<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
Commission File Number 1-9750
Sotheby's Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2478409
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 North Woodward Avenue, Suite 100
Bloomfield Hills, Michigan 48304
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 646-2400
----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
As of May 5, 2000, there were outstanding 42,299,065 shares of Class A
Limited Voting Common Stock, par value $0.10 per share, and 16,585,650 shares
of Class B Common Stock, par value $0.10 per share, of the Registrant. Each
share of Class B Common Stock is freely convertible into one share of Class A
Limited Voting Common Stock.
<PAGE>
INDEX
PART I: FINANCIAL INFORMATION
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PAGE
Item 1. Financial Statements:
Consolidated Statements of Income for the Three
Months Ended March 31, 2000 and 1999 3
Consolidated Balance Sheets at March 31, 2000, 4
December 31, 1999 and March 31, 1999
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 24
EXHIBIT INDEX 25
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------
2000 1999
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(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C>
REVENUES:
Auction and related $ 40,389 $ 51,665
Other 14,381 11,537
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TOTAL REVENUES 54,770 63,202
EXPENSES:
Direct costs of services 18,748 13,004
Salaries and related costs 42,003 36,168
General and administrative 29,598 25,302
Depreciation and amortization 6,093 3,339
Special charges 1,808 --
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TOTAL EXPENSES 98,250 77,813
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Operating loss (43,480) (14,611)
Interest income 1,183 1,123
Interest expense (2,895) (1,442)
Other expense (257) (191)
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Loss before taxes (45,449) (15,121)
Income tax benefit 16,361 5,595
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NET LOSS ($29,088) ($ 9,526)
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BASIC LOSS PER SHARE ($ 0.49) ($ 0.17)
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DILUTED LOSS PER SHARE ($ 0.49) ($ 0.17)
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BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (IN MILLIONS) 58.9 57.3
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DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (IN MILLIONS) 58.9 57.3
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DIVIDENDS PER SHARE -- $ 0.10
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</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
CONSOLIDATED BALANCE SHEETS
SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, December 31, March 31,
2000 1999 1999
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(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 48,814 $ 42,319 $ 32,278
Accounts and notes receivable, net of allowance
for doubtful accounts of $12,078, $11,085 and $10,964
Accounts receivable 233,248 495,986 201,055
Notes receivable 104,202 145,359 135,328
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TOTAL ACCOUNTS AND NOTES RECEIVABLE, NET 337,450 641,345 336,383
Inventory, net 21,577 20,843 20,840
Deferred income taxes 11,968 12,986 16,384
Prepaid expenses and other current assets 25,444 18,754 27,470
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TOTAL CURRENT ASSETS 445,253 736,247 433,355
Notes receivable 75,560 42,535 75,985
Properties, less allowance for depreciation
and amortization of $74,686, $72,463 and $59,806 234,702 232,661 125,533
Intangible assets, less allowance for
amortization of $16,203, $15,903 and $17,779 23,722 24,124 34,270
Investments 35,755 35,982 36,471
Other assets 3,628 1,963 6,794
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TOTAL ASSETS $ 818,620 $ 1,073,512 $ 712,408
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Due to consignors $ 144,707 $ 422,552 $ 148,198
Short-term borrowings 374 272 5,016
Accounts payable and accrued liabilities 97,395 126,263 105,241
Deferred revenues 6,602 7,273 7,158
Accrued income taxes 3,387 20,427 22,235
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TOTAL CURRENT LIABILITIES 252,465 576,787 287,848
LONG-TERM LIABILITIES
Long-term debt 198,925 100,000 100,000
Deferred income taxes 9,085 9,126 11,046
Other liabilities 11,147 10,555 9,159
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TOTAL LIABILITIES 471,622 696,468 408,053
SHAREHOLDERS' EQUITY
Common Stock, $0.10 par value 5,890 5,885 5,751
Authorized shares - 125,000,000 of Class A and
75,000,000 of Class B Issued and outstanding
shares - 42,280,487, 42,258,393 and 40,497,788
of Class A and 16,585,650, 16,585,650 and 16,995,299
of Class B, at March 31, 2000, December 31, 1999
