approximately $12.1 million, of which approximately $7.2 million had been paid through August 1, 2005.

Lending Commitments — In certain situations, the Company’s Finance segment enters into legally binding arrangements to lend, primarily on a collateralized basis and subject to certain limitations and conditions, to potential consignors and other individuals who have collections of fine art or other objects. Unfunded commitments to extend additional credit were $9 million at June 30, 2005.

Legal Actions — The Canadian Competition Bureau is continuing to conduct an investigation regarding anti-competitive practices relating to commissions charged by the Company and Christie’s International, PLC (“Christie’s”) for auction services during the period 1993 to 2000. The Company also becomes involved, from time to time, in various claims and lawsuits incidental to the ordinary course of its business.

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

Gain Contingency — During the third quarter of 2004, the Company signed an agreement for the sale of land and buildings at Billingshurst, West Sussex in the U.K. (the “Sussex Property”). The completion of the sale is conditional upon the receipt of planning permission for redevelopment of part of the site. The Company had previously disclosed in its 2004 Form 10-K and Form 10-Q for the period ended March 31, 2005 that, if completed, the sale of the Sussex Property would result in a pre-tax gain in the range of approximately $5 to $6 million. However, subsequent to the date of those filings, as a result of discussions with the planning authorities and the developer based on recent events, the structure of the planned sale is being amended. Consequently, the amount of the expected proceeds or gain from the sale, if any, cannot be reasonably estimated at this time. The Company expects this contingency to be resolved some time in 2005 or 2006.

(See Note 10 for other commitments and contingencies.)

10.

Auction Guarantees

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

As of June 30, 2005, the Company had outstanding auction guarantees totaling $21.5 million, the property relating to which had a mid-estimate sales price (1) of $33 million. The property related to such auction guarantees is being offered at auctions during the second half of 2005. As of June 30, 2005, $5 million of the guaranteed amount had been advanced by the Company and is recorded within Notes Receivable and Consignor Advances in the Consolidated Balance Sheets (see Note 5). As of June 30, 2005, December 31, 2004 and June 30, 2004, the carrying amount of the liability related to the Company’s auction guarantees was approximately $0.1 million and was reflected in the Consolidated Balance Sheets within Accounts Payable and Accrued Liabilities.

As of August 1, 2005, the Company had outstanding auction guarantees totaling $48.2 million, the property relating to which had a mid-estimate sales price (1) of $61.5 million. The property related to such auction guarantees is being offered at auctions during the fourth quarter of 2005. As of August 1, 2005, $18.5 million of the guaranteed amount had been advanced by the Company.

(1)

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

11.

Settlement Liabilities

In February 2001, the U.S. District Court for the Southern District of New York imposed on the Company a fine of $45 million payable to the DOJ without interest over a period of five years. As a result, in the third quarter of 2000, the Company recorded Settlement Liabilities of $34.1 million representing the present value of the fine payable. The $10.9 million discount on the amount due is being amortized to interest expense over the five-year period during which the fine is being paid. As of June 30, 2005, the carrying value of the fine payable to the DOJ was $14.3 million. The final payment of $15 million owed under the fine is due on February 6, 2006.

Additionally, in conjunction with the settlement of certain civil litigation related to the investigation by the DOJ, the Company issued to the class of plaintiffs vendor’s commission discount certificates (“Discount Certificates”) with a face value of $62.5 million. The Discount Certificates are fully redeemable in connection with any auction conducted by the Company or Christie’s in the U.S. or in the U.K. and may be used to satisfy consignment charges involving vendor’s commission, risk of loss and/or catalogue illustration. The court determined that the $62.5 million face value of the Discount Certificates had a fair market value of not less than $50 million, which represents the amount recorded by the Company as Settlement Liabilities in the third quarter of 2000. The Discount Certificates will expire on May 14, 2008 and cannot be redeemed subsequent to that date; however, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. The $12.5 million discount on the face value of the Discount Certificates is being amortized to interest expense over the four-year period prior to May 15, 2007, the first date at which the Discount Certificates are redeemable for cash. As of June 30, 2005, the outstanding face value of unused Discount Certificates that the Company could be required to redeem was $54.6 million and the carrying value of such Discount Certificates was $49.2 million.

As of June 30, 2005, December 31, 2004 and June 30, 2004, Settlement Liabilities consisted of the following:

	June 30, 2005			December 31, 2004		June 30, 2004
	(Thousands of dollars)
Current:
Discount Certificates (net)		$ 3,900	*		$ 3,700		$ 3,200
DOJ antitrust fine (net)		14,311			10,754		10,331
Sub-total		18,211			14,454		13,531

Long-term:
Discount Certificates (net)		45,299			46,186		47,330
DOJ antitrust fine (net)		–			14,899		14,311
Sub-total		45,299			61,085		61,641

Total		$63,510			$75,539		$75,172

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

During the six months ended June 30, 2005, amounts charged to and cash payments made against Settlement Liabilities were:

	Discount Certificates (net)		DOJ Antitrust Fine (net)		Total
	(Thousands of dollars)
Settlement Liabilities as of January 1, 2005		$49,886		$25,653		$75,539
Cash payment to DOJ		–		(12,000)		(12,000)
Redemption of Discount Certificates		(2,330)		–		(2,330)
Amortization of discount		1,390		658		2,048
Loss on redemption of Discount Certificates		253		–		253
Settlement Liabilities as of June 30, 2005		$49,199		$14,311		$63,510

12.

Comprehensive Income

The Company’s comprehensive income includes the net income for the period, as well as other comprehensive loss, which consists of the change in the foreign currency translation adjustment account during the period. For the three and six months ended June 30, 2005 and 2004, comprehensive income is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(Thousands of dollars)
Net income	$	41,977		$	42,477		$	32,256		$	79,197
Other comprehensive loss		(3,155	)		(669	)		(6,073	)		(1,313	)
Comprehensive income	$	38,822		$	41,808		$	26,183		$	77,884

13.

Stock-Based Compensation

Stock Option Plans — As currently permitted under Statement of Financial Accounting Standards (“SFAS”) SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to measure stock-based compensation related to its employee stock option plans using the intrinsic value approach under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” When the intrinsic value approach is used, SFAS No. 123 requires supplemental disclosure to show the effects of using this approach on net income (loss) and earnings (loss) per share.

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

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
	(Thousands of dollars, except per share data)
Net income, as reported		$41,977		$42,477		$32,256		$79,197
Add: Stock-based employee compensation expense included in reported net income, net of tax effects		1,317		1,428		2,965		1,572
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,690)		(1,082)		(3,709)		(2,230)
Pro forma net income		$41,604		$42,823		$31,512		$78,539
Earnings per share:
Basic earnings per share, as reported		$0.67		$0.69		$0.51		$1.29
Basic earnings per share, pro-forma		$0.66		$0.69		$0.50		$1.27
Diluted earnings per share, as reported		$0.66		$0.68		$0.50		$1.27
Diluted earnings per share, pro-forma		$0.65		$0.69		$0.49		$1.26

In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) requires the recognition of compensation expense equal to the fair value of stock options or other share-based payments. Under SFAS No. 123(R), the Company would have been required to implement the standard as of July 1, 2005. In April 2005, the SEC announced the adoption of a new rule that amended the compliance date for SFAS No. 123(R). The new rule will allow the Company to implement SFAS No. 123(R) as of January 1, 2006. The Company will adopt SFAS No. 123(R) using the modified prospective method, which will result in the amortization of stock compensation expense related to unvested stock options outstanding on the date of adoption, as well as any stock options granted subsequent to that date. The Company expects the adoption of SFAS No. 123(R) to result in the recording of compensation expense in the range of $0.5 million to $1.2 million in 2006 related to unvested stock options outstanding on the date of adoption.

14.

Variable Interest Entity

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

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

The entity is an art gallery which is engaged in business as a broker/dealer in works of art. The Company provides management consulting services to the entity in exchange for a management fee, which is equal to 50% of the entity’s net income (excluding the management fee and certain other specified revenues and expenses). Included in the Company’s consolidated assets as of June 30, 2005 is inventory with a carrying value of approximately $3.5 million. Such inventory consists entirely of artwork and is the collateral for the $3.7 million in outstanding loans discussed above, which are eliminated in consolidation. The Company has no equity investment in the entity.