and March 31, 1999, respectively
Additional paid-in capital 156,688 156,125 109,829
Retained earnings 199,172 228,261 204,125
Accumulated other comprehensive income (14,752) (13,227) (15,350)
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TOTAL SHAREHOLDERS' EQUITY 346,998 377,044 304,355
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 818,620 $ 1,073,512 $ 712,408
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</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SOTHEBY'S HOLDINGS, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000 1999
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(THOUSANDS OF DOLLARS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss ($ 29,088) ($ 9,526)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 6,093 3,339
Deferred income taxes 936 (876)
Tax benefit of stock option exercises 29 1,273
Asset provisions 1,216 291
Other -- (85)
Changes in assets and liabilities:
Decrease in accounts receivable 257,154 106,901
Increase in inventory (1,128) (3,710)
Increase in prepaid expenses and other current assets (6,836) (3,064)
Increase in intangible and other assets (1,778) (2,466)
Decrease in due to consignors (276,717) (144,455)
Decrease in accrued income taxes (16,957) (16,709)
(Decrease) increase in accounts payable, accrued liabilities
and other liabilities (26,484) 4,650
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Net cash used by operating activities (93,560) (64,437)
INVESTING ACTIVITIES:
Increase in notes receivable (19,505) (79,767)
Collections of notes receivable 29,398 22,415
Capital expenditures (9,738) (18,142)
Decrease in investments 227 267
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Net cash provided (used) by investing activities 382 (75,227)
FINANCING ACTIVITIES:
Increase in long-term debt 98,925 100,000
Increase in short term borrowings 136 2,614
Proceeds from exercise of stock options 539 4,498
Dividends paid -- (5,731)
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Net cash provided by financing activities 99,600 101,381
Effect of exchange rate changes on cash 73 (677)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,495 (38,960)
Cash and cash equivalents at beginning of period 42,319 71,238
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Cash and cash equivalents at end of period 48,814 $ 32,278
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Income taxes paid $ 999 $ 10,236
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Interest paid (net of capitalized interest) $ 3,291 $ 1,521
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</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
SOTHEBY'S HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO THE 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. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
notes thereto on Form 10-K for the year ended December 31, 1999 ("Form
10-K").
In the opinion of the management of the Company, all adjustments,
consisting of normal recurring adjustments, necessary for a fair
presentation of the results of operations for the three months ended March
31, 2000 and 1999 have been included.
2. ACCOUNTS AND NOTES RECEIVABLE
The Company provides collectors, estates and dealers with financing
generally secured by works of art that the Company typically controls and
other personal property owned by its clients. The Company generally makes
two types of secured loans: (1) advances secured by consigned property to
borrowers who are contractually committed, in the near term, to sell the
property at auction (a "consignor advance"); and (2) general purpose loans
to collectors, estates or dealers secured by property not presently
intended for sale. The consignor advance allows a consignor to receive
funds shortly after consignment for an auction that will occur several
weeks or months in the future, while preserving for the benefit of the
consignor the potential of the auction process. The general purpose
secured loans allow the Company to establish or enhance a mutually
beneficial relationship with estates, dealers and collectors. The loans
are generally made with full recourse to the borrower. In certain
instances, however, loans are made with recourse limited to the works of
art pledged as security for the loan. To the extent that the Company is
looking wholly or partially to the collateral for repayment of its loans,
repayment can be adversely impacted by a decline in the art market in
general or in the value of the particular collateral. In addition, in
situations where the borrower becomes subject to bankruptcy or insolvency
laws, the Company's ability to realize on its collateral may be limited or
delayed by the application of such laws.
<PAGE>
As of March 31, 2000, no individual loan or group of related loans
amounted to more than 10% of the Company's notes receivable (current and
non-current).
The Company regularly reviews its loan portfolio. Each loan is analyzed
based on the current estimated realizable value of collateral securing the
loan. For financial statement purposes, the Company establishes reserves
for certain loans that the Company believes are under-collateralized and
with respect to which the under-collateralized amount may not be
collectible from the borrower.
Following are the changes in the allowance for credit losses relating to
both current and non-current notes receivable for the three months ended
March 31, 2000 and 1999 (in thousands):
2000 1999
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Allowance for credit losses
at December 31, 1999 and 1998 $ 2,904 $ 2,874
Provisions -- --
Write-offs (46) --
Other (7) (19)
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Allowance for credit losses
at March 31, 2000 and 1999 $ 2,851 $ 2,855
======= =======
As of March 31, 2000, an amount equal to approximately 23% of the
Company's accounts receivable balance was due from one purchaser.
3. CREDIT ARRANGEMENTS
During the first quarter of 2000, the Company amended and restated its
Bank Credit Agreement (the "Credit Agreement") with its existing banking
group. Borrowings under the Credit Agreement are available for general
corporate purposes. Under the Credit Agreement, the Company has up to
$300 million of committed senior secured financing with an international
syndicate of banks arranged through Chase Manhattan Bank available
through July 11, 2001. The amount available for borrowings under the
Credit Agreement is reduced by the outstanding commercial paper, if any.
The Company's obligations under the Credit Agreement are secured by
substantially all of the assets of the Company and its domestic
subsidiaries. In addition, borrowings by the Company's U.K. based
affiliates are secured by the Company's U.K. loan portfolio. Borrowings
under the Credit Agreement are permitted in either U.S. dollars or Pounds
Sterling. Interest rates on borrowings under the Credit Agreement are
determined on a pricing matrix based on the Company's long-term debt
rating assigned by Standard & Poor's Ratings Group and Moody's Investor
Services.
<PAGE>
Commitment fees are determined on a similar pricing matrix based on the
Company's long-term debt rating and charged quarterly in arrears. The
Company incurred arrangement and amendment fees of $3.6 million in
connection with amending and restating the Credit Agreement, which will be
amortized over the expected term of the commitment. The Credit Agreement
contains certain financial covenants, including covenants requiring the
Company to maintain a minimum net worth, to meet certain leverage ratio
and interest coverage ratio tests (as defined in the Credit Agreement) and
to limit dividend payments. At March 31, 2000 the Company was in
compliance with respect to all financial and other covenants. The Company
had outstanding borrowings of $98.9 million under this facility at a
weighted average interest rate of 7.9% at March 31, 2000.
In February 1999 the Company sold a tranche of senior unsecured long-term
debt securities, 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%. If and to the extent required under the Indenture pursuant to
which the Notes were issued and subject to certain exceptions contained in
the Indenture, the security documents executed in connection with the
Credit Agreement provide that the obligations under the Notes shall be
secured equally and ratably with that portion of the obligations under the
Credit Agreement that exceed the permitted exceptions contained in the
Indenture.
The Company may issue up to $300 million in notes under its U.S.
commercial paper program. At March 31, 2000 there were no outstanding
commercial paper borrowings. At March 31, 2000, the Company had $0.4
million outstanding under domestic and foreign bank lines of credit at
weighted average interest rates of 4.89%.
Long-term debt consists of the following:
As of March 31,
------------------------
2000 1999
-------- --------
Borrowings under the Credit Agreement $ 98,925 $ --
Long-term debt securities 100,000 100,000
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Total $198,925 $100,000
======== ========
4. COMPREHENSIVE INCOME
The Company's other comprehensive income consisted of the change in the
foreign currency translation adjustment amount during the period.
Comprehensive loss for the three months ended March 31, 2000 and 1999
amounted to $30.6 million and $9.8 million, respectively.
<PAGE>
5. COMMITMENTS AND CONTINGENCIES
In May 1997, the Antitrust Division of the United States Department of
Justice began an investigation of certain art dealers and major auction
houses, including the Company and it principal competitor, Christie's.