The Company accounts for its interest in the entity on a quarter lag applied on a consistent basis. As of March 31, 2005, the entity had total assets of $5.7 million, total liabilities of $5.2 million and capital of $0.5 million.

15.

Recently Issued Accounting Standards

The Company has adopted the provisions of FASB Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” According to FSP No. 109-2, the Company is allowed time beyond the financial reporting period of enactment to evaluate the effects of the American Jobs Creation Act of 2004 (the “Act”) on its plan for repatriation of foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income Taxes.” The Company has not yet completed its evaluation of the possible effect of the Act on its plan for repatriation of foreign earnings. Accordingly, the Company has not adjusted its income tax expense or deferred tax liability as of June 30, 2005 to reflect the possible effect of the new repatriation provision. Income tax expense, if any, associated with any repatriation under the Act will be provided in the Company's financial statements in the reporting period in which the Company’s evaluation is completed and the required management approvals have been obtained.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for the accounting and reporting of a change in accounting principle and error corrections. SFAS No. 154 applies to all voluntary changes in accounting principle, as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Starting in 2006, the Company will apply the provisions of SFAS No. 154 on a prospective basis when applicable.

(See Note 13 for a discussion of SFAS No. 123(R), “Share-Based Payment,” which will be adopted by the Company on January 1, 2006.)

ITEM 2 :

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004

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

Use of Non-GAAP Financial Measures

GAAP refers to generally accepted accounting principles in the United States of America. Included in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are financial measures presented in accordance with GAAP and also on a non-GAAP basis. Specifically, in MD&A, the Company makes reference to Adjusted EBITDA, which is defined as income from continuing operations before taxes excluding net interest expense and depreciation and amortization expense, as well as the one-time license fee revenue and transaction costs related to the Company’s license agreement with Cendant Corporation (“Cendant”). Management believes that Adjusted EBITDA provides a useful supplemental measure of the Company’s operations and financial performance. Management also believes that EBITDA-based measures are used by many investors, equity analysts and rating agencies as a measure of the Company’s financial performance. It is important to note that Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Furthermore, Adjusted EBITDA should not be considered as an alternative to income from continuing operations before taxes determined in accordance with GAAP . Management utilizes this non-GAAP financial measure in analyzing its operating results. A reconciliation of Adjusted EBITDA to income from continuing operations before taxes is provided in the “Overview” section below.

Overview

The Company’s results for the three and six months ended June 30, 2005 reflect the continuing strength of the international art market as Net Auction Sales (defined below) and Private Sale totals remained strong. Auction commission revenues increased $7.8 million, or 5%, and $29.3 million, or 16%, when compared to the same periods in the prior year. The Company was able to achieve such results despite a lower level of Net Auction Sales when compared to the prior year principally due to a significant improvement in auction commission margins. However, because first half results for 2004 included a one-time license fee of $45 million earned in conjunction with the sale of the Company’s domestic real estate brokerage business (see “Discontinued Operations” below), first half results for 2005 are substantially lower than those reported for the same period in the prior year.

Management currently anticipates a continuation of the strong international art market and is encouraged by its 2005 auction sales results to-date, as well as by the level of consignments for the fall auction season. (See statement on Forward Looking Statements.)

The Company’s pre-tax results from continuing operations for the three and six months ended June 30, 2005 and 2004 are summarized below (in thousands of dollars):

	Three Months Ended June 30,
	2005		2004		$ Change	% Change
Revenues:
Auction and related revenues	$175,558		$166,166		$9,392	5.7%
License fee revenues	448		–		448	*
Other revenues	2,250		2,599		(349)	-13.4%
Total revenues	178,256		168,765		9,491	5.6%

Expenses	108,465		98,703		9,762	9.9%

Operating income	69,791		70,062		(271)	-0.4%
Net interest expense	(6,370	)	(7,863	)	1,493	19.0%
Other expense	(218	)	(249	)	31	12.4%

Income from continuing operations before taxes	$63,203		$61,950		$1,253	2.0%

Key performance indicators:
Aggregate Auction Sales (a)	$977,060		$1,120,083		($143,023)	-12.8%
Net Auction Sales (b)	$838,747		$972,867		($134,120)	-13.8%
Private Sales (c)	$79,537		$17,394		$62,143	*
Auction commission margin (d)	18.7	%	15.3	%	N/A	22.2%
Average loan portfolio	$92,549		$75,252		$17,297	23.0%
Adjusted EBITDA	$75,141		$75,502		($361)	-0.5%

	Six Months Ended June 30,
	2005		2004		$ Change	% Change
Revenues:
Auction and related revenues	$247,733		$225,019		$22,714	10.1%
License fee revenues	624		45,000		(44,376)	-98.6%
Other revenues	3,926		4,172		(246)	-5.9%
Total revenues	252,283		274,191		(21,908)	-8.0%

Expenses	191,043		176,739		14,304	8.1%

Operating income	61,240		97,452		(36,212)	-37.2%
Net interest expense	(12,903	)	(15,704	)	2,801	17.8%

Other expense	(214	)	391		(605)	*
Income from continuing operations before taxes	$48,123		$82,139		($34,016)	-41.4%

Key performance indicators:
Aggregate Auction Sales (a)	$1,333,040		$1,353,280		($20,240)	-1.5%
Net Auction Sales (b)	$1,143,799		$1,173,673		($29,874)	-2.5%
Private Sales (c)	$138,110		$163,735		($25,625)	-15.7%
Auction commission margin (d)	19.0	%	16.0	%	N/A	18.8%
Average loan portfolio	$84,435		$85,149		($714)	-0.8%
Adjusted EBITDA	$72,240		$66,473		$5,767	8.7%

Legend :

*	Represents a change in excess of 100%.

(a)	Represents the hammer (sale) price of property sold at auction plus buyer’s premium.

(b)	Represents the hammer (sale) price of property sold at auction.

(c)	Represents the total purchase price of property sold privately by the Company.
(d)	Represents total auction commission revenues as a percentage of Net Auction Sales.

The following is a reconciliation of Adjusted EBITDA to income from continuing operations before taxes for the three and six months ended June 30, 2005 and 2004 (in thousands of dollars):

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Adjusted EBITDA	$75,141		$75,502		$72,240		$66,473

Subtract: Net interest expense	(6,370	)	(7,863	)	(12,903	)	(15,704)
Subtract: Depreciation and amortization expense	(5,568	)	(5,593	)	(11,214	)	(11,488)
Subtract: License Agreement transaction costs	–		(96	)	–		(2,142)
Add: One-time license fee revenue	–		–		–		45,000

Income from continuing operations before taxes	$63,203		$61,950		$48,123		$82,139

Please refer to the discussion below for a more detailed discussion of the significant factors impacting the Company’s results from continuing operations for the three and six months ended June 30, 2005.

Revenues

For the three and six months ended June 30, 2005 and 2004, revenues from continuing operations consisted of the following (in thousands of dollars):

	Three Months Ended June 30,
	2005		2004		$ Change			% Change
Auction and related revenues:
Auction commission revenues		$156,857		$149,097		$7,760		5.2	%
Auction expense recoveries		7,197		6,978		219		3.1	%
Private sale commissions		5,589		3,054		2,535		83.0	%
Principal activities		1,348		2,663		(1,315	)	-49.4	%
Catalogue subscription revenues		2,548		2,622		(74	)	-2.8	%
Other		2,019		1,752		267		15.2	%
Total auction and related revenues		175,558		166,166		9,392		5.7	%

License fee revenues		448		–		448		N/A

Other revenues:
Finance segment revenues		1,768		1,865		(97	)	-5.2	%
Other		482		734		(252	)	-34.3	%
Total other revenues		2,250		2,599		(349	)	-13.4	%

Total revenues		$178,256		$168,765		$9,491		5.6	%

	Six Months Ended June 30,
	2005		2004		$ Change			% Change
Auction and related revenues:
Auction commission revenues		$216,965		$187,682		$29,283		15.6	%
Auction expense recoveries		10,064		8,581		1,483		17.3	%
Private sale commissions		10,722		16,316		(5,594	)	-34.3	%
Principal activities		1,754		4,649		(2,895	)	-62.3	%
Catalogue subscription revenues		4,886		4,765		121		2.5	%
Other		3,342		3,026		316		10.4	%
Total auction and related revenues		247,733		225,019		22,714		10.1	%

License fee revenues		624		45,000		(44,376	)	-98.6	%

Other revenues:
Finance segment revenues		2,976		3,081		(105	)	-3.4	%
Other		950		1,091		(141	)	-12.9	%
Total other revenues		3,926		4,172		(246	)	-5.9	%

Total revenues		$252,283		$274,191		($21,908	)	-8.0	%

Auction and Related Revenues

For the three and six months ended June 30, 2005, auction and related revenues increased $9.4 million, or 6%, to $175.6 million, and $22.7 million, or 10%, to $247.7 million, when compared to the same periods in the prior year. For the three months ended June 30, 2005, the increase in auction and related revenues was principally due to higher auction commission revenues and private sale commissions, partially offset by lower principal activities. For the six months ended June 30, 2005, the increase in auction and related revenues was principally due to higher auction commission revenues and expense recoveries, partially offset by lower private sale commissions and principal activities. Each of the significant factors impacting the overall change in auction and related revenues for the periods is explained in more detail below.

Auction Commission Revenues — For the three and six months ended June 30, 2005, auction commission revenues increased $7.8 million, or 5%, to $156.9 million, and $29.3 million, or 16%, to $217 million, when compared to the same periods in the prior year. The higher level of auction commission revenues during the periods was principally attributable to a significant increase in auction commission margin partially offset by a lower level of Net Auction Sales. See “Net Auction Sales” and “Auction Commission Margin” below for a detailed discussion of these key performance indicators.

Net Auction Sales — For the three and six months ended June 30, 2005, Net Auction Sales decreased $134.1 million, or 14%, to $838.7 million, and $29.9 million, or 3%, to $1.1 billion, when compared to the same periods in the prior year.

The $134.1 million decrease in second quarter Net Auction Sales is primarily attributable to the fact that results for the second quarter of 2004 included $189.4 million of sales of property from the Greentree Foundation, for which there was no comparable event in the current year. The overall decrease in Net Auction Sales for the second quarter of 2005 was partially offset by:

•

A $26.9 million, or 45%, increase in Net Auction Sales conducted in Asia, primarily due to a higher level of Chinese Paintings and Ceramics sales, reflecting the continued growth of the Chinese art market.

•

A $22.9 million increase in results from the second quarter Russian Art sale held in New York, reflecting the rapid growth of the Russian Art market. In the second quarter of 2005, this sale generated $30.3 million in Net Auction Sales; compared to $7.4 million in the prior year.

•

Several less significant increases in Net Auction Sales related to recurring second quarter sales such as those for American Paintings ($9.5 million improvement, excluding property from the Greentree Foundation) and 19 ^th Century Paintings ($8.4 million improvement).

The $29.9 million decrease in Net Auction Sales for the first half of 2005 when compared to the prior year was influenced by the factors described above, as well as by the Company’s strong first quarter results which included:

•

A $35.2 million, or 35%, improvement in results from the winter Impressionist and Contemporary sales in February 2005 in London.

•

A $32 million increase in Net Auction Sales attributable to single-owner collections in the first quarter of 2005, including the sales of property from the Goddard Family Collection and the Collection of Baron de Rede, for which there were no comparable events in the prior period.

•

Several less significant increases in Net Auction Sales related to recurring first quarter sales such as those for Chinese Works of Art ($5.6 million improvement) and Old Master Paintings ($3.9 million improvement).

Auction Commission Margin — Auction commission margin represents total auction commission revenues as a percentage of Net Auction Sales. Typically, auction commission margins are higher for lower value works of art or collections, while higher valued property earns lower margins.

Effective January 1, 2005, the Company increased its buyer’s premium charged on certain auction sales. In salesrooms in the United States (“U.S.”), the buyer’s premium is now 20% of the hammer (sale) price on the first $200,000 and 12% of any remaining amount over $200,000. In foreign salesrooms, these U.S. dollar thresholds were translated into an appropriate fixed local currency amount upon the effective date. Previously, the buyer’s premium charged on auction sales was generally 20% of the hammer (sale) price on the first $100,000 and 12% of any remaining amount over $100,000.

For the three and six months ended June 30, 2005, auction commission margin increased 22% and 19%, respectively, when compared to the same periods in the prior year. These increases were principally due to:

•

A $14 million decrease in shared auction commissions as certain significant consignments for property sold in the second quarter of 2004 were subject to commission sharing arrangements with unaffiliated third parties. These arrangements were primarily the result of the competitive environment for such consignments, as well as the Company’s decision to reduce its auction guarantee risk through sharing arrangements with partners, whereby the Company reduces its financial exposure under the auction guarantee in exchange for sharing the auction commission with the partner.

•

A favorable change in sales mix as a significant portion of auction sales in 2004 were at the high-end of the Company’s business where auction commission margins are traditionally lower.

•

The increase in the buyer’s premium rate structure discussed above.

Private Sale Commissions — For the three months ended June 30, 2005, private sale commissions increased $2.5 million, or 83%, to $5.6 million when compared to the same period in the prior year. This increase is principally due to a significant private sale in the second quarter of 2005, for which there was no comparable sale in the prior year.

Despite the increase in second quarter private sale commissions, June 2005 year-to-date private sale commissions decreased $5.6 million, or 34%, when compared to the same period in the prior year. This decrease is principally due to the landmark private sale of the Forbes Collection of Faberge in the first quarter of 2004, for which there was no comparable sale in the current year. Excluding this unique sale, private sale commissions for the first half of 2005 increased when compared to the prior year due to the higher level of private sale commissions in the second quarter of 2005, as discussed above, which reflects the traditionally variable nature of the Company’s private sale totals.

Principal Activities — Principal activities consist mainly of gains or losses on sales of inventory, income or loss related to auction guarantees and gains or losses related to the sales of loan collateral, as well as any decreases in the carrying value of the Company’s inventory. The level of principal activities in a period is largely attributable to the level of auction guarantees issued by the Company, as well as the supply of quality property available for investment and resale and the demand by buyers for such property.

For the three and six months ended June 30, 2005, results from principal activities decreased $1.3 million, or 49%, to $1.3 million, and $2.9 million, or 62%, to $1.8 million, respectively, when compared to the same periods in the prior year. For the three months ended June 30, 2005, the decrease was due to inventory write downs as a result of a decrease in the value of certain properties and less favorable auction guarantee experience during 2005. For the first half of 2005, the decrease was due to the factors mentioned above, as well as a significant gain recognized in the first quarter of 2004 in the amount of $2.2 million for which there was no comparable transaction in the prior year.

Expenses

For the three and six months ended June 30, 2005 and 2004, expenses related to the Company’s continuing operations consisted of the following (in thousands of dollars):

	Three Months Ended June 30,
	2005		2004		$ Change			% Change

Direct costs of services		$19,017		$18,974		$43		0.2%
Salaries and related costs		53,296		49,568		3,728		7.5%
General and administrative expenses		30,584		24,541		6,043		24.6%
Depreciation and amortization expense		5,568		5,593		(25	)	-0.4%
Net restructuring charges		–		27		(27	)	-100.0%
Total expenses		$108,465		$98,703		$9,762		9.9%

	Six Months Ended June 30,
	2005		2004		$ Change			% Change

Direct costs of services		$29,246		$26,094		$3,152		12.1%
Salaries and related costs		92,815		88,528		4,287		4.8%
General and administrative expenses		57,768		50,198		7,570		15.1%
Depreciation and amortization expense		11,214		11,488		(274	)	-2.4%
Retention costs		–		285		(285	)	-100.0%
Net restructuring charges		–		146		(146	)	-100.0%
Total expenses		$191,043		$176,739		$14,304		8.1%

Direct Costs of Services

Direct costs of services consist largely of catalogue production and distribution costs, as well as sale marketing costs and corporate marketing expenses. The level of direct costs incurred in any period is generally dependent upon the volume and composition of the Company’s auction offerings. For example, direct costs attributable to single-owner collections are typically higher than those associated with various-owner sales, mainly due to higher promotional costs for catalogues, special events and traveling exhibitions.

For the three months ended June 30, 2005, direct costs of services were unchanged when compared to the same period in the prior year, as the impact of catalogue production and other direct sale costs related to the off-premises single-owner sale of cars and related memorabilia at Ferrari headquarters in Maranello, Italy and the Easton Neston house sale in the United Kingdom (“U.K.”) were virtually equal to $1.2 million in direct costs related to the single-owner sale of property from the Greentree Foundation in the second quarter of 2004.

For the six months ended June 30, 2005, direct costs of services increased $3.2 million, or 12%, to $29.2 million, when compared to the same period in the prior year. This increased level of direct costs is consistent with the higher level of sales activity and in particular, single-owner sales, during the first quarter of 2005. Most prominently, direct costs of services reflect an increase in catalogue production expenses of $1.9 million, which is principally attributable to the single-owner sales of property from the Kennedy Family Homes and the Collection of Baron de Rede, for which there were no comparable events in the first quarter of 2005.

Salaries and Related Costs

For the three and six months ended June 30, 2005 and 2004, salaries and related costs consisted of the following (in thousands of dollars):

	Three Months Ended June 30,
	2005		2004		$ Change			% Change

Full-time salaries		$24,941		$24,048		$893		3.7	%
Employee benefits		5,505		4,156		1,349		32.5	%
Payroll taxes		3,355		3,365		(10	)	-0.3	%
Option Exchange		995		1,944		(949	)	-48.8	%
Incentive bonus costs		14,049		12,697		1,352		10.6	%
Stock compensation expense		970		219		751			*
Other		3,481		3,139		342		10.9	%
Total salaries and related costs		$53,296		$49,568		$3,728		7.5	%

	Six Months Ended June 30,
	2005		2004		$ Change		% Change

Full-time salaries		$50,562		$48,941	$1,621		3.3	%
Employee benefits		10,571		8,748	1,823		20.8	%
Payroll taxes		6,507		6,306	201		3.2	%
Option Exchange		2,658		4,088	(1,430	)	-35.0	%
Incentive bonus costs		14,785		14,123	662		4.7	%
Stock compensation expense		1,724		437	1,287			*
Other		6,008		5,885	123		2.1	%
Total salaries and related costs		$92,815		$88,528	$4,287		4.8	%

* Represents a change in excess of 100%.

For the three and six months ended June 30, 2005, salaries and related costs increased $3.7 million, or 8%, to $53.3 million, and $4.3 million, or 5%, to $92.8 million, respectively, when compared to the same periods in the prior year. These increases are primarily attributable to higher incentive bonus costs and increased employee benefit costs, as well as the impact of limited full-time salary increases in 2005 and higher stock compensation expenses. The overall increase in salaries and related costs for both periods was partially offset by lower costs related to the Option Exchange program, primarily related to the one-time $2.2 million cash payment made to employees upon acceptance of the Exchange Offer in 2004, for which there was no comparable event in 2005. See discussion below for a more detailed explanation of each of these factors.

Incentive Bonus Costs — For the three and six months ended June 30, 2005, incentive bonus costs increased approximately $1.4 million, or 11%, and $0.7 million, or 5%, respectively, when compared to the same periods in the prior year. The increase in incentive bonus costs for the periods is attributable to the Company’s financial performance through the first six months of 2005.

Employee Benefit Costs— For the three and six months ended June 30, 2005, employee benefit costs increased $1.3 million, or 33%, and $1.8 million, or 21%, respectively, when compared to the same periods in the prior year. The higher level of employee benefit costs for the periods was primarily due to increases of $0.5 million and $1.1 million, respectively, in costs related to the Company’s U.K. defined benefit pension plan (see Note 8 of Notes to Consolidated Financial Statements under Part I, Item 1 “Financial Statements”). To a lesser extent, the increases in employee benefit costs were attributable to incremental profit-sharing costs related to the Company’s U.S. pension plans, reflecting the Company’s financial performance for the first half of 2005. In the prior periods, certain contributions to the Company’s U.S. pension plans were determined as a fixed percentage of an employee’s eligible compensation rather than via a profit-sharing formula. Also unfavorably impacting the comparison to the prior periods were increased health and welfare benefit costs in the U.K. For the six months ended June 30, 2005, the overall increase in employee benefit costs was partially offset by $0.6 million in severance costs incurred in the first quarter of 2004 related to headcount reductions in Continental Europe, for which there was no comparable event in the current period.

Full-Time Salaries— For the three and six months ended June 30, 2005, full-time salaries increased $0.9 million, or 4%, to $24.9 million, and $1.6 million, or 3%, to $50.6 million, respectively, when compared to the same periods in the prior year. These increases were principally due to limited salary increases taking effect in 2005 and the unfavorable impact of foreign currency translations ($0.4 million and $0.9 million for the three and six months ended June 30, 2005, respectively); partially offset by savings achieved as a result of certain headcount reductions taking effect in 2004.

Stock Compensation Expense— For the three and six months ended June 30, 2005 and 2004, stock compensation expense related to restricted stock shares granted pursuant to the Sotheby’s Holdings, Inc. 2003 Restricted Stock Plan (excluding shares issued in conjunction with the Exchange Offer discussed below) increased $0.8 million and $1.3 million, respectively, when compared to the same periods in the prior year. These increases are primarily due to incremental stock compensation expense associated with a grant of 276,000 shares of restricted stock on February 7, 2005. The amortization of stock compensation expense related to restricted stock shares granted pursuant to the Sotheby’s Holdings, Inc. 2003 Restricted Stock Plan (excluding shares issued in conjunction with the Exchange Offer discussed below) is expected to be approximately $3.9 million for the year ended December 31, 2005.

Option Exchange Program— In February 2003, the Compensation Committee approved an exchange offer of cash or restricted stock for certain stock options held by eligible employees under the 1997 Stock Option Plan (the “Exchange Offer”). The Exchange Offer was tendered during the first half of 2004.

Compensation expense related to the Exchange Offer decreased $0.9 million, or 49%, and $1.4 million, or 35%, for the three and six months ended June 30, 2005, respectively, when compared to the same periods in the prior year. For the three months ended June 30, 2005, the decrease in compensation expense related to the Exchange Offer is principally attributable to lower amortization of stock compensation expense related to the issuance of approximately 1.1 million shares as a result of the Exchange Offer, the expense relating to which is being amortized over a graded four-year vesting period. For the six months ended June 30, 2005, the comparison of compensation expense related to the Exchange Offer to the prior year was also significantly influenced by $2.2 million of expense recognized in the first quarter of 2004 representing the full cash payment made to employees upon acceptance of the Exchange Offer on March 31, 2004, for which there is no comparable event in 2005; partially offset by the higher amortization of stock compensation expense in 2005 due to the timing of the Exchange Offer restricted stock grant in 2004.

The amortization of stock compensation expense related to the Exchange Offer is expected to be approximately $4.6 million, $2.5 million and $1.2 million for the years ended December 31, 2005, 2006 and 2007, respectively.

General and Administrative Expenses

For the three and six months ended June 30, 2005, general and administrative expenses increased $6 million, or 25%, to $30.6 million, and $7.6 million, or 15%, to $57.8 million, respectively, when compared to the same periods in the prior year. For the three and six months ended June 30, 2005, the overall increase in general and administrative expenses is largely attributable to the following factors:

•

An insurance recovery of approximately $4 million recorded in the second quarter of 2004, for which there was no comparable event in the first half of 2005.

•

Increases of $0.6 million and $1.2 million, respectively, in property taxes related to the Company’s headquarters building at 1334 York Avenue in New York as a result of a tax reassessment that became effective on July 1, 2004.

•

Increases of $0.7 million and $1.2 million, respectively, in travel and entertainment costs principally due to the higher level of travel for pursuing business opportunities during 2005.

•

Increases of $0.2 million and $1.2 million, respectively, in professional fees principally related to the timing of the Company’s compliance efforts for Section 404 of the Sarbanes-Oxley Act.

•

Increases of $0.9 million and $2 million, respectively, in other professional fees partially due to fees incurred as a result of outsourcing management of the Company’s catalogue production operations in the U.S.

•

Increases in facility-related costs of $0.4 million and $0.8 million, respectively.

For the three and six months ended June 30, 2005, general and administrative costs were favorably influenced by a decrease in client goodwill gestures and authenticity claims of approximately $0.8 million, when compared to the same periods in the prior year.

For the six months ended June 30, 2005, general and administrative expenses were also favorably influenced by $2.1 million of transaction costs incurred in the first quarter of 2004 related to consummation of the Company’s agreement with Cendant to license the Sotheby’s International Realty trademark. There were no comparable fees incurred in the current period.

Net Interest Expense

For the three and six months ended June 30, 2005, net interest expense decreased $1.5 million, or 19%, and $2.8 million, or 18%, respectively, when compared to the same periods in the prior year. The improvement over the prior year is largely attributable to increases of $1.1 million and $2.1 million, respectively, in interest income resulting from significantly higher balances of cash and short-term investments, as well as higher interest rates in part due to a change in investment composition. To a lesser extent, the decrease in net interest expense versus the prior periods is attributable to lower credit facility related costs, as the Company had no outstanding credit facility borrowings during the current year, as well as lower amortization of the discount related to antitrust matters (see Note 11 of Notes to Consolidated Financial Statements in Part I, Item 1, “Financial Statements”).

Income Tax Expense

The effective tax rate for continuing operations was approximately 33% for the three and six months ended June 30, 2005, compared to approximately 34% for the same periods in the prior year. The change in the effective rate was primarily due to permanent adjustments resulting from a current year tax benefit on stock options exercised, exempt interest income and certain other one-time adjustments which were partially offset by non deductible payments related to the antitrust settlement and other disallowable expenses.

The American Jobs Creation Act of 2004 (the “Act”), signed into law in October 2004, allows the Company to repatriate up to $500 million of permanently reinvested foreign earnings in 2005 and 2006 at an effective tax rate of 5.25%. The Company has not yet completed its evaluation of the possible effect of the Act on its plan for repatriation of foreign earnings. Accordingly, the Company has not adjusted its income tax expense or deferred tax liability as of June 30, 2005 to reflect the possible effect of the new repatriation provision. Income tax expense, if any, associated with any repatriation under the Act will be provided in the Company’s financial statements in the reporting period in which the Company's evaluation is completed and the required management approvals have been obtained. (See statement on Forward Looking Statements and “Future Impact of Recently Issued Accounting Standards” below.)

Discontinued Operations

For information related to Discontinued Operations, see Note 3 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”.

FINANCIAL CONDITION AS OF JUNE 30, 2005

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, 2005, total cash and cash equivalents related to the Company’s continuing and discontinued operations decreased $46.6 million primarily due to the factors discussed below.

Net cash used by operations was $51.1 million for the six months ended June 30, 2005 and was due in part to:

•

The funding of a $15 million discretionary contribution to the Company’s U.K. defined benefit pension plan in May 2005 (see Note 8 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”).

•

The funding of $12 million of the fine payable to the DOJ in February 2005 (see Note 11 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”).

•

A $9.6 million net increase in inventory due to property relating to auction guarantees that did not sell at auction during the spring auction season ($5.8 million) and investments made in certain properties during the first half of 2005 ($5.3 million).

Net cash used by operations was also significantly influenced by a $122 million decrease in amounts due to consignors, partially offset by a $35.2 million decrease in accounts receivable, both principally resulting from the timing and settlement of auction sales in the fourth quarter of 2004 and the first half of 2005. The impact of these net cash outflows from operations was also partially offset by the Company’s income from continuing operations of $32.7 million during the period, as well as the collection of $12.5 million in cash due from the Company’s partner in an auction guarantee.

Net cash provided by investing activities was $2.1 million for the six months ended June 30, 2005 and was largely due to $301.3 million in proceeds received from the maturity of short-term investments during the period and, to a lesser extent the collection of $90.6 million in client loans, a $3.6 million decrease in restricted cash and $2.7 million in distributions received from an equity investee. These investing cash inflows were almost entirely offset by the funding of $297.6 million in short-term investments, the funding of $94.1 million in new client loans and $4.4 million in capital expenditures.

Net cash provided by financing activities was $2.8 million for the six months ended June 30, 2005 and was almost entirely attributable to proceeds received from the exercise of stock options.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes the Company’s material contractual obligations and commitments as of June 30, 2005:

	Payments Due by Period
	Total			Less Than One Year			1 to 3 Years			3 to 5 Years			After 5 Years
	(Thousands of dollars)
Long-term debt (1) :
Principal payments		$	100,000		$	–		$	–		$	100,000		$	–
Interest payments			26,927			6,875			13,750			6,302			–
Sub-total			126,927			6,875			13,750			106,302			–

Other commitments :
York Property capital lease			397,948			18,633			38,574			40,575			300,166
Operating lease obligations			86,197			14,046			24,581			15,330			32,240
DOJ antitrust fine (2)			15,000			15,000			–			–			–
Employment agreements (3)			3,525			3,525			–			–			–
Sub-total			502,670			51,204			63,155			55,905			332,406

Total		$	629,597		$	58,079		$	76,905		$	162,207		$	332,406

(1)	Represents the aggregate outstanding principal and semi-annual interest payments due on the Company’s long-term debt. (See Note 7 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”)

(2)	Represents the remaining fine payable to the Antitrust Division of the U.S. Department of Justice (the “DOJ”). (See Note 11 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”)

(3)	Represents the remaining commitment for future salaries as of June 30, 2005 related to employment agreements with a number of employees, excluding incentive bonuses. (See Note 9 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”)

The vendor’s commission discount certificates (the “Discount Certificates”) that were distributed in conjunction with the settlement of certain civil litigation related to the investigation by the DOJ (see Note 11 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”) are fully redeemable in connection with any auction that is conducted by the Company or Christie’s International, PLC (“Christie’s”) in the U.S. or in the U.K. The Discount Certificates may be used to satisfy consignment charges involving vendor’s commission, risk of loss and/or catalogue illustration. The Discount Certificates will expire on May 14, 2008 and cannot be redeemed subsequent to that date; however, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. As of June 30, 2005, the outstanding face value of unused Discount Certificates that the Company could be required to redeem was $54.6 million.

(See “Off-Balance Sheet Arrangements” below for information on auction guarantees and lending commitments.)

OFF-BALANCE SHEET ARRANGEMENTS

Auction Guarantees

in the event that the property sells for less than the minimum price and, therefore, the Company must pay the difference between the sale price at auction and the amount of the auction guarantee. If the property does not sell, the amount of the auction guarantee must be paid, but the Company has the right to recover such amount through future sale of the property. Generally, the Company is entitled to a share of the excess proceeds if the property under the auction guarantee sells above a minimum price. In addition, the Company is obligated under the terms of certain guarantees to advance a portion of the guaranteed amount prior to the auction. In certain situations, the Company reduces its financial exposure under auction guarantees through sharing arrangements with unaffiliated third parties.

As of June 30, 2005, the Company had outstanding auction guarantees totaling $21.5 million, the property relating to which had a mid-estimate sales price (1) of $33 million. The property related to such auction guarantees is being offered at auctions during the second half of 2005. As of June 30, 2005, $5 million of the guaranteed amount had been advanced by the Company and is recorded within Notes Receivable and Consignor Advances in the Consolidated Balance Sheets (see Note 5 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”)

(1)

Lending Commitments

In certain situations, the Company’s Finance segment enters into legally binding arrangements to lend, primarily on a collateralized basis and subject to certain limitations and conditions, to potential consignors and other individuals who have collections of fine art or other objects. Unfunded commitments to extend additional credit were approximately $9 million at June 30, 2005. (See Note 9 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”)

DERIVATIVE INSTRUMENTS

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

The forward exchange contracts entered into by the Company are used as economic cash flow hedges of the Company’s exposure to short-term foreign currency denominated intercompany balances. Such forward exchange contracts are typically short-term with settlement dates no more than one month from their inception. These contracts are not designated as hedging instruments under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and are recorded in the Consolidated Balance Sheets at fair value, which is based on referenced market rates. Changes in the fair value of the Company’s forward exchange contracts are recognized currently in earnings and are generally offset by the revaluation of the underlying intercompany balances in accordance with SFAS No. 52, “Foreign Currency Translation.”

CONTINGENCIES

Legal Actions —The Canadian Competition Bureau is continuing to conduct an investigation regarding anti-competitive practices relating to commissions charged by the Company and Christie’s for auction services during the period 1993 to 2000. The Company also becomes involved, from time to time, in various claims and lawsuits incidental to the ordinary course of its business.

Gain Contingency— During the third quarter of 2004, the Company signed an agreement for the sale of land and buildings at Billingshurst, West Sussex in the U.K. (the “Sussex Property”). The completion of the sale is conditional upon the receipt of planning permission for redevelopment of part of the site. The Company had previously disclosed in its 2004 Form 10-K and Form 10-Q for the period ended March 31, 2005 that, if completed, the sale of the Sussex Property would result in a pre-tax gain in the range of approximately $5 to $6 million. However, subsequent to the date of those filings as a result of discussions with the planning authorities and the developer based on recent events, the structure of the planned sale is being amended. Consequently, the amount of the expected proceeds or gain from the sale, if any, cannot be reasonably estimated at this time. The Company expects this contingency to be resolved some time in 2005 or 2006.

(See Note 9 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”)

LIQUIDITY AND CAPITAL RESOURCES

On March 4, 2004, the Company entered into a new senior secured credit agreement with General Electric Capital Corporation (the “GE Capital Credit Agreement”). The GE Capital Credit Agreement is available through March 4, 2007 and provides for borrowings of up to $200 million provided by an international syndicate of lenders.

Borrowings under the GE Capital Credit Agreement are available for the funding of the Company’s ordinary working capital requirements and general corporate needs. The Company paid arrangement fees of $3 million related to the GE Capital Credit Agreement, which are being amortized to interest expense over the three-year term of the agreement. The Company’s obligations under the GE Capital Credit Agreement are secured by substantially all of the assets of the Company, as well as the assets of its subsidiaries in the U.S. and the U.K.

As of June 30, 2005, the Company had no outstanding borrowings under the GE Capital Credit Agreement.

The Company generally relies on operating cash flows supplemented by borrowings, when necessary, to meet its liquidity requirements. The Company currently believes that operating cash flows, current cash and short-term investment balances and borrowings available under the GE Capital Credit Agreement will be adequate to meet its short-term and long-term commitments, operating needs and capital requirements through March 4, 2007. Subsequent to March 4, 2007, management anticipates that the Company will extend or renew the GE Capital Credit Agreement or obtain other forms of long-term financing. Additionally, as a result of the current level of cash balances, short-term investments and borrowings available under the GE Capital Credit Agreement, the Company has considerably more liquidity and financial flexibility than it has had in the recent past. It is the Company’s present intention to use this additional liquidity to expand its loan portfolio. (See statement on Forward Looking Statements.)

The Company’s short-term 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 portfolio and the funding of capital expenditures, as well as the short-term commitments to be funded prior to July 1, 2006 included in the table of contractual obligations above.

The Company’s long-term operating needs and capital requirements include peak seasonal working capital requirements, the potential funding of the Company’s client loan portfolio and the funding of capital expenditures beyond the next twelve months and through March 4, 2007, as well as the funding of the Company’s long-term contractual obligations and commitments included in the table of contractual obligations above through March 4, 2007.

In addition to the short-term and long-term operating needs and capital requirements described above, the Company is obligated to fund the redemption of the Discount Certificates distributed in conjunction with the settlement of certain civil litigation related to the investigation by the DOJ (see Note 11 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements”). As discussed above, the Discount Certificates are fully redeemable in connection with any auction that is conducted by the Company or Christie’s in the U.S. or the U.K. The Discount Certificates may be used to satisfy consignment charges involving vendor’s commission, risk of loss and/or catalogue illustration. The Discount Certificates will expire on May 14, 2008 and cannot be redeemed subsequent to that date; however, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. As of June 30, 2005, the outstanding face value of unused Discount Certificates that the Company could be required to redeem was approximately $54.6 million.

FACTORS AFFECTING OPERATING RESULTS AND LIQUIDITY

Operating results from the Company’s Auction and Finance 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:

•

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

•

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

•

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

•

Government laws and regulations which the Company is subject to, including, but not limited to, import and export regulations, cultural patrimony laws and value added taxes;

•

The effects of foreign currency exchange rate movements;

•

The outcome of any pending legal claims or proceedings;

•

The seasonality of the Company’s auction business;

•

Competition with other auctioneers and art dealers, specifically in relation to the following factors:

(a)

The level and breadth of expertise of the dealer or auction house with respect to the property;

(b)

The extent of the prior relationship, if any, between the seller and the firm;

(c)

The reputation and historic level of achievement by a firm in attaining high sale prices in the property’s specialized category;

(d)

The desire for privacy on the part of sellers and buyers;

(e)

The amount of cash offered by a dealer, auction house or other purchaser to purchase the property outright;

(f)

The level of auction guarantees or the terms of other financial options offered by auction houses or dealers;

(g)

The level of pre-sale estimates offered by auction houses;

(h)

The desirability of a public auction in order to achieve the maximum possible price;

(i)

The amount of commission proposed by dealers or auction houses to sell a work on consignment;

(j)

The cost, style and extent of presale marketing and promotion to be undertaken by a firm;

(k)

Recommendations by third parties consulted by the seller;

(l)

Relationships and personal interaction between the seller and the firm’s staff; and

(m)

The availability and extent of related services, such as tax or insurance appraisal and short-term financing;

•

The amount of quality property being consigned to art auction houses (and, in particular, the number of single-owner sale consignments), as well as the ability of the Company to sell such property, both of which factors can cause auction and related revenues to be highly variable from period-to-period;

•

The demand for fine arts, decorative arts and collectibles;

•

The success of the Company in attracting and retaining qualified personnel, who have or can develop relationships with certain potential sellers and buyers;

•

The success of the Company in retaining key members of management;

•

The demand for art-related financing;

•

The uncertainty in future costs related to the Company’s U.K. defined benefit pension plan, as well as the impact of any decline in the equity markets or unfavorable changes in interest rates on plan assets and obligations;

•

The impact of the variability in taxable income between the various jurisdictions where the Company does business on its effective tax rate; and

•

The ability of the Company to utilize its deferred tax assets.

FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) requires the recognition of compensation expense equal to the fair value of stock options or other share-based payments. Under SFAS No. 123(R), the Company would have been required to implement the standard as of July 1, 2005. In April 2005, the Securities and Exchange Commission (the “SEC”) announced the adoption of a new rule that amended the compliance date for SFAS No. 123(R). The new rule will allow the Company to implement SFAS No. 123(R) as of January 1, 2006. The Company will adopt SFAS No. 123(R) using the modified prospective method, which will result in the amortization of stock compensation expense related to unvested stock options outstanding on the date of adoption, as well as any stock options granted subsequent to that date. The Company expects the adoption of SFAS No. 123(R) to result in the recording of compensation expense in the range of $0.5 million to $1.2 million in 2006 related to unvested stock options outstanding on the date of adoption.

The Company has adopted the provisions of FASB Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” According to FSP No. 109-2, the Company is allowed time beyond the financial reporting period of enactment to evaluate the effects of the Act on its plan for repatriation of foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income Taxes.” The Company has not yet completed its evaluation of the possible effect of the Act on its plan for repatriation of foreign earnings. Accordingly, the Company has not adjusted its income tax expense or deferred tax liability as of June 30, 2005 to reflect the possible effect of the new repatriation provision. Income tax expense, if any, associated with any repatriation under the Act will be provided in the Company's financial statements in the reporting period in which the Company’s evaluation is completed and the required management approvals have been obtained. (See statement on Forward Looking Statements.)

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 above under “Factors Affecting Operating Results and Liquidity”, which are not ranked in any particular order.

ITEM 3 : Q UANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company continually evaluates its market risk associated with its financial instruments and forward exchange contracts during the course of its business. The Company’s financial instruments include cash and cash equivalents, restricted cash, short-term investments, notes receivable, consignor advances, long-term debt, the fine payable to the DOJ and the settlement liability related to the Discount Certificates issued in connection with certain civil litigation related to the investigation by the DOJ.

At June 30, 2005, a hypothetical 10% strengthening or weakening of the U.S. dollar relative to all other currencies would result in a decrease or increase in cash flow of approximately $11.4 million. Excluding the potential impact of this hypothetical strengthening or weakening of the U.S. dollar, the market risk of the Company’s financial instruments has not changed significantly as of June 30, 2005 from that set forth in the Company’s Form 10-K for the year ended December 31, 2004.

At June 30, 2005, the Company had $54.6 million of notional value forward exchange contracts outstanding. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under such contracts. The Company is exposed to credit-related losses in the event of nonperformance by the two counterparties to its forward exchange contracts, but the Company does not expect any counterparties to fail to meet their obligations given their high credit ratings.

ITEM 4 : CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of June 30, 2005, the Company has 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. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) were effective as of June 30, 2005.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1 : LEGAL PROCEEDINGS

The Canadian Competition Bureau is continuing to conduct an investigation regarding anti-competitive practices relating to commissions charged by the Company and Christie’s for auction services during the period 1993 to 2000.

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

(See Note 9 of Notes to Consolidated Financial Statements under Part I, Item 1, “Financial Statements.”)

ITEM 6 : EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

10.1

Amendment No. 1 to Trademark License Agreement dated as of May 2, 2005 by and among SPTC Delaware, LLC (as an assignee of SPTC, Inc.) and Sotheby’s Holdings, Inc. and Cendant Corporation and Sotheby’s International Realty Licensee Corporation (formerly known as Monticello Licensee Corporation)

10.2

Amendment No. 2 to Trademark License Agreement dated as of May 2, 2005 by and among SPTC Delaware, LLC (as an assignee of SPTC, Inc.) and Sotheby’s Holdings, Inc. and Cendant Corporation and Sotheby’s International Realty Licensee Corporation (formerly known as Monticello Licensee Corporation)

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

(b)	Reports on Form 8-K

(i)

On April 18, 2005, the Company filed a current report on Form 8-K under Item 1.01, “Entry into a Material Definitive Agreement,” and Item 9.01, “Financial Statements and Exhibits.”

(ii)

On May 10, 2005, the Company filed a current report on Form 8-K under Item 1.01, “Entry into a Material Definitive Agreement,” and Item 9.01, “Financial Statements and Exhibits.”

(iii)

On May 12, 2005, the Company filed a current report on Form 8-K under Item 2.02, “Results of Operations and Financial Condition,” and Item 9.01, “Financial Statements and Exhibits.”

(iv)

On June 30, 2005, the Company filed a current report on Form 8-K under Item 5.02, “Departure of Director or Principal Officers; Election of Directors; Appointment of Principal Officers.”

SIGNATURE

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

		SOTHEBY’S HOLDINGS, INC.
		By:	/s/ Michael L. Gillis
			Michael L. Gillis Senior Vice President, Controller and Chief Accounting Officer

		Date:	August 8, 2005

Exhibit Index

Exhibit No.	Description

10.1	Amendment No. 1 to Trademark License Agreement dated as of May 2, 2005 by and among SPTC Delaware, LLC (as an assignee of SPTC, Inc.) and Sotheby’s Holdings, Inc. and Cendant Corporation and Sotheby’s International Realty Licensee Corporation (formerly known as Monticello Licensee Corporation.

10.2	Amendment No. 2 to Trademark License Agreement dated as of May 2, 2005 by and among SPTC Delaware, LLC (as an assignee of SPTC, Inc.) and Sotheby’s Holdings, Inc. and Cendant Corporation and Sotheby’s International Realty Licensee Corporation (formerly known as Monticello Licensee Corporation.

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

Exhibit 10.1

EXECUTION COPY

AMENDMENT NO. 1

TRADEMARK LICENSE AGREEMENT

THIS AMENDMENT TO TRADEMARK LICENSE AGREEMENT is made and entered into on this 2 ^nd day of May, 2005 by and among SPTC DELAWARE, LLC, a Delaware limited liability company (as assignee of SPTC, Inc., a Delaware corporation) (“ SPTC ”) and SOTHEBY’S HOLDINGS, INC., a Michigan corporation (“ Holdings ”), on the one hand, and CENDANT CORPORATION, a Delaware Corporation (“ Parent ”) and SOTHEBY’S INTERNATIONAL REALTY LICENSEE CORPORATION (f/k/a Monticello Licensee Corporation), a Delaware corporation (“ Licensee ”). Capitalized terms used herein and not defined herein shall have the meaning ascribed to such terms in the License Agreement (as defined below).

WHEREAS, SPTC, Holdings, Parent and Licensee entered into that certain Trademark License Agreement on February 17, 2004 (the “License Agreement”); and

WHEREAS, the parties hereby desire to amend the License Agreement to (i) modify the mutual referral program set forth in Article VI thereof, (ii) modify the definition of Authorized Brokerage Services to include, in certain circumstances, commercial real estate brokerage services, (iii) modify the manner in which Branded Operators may provide Excluded Services, and (iv) clarify that Licensee and Branded Operators can use the abbreviation “SIR” in internet domain names, each on the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound hereby, the parties agree as follows:

1. Referrals by Licensor . The first sentence of Section 6.1(a) is hereby deleted in its entirety and replaced with the following:

“(a) Licensee agrees to pay Licensor (or to a Licensor Affiliate designed by Licensor) a fee equal to 25% of any gross commission income per transaction side earned by Licensee or any Company Affiliate from the provision of Authorized Brokerage Services to a third party referred by Licensor or any Licensor Affiliate to the Licensee Group for such Authorized Brokerage Services, provided that such third party is not an Existing Brokerage Lead (it being understood that Licensee shall give first preference in transmitting any such referral to Branded Operators).”

Authorized Commercial Services .

2.1

A new Section 2.4 shall be added to the License Agreement as follows:

“Section 2.4. Authorized Commercial Services . Notwithstanding anything to the contrary contained in this Agreement, Commercial Qualifying Branded Operators shall be permitted to provide real estate brokerage services for commercial properties under the Licensed Marks, subject to the following conditions: (i) any such commercial real estate brokerage service is offered as a service ancillary to the provision of real estate brokerage services for Residential Real Estate and (ii) such Branded Operator shall not hold itself out as providing such commercial real estate brokerage services as its principal business or as being a stand-alone provider solely of such services (the provision of real estate brokerage services for commercial properties in compliance with (i) and (ii), “ Authorized Commercial Services ”). “ Commercial Qualifying Branded Operator ” shall mean a Branded Operator whose aggregate listings of commercial properties marketed under the Licensed Marks pursuant to this Agreement do not exceed five percent (5%) of all listings marketed under the Licensed Marks pursuant to this Agreement by such Branded Operator in any calendar year (or portion thereof) included in the term of the agreement between Licensee (or a Company Affiliate) and such Branded Operator. Notwithstanding the foregoing, only Commercial Qualifying Branded Operators who have been authorized to provide, and shall be currently providing, Authorized Commercial Services under agreements in effect on February 17, 2014 shall be authorized to perform such services after such date, and only thereafter for so long as such agreements shall remain in effect.”

2.2 The definition of the term “Authorized Brokerage Services” as set forth in Section 1.1 is hereby deleted in its entirety and replaced with the following:

‘“ Authorized Brokerage Services ” shall mean (i) real estate brokerage services for Residential Real Estate or (ii) if applicable, Authorized Commercial Services offered in combination with real estate brokerage services for Residential Real Estate pursuant to and in accordance with Section 2.4.’

2.3 The definition of the term “Excluded Services” as set forth in Section 1.1 is hereby deleted in its entirety and replaced with the following:

‘“ Excluded Services ” shall mean (i) commercial real estate brokerage services (other than Authorized Commercial Services performed under the Licensed Marks pursuant to and in accordance with Section 2.4), (ii) Timeshare Brokerage Services, (iii) Residential Real Estate management and management

services, other than as specifically included in the definition of “Residential Real Estate” in the Agreement, (iv) real estate development services or products (whether as a developer or as an advisor or consultant or other service provider with respect to real estate developments), other than advice and consultation related to sales of Residential Real Estate within any development and (v) any other services relating to the foregoing or to any real estate brokerage services, in each case other than the Authorized Services.’

3. Excluded Services; Model Co-Mingling Provisions . Exhibit C to the License Agreement setting forth the Model Co-Mingling Provisions is hereby deleted in its entirety and replaced with amended and restated Exhibit C attached hereto. Notwithstanding anything to the contrary contained in the License Agreement, the parties further agree that so long as Licensee takes commercially reasonable steps (consistent with its past practices) to enforce the Model Co-Mingling Provisions (as amended hereby) on Branded Operators then Licensee shall not be deemed to be in breach of Section 7.5(a)(iii) of the License Agreement.

4. Domain Names . Notwithstanding anything to the contrary contained in the License Agreement (including but not limited to Sections 2.2 and 3.2), the parties acknowledge and agree that Licensee and Branded Operators are permitted to use the consecutive letters “SIR” (in upper or lower case) (the “Abbreviation”) as part of an internet domain name or Uniform Resource Locator relating to the provision of Authorized Services by such Person. In addition, Licensee (or any applicable Company Affiliate) may amend, in good faith, its Identity Standards Manual guidelines to include the use of such Abbreviation in domain names pursuant hereto.

Miscellaneous .

5.1 Counterparts . This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, and all of which, when taken together shall constitute one and the same agreement.

5.2 Heading . The headings herein are for convenience purposes only, do not constitute a part of this Amendment and shall not be deemed to limit or affect any of the provisions of this Amendment.

5.3 License Agreement . This Amendment shall operate as an Amendment to the License Agreement. Except as expressly provided herein, the License Agreement is not amended, modified or affected by this Amendment, and the License Agreement and the rights and obligations of the parties hereto thereunder are hereby ratified and confirmed by the parties hereto in all respects.

[Remainder of Page Intentionally Left Blank; Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

				SPTC DELAWARE, LLC
				By:	/s/ W ILLIAM S. S HERIDAN
				Name: William S. Sheridan
				Title: Vice President and Treasurer

				SOTHEBY’S HOLDINGS, INC.
				By:	/s/ W ILLIAM S. S HERIDAN
				Name: William S. Sheridan
				Title: Executive Vice President and Chief
				Financial Officer

				CENDANT CORPORATION
				By:	/s/ C. P ATTESON C ARDWELL , IV
				Name: C. Patteson Cardwell, IV
				Title: Senior Vice President and Assistant
				Secretary

				SOTHEBY’S INTERNATIONAL REALTY LICENSEE CORPORATION
				By:	/s/ K IM V UKANOVICH
				Name: Kim Vukanovich
				Title: Vice President

E XHIBIT C

M ODEL C O -M INGLING P ROVISIONS

The Model Co-Mingling Provisions are drafted to be adapted consistently with the language below for particular agreements, and for convenience of reference the bracketed provisions below contain certain terms defined in the Agreement .

I.	No [Branded Franchisee] shall offer or sell any [Excluded Service] unless:

(a) there is no use or mention of any [Licensed Mark] in connection with any such Excluded Service;

(b) any offer or sale of any [Excluded Service] shall be carried out without the use or mention of the [Licensed Marks], using separate and different signage, web-site (URL addresses), stationery, business cards, and similar documents;

(c) any offer or sale of any [Excluded Service] shall be carried out using a different business name, which may include the [Branded Franchisee’s] local business name (e.g. Premier Properties Sotheby’s International Realty may use Premier Properties Commercial Real Estate as the business name for their separate commercial real estate brokerage operations);

(d) there shall be no advertising referencing any [Excluded Service] and including any [Licensed Marks] or referencing the offer or sale of any [Authorized Service] by such [Branded Franchises] or identifying any common ownership or relationship between the business name being used to provide any [Excluded Service] and the business name of the [Branded Franchisee] that is providing any [Authorized Service],

(e) [Excluded Services] may be offered from the same office location as any [Authorized Service] so long as there are no references to any [Excluded Service] displayed on exterior office signage or office windows.

Exhibit 10.2

EXECUTION COPY

AMENDMENT NO. 2

TRADEMARK LICENSE AGREEMENT

THIS AMENDMENT TO TRADEMARK LICENSE AGREEMENT is made and entered into on this 2nd day of May, 2005 by and among SPTC DELAWARE, LLC, a Delaware limited liability company (as assignee of SPTC, Inc., a Delaware corporation) (“ SPTC ”) and SOTHEBY’S HOLDINGS, INC., a Michigan corporation (“ Holdings ”), on the one hand, and CENDANT CORPORATION, a Delaware Corporation (“ Parent ”) and SOTHEBY’S INTERNATIONAL REALTY LICENSEE CORPORATION (f/k/a Monticello Licensee Corporation), a Delaware corporation (“ Licensee ”) . Capitalized terms used herein and not defined herein shall have the meaning ascribed to such terms in the License Agreement (as defined below).

WHEREAS, SPTC, Holdings, Parent and Licensee entered into that certain Trademark License Agreement on February 17, 2004 (as heretofore amended, the “License Agreement”); and

WHEREAS, the parties hereby desire to amend the License Agreement to add the country of New Zealand to the Territory on the terms and conditions set forth herein.

1. Addition of New Zealand to the Territory. The country of New Zealand is hereby added to the Territory.

1.1 Amendment of Schedule C. Schedule C is hereby amended by adding the country of New Zealand as part of the Territory.

1.2 Amendment of the Definition of “Territory.” The definition of “Territory” under Section 1.1 of the Agreement is hereby deleted in its entirety and replaced and superceded by the following (new or revised language has been underscored ):

“ ‘ Territory’ shall mean the Original Territory and any country set forth in Schedule C, as amended, including, without limitation, any country added following any exercise of the Option and upon (and subject

to) the grant of the license thereunder pursuant to the terms and conditions of Article 18.”

2. Sharing of Development Fees for New Zealand. In the event that an initial franchise fee or development fee ( “Development Fee ” ) is paid to the Licensee Group in connection with the grant of a master franchise or subfranchise agreement for the country of New Zealand as permitted under Subsection 7.2(a) of the License Agreement, the Licensee Group shall pay to Licensor an amount equal to 35% of such Development Fees on the 15 ^th Business Day after the end of the calendar month in which such Development Fees are received by the Licensee Group.

3.	Miscellaneous .

3.1 Counterparts . This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, and all of which, when taken together shall constitute one and the same agreement.

3.2 Heading . The headings herein are for convenience purposes only, do not constitute a part of this Amendment and shall not be deemed to limit or affect any of the provisions of this Amendment.

3.3 License Agreement . This Amendment shall operate as an Amendment to the License Agreement. Except as expressly provided herein, the License Agreement is not amended, modified or affected by this Amendment, and the License Agreement and the rights and obligations of the parties hereto thereunder are hereby ratified and confirmed by the parties hereto in all respects.

[Remainder of Page Intentionally Left Blank; Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

			SPTC DELAWARE, LLC
			By:	/s/ W ILLIAM S. S HERIDAN
			Name: William S. Sheridan
			Title: Vice President and Treasurer

			SOTHEBY’S HOLDINGS, INC.
			By:	/s/ W ILLIAM S. S HERIDAN
			Name: William S. Sheridan
			Title: Executive Vice President and Chief Financial Officer

			CENDANT CORPORATION
			By:	/s/ C. P ATTESON C ARDWELL , IV
			Name: C. Patteson Cardwell, IV
			Title: Senior Vice President and Assistant Secretary

			SOTHEBY’S INTERNATIONAL REALTY LICENSEE CORPORATION
			By:	/s/ K IM V UKANOVICH
			Name: Kim Vukanovich
			Title: Vice President

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

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

(1)

I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2005 of the Company;

(2)

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

(3)

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

(4)

The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5)

The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

/s/ William F. Ruprecht
William F. Ruprecht President and Chief Executive Officer Sotheby’s Holdings, Inc. August 8, 2005

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

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

(1)

I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2005 of the Company;

(2)

(3)

(4)

(a)

(b)

(c)

(d)

(5)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

/s/ William S. Sheridan
William S. Sheridan Executive Vice President and Chief Financial Officer Sotheby’s Holdings, Inc. August 8, 2005

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sotheby’s Holdings, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William F. Ruprecht, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William F. Ruprecht
William F. Ruprecht President and Chief Executive Officer Sotheby’s Holdings, Inc. August 8, 2005

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sotheby’s Holdings, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William S. Sheridan, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William S. Sheridan
William S. Sheridan Executive Vice President and Chief Financial Officer Sotheby’s Holdings, Inc. August 8, 2005