Among other matters, the investigation has reviewed whether Sotheby's and
Christie's had any agreement regarding the amounts charged for commissions
in connection with auctions. The Company has met and is continuing to meet
with the Department of Justice in order to discuss a prompt and
appropriate resolution of this investigation. The European Commission has
also commenced an inquiry and the Australian Competition Commission an
investigation, regarding commissions charged by the Company and Christie's
for auction services.
A number of private civil complaints, styled as class action complaints,
have also been filed against the Company alleging violation of federal and
state antitrust laws based upon alleged agreements between Christie's and
the Company regarding commission pricing. In addition, several shareholder
class action complaints have been filed against the Company and certain
directors and officers, alleging failure to disclose the alleged
agreements and their impact on the Company's financial condition and
results of operations. And, a number of shareholder derivative suits have
been filed against the directors of the Company based on allegations
related to the foregoing lawsuits and investigations. Although the outcome
of the investigation by the Department of Justice, other governmental
inquiries and investigations and these various lawsuits cannot presently
be determined, any loss resulting from these matters could well have a
material impact on the Company's financial condition and/or results of
operations. The amount of any such loss is not currently estimatable.
The Company, in the normal course of business, is also a defendant in
various other legal actions.
During the first quarter of 2000, the Compensation Committee of the Board
of Directors approved a special grant of 3 million stock options under the
terms of the 1997 Stock Option Plan in addition to the normal annual grant
and approved a cash award pool of up to $7 million for the retention of
certain key employees. The cash awards will be paid only upon the
fulfillment of full-time employment through February 28, 2002.
In conjunction with the client loan program, the Company enters into
legally binding arrangements to lend, generally on a collateralized basis,
to potential consignors and other individuals who have collections of fine
art and other objects. Unfunded commitments to extend additional credit
were approximately $19.6 million at March 31, 2000.
<PAGE>
On certain occasions, the Company will guarantee to the consignor a
minimum price in connection with the sale of property at auction. The
Company must perform under its guarantee only in the event that the
property sells for less than the minimum price or the property does not
sell and, therefore, the Company must pay the difference between the
sale price at auction and the amount of the guarantee. At March 31,
2000 and May 5, 2000, the Company had outstanding guarantees totaling
approximately $39.3 million and $38.8 million which covers auction
property having a mid-estimate sales price of approximately $49.0
million and $48.3 million, respectively. Under certain guarantees, the
Company participates in a share of the proceeds if the property under
guarantee sells above a specified price. In addition, the Company is
obligated under the terms of certain guarantees to fund a portion of
the guarantee prior to the auction. At March 31, 2000 and May 5, 2000,
$10.0 million had been funded.
The Company has financial commitments of approximately $8.9 million as of
May 3, 2000 related to the construction of the York Property.
As of March 31, 2000, the Company has outstanding letters of credit of
approximately $31.2 million primarily relating to bank guarantees on U.K.
Temporary Import VAT and rental obligations in Europe.
In the opinion of management, the commitments and contingencies described
above currently are not expected to have a material adverse effect on the
Company's consolidated financial statements, with the possible exception
of the investigation by the Department of Justice, other governmental
investigations and inquiries and related civil lawsuits, as any losses
resulting from these latter matters could well have a material impact on
the Company's financial condition and/or results of operations.
6. SEGMENT REPORTING
For the Three Months Ended March 31, 2000, the Company's operating segment
information is as follows (in thousands):
<TABLE>
<CAPTION>
Auction Real Estate Finance Other Total
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<S> <C> <C> <C> <C> <C>
Revenues $ 40,389 $ 8,208 $ 4,309 $ 1,864 $ 54,770
Profit/(Loss) $(47,935) $ 2,172 $ 552 $ (238) $(45,449)
</TABLE>
<PAGE>
For the Three Months Ended March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Auction Real Estate Finance Other Total
------- ----------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 51,665 $ 5,949 $ 3,627 $ 1,961 $ 63,202
Profit/(Loss) $(16,381) $ 366 $ 972 $ (78) $(15,121)
</TABLE>
7. SEASONALITY OF BUSINESS
The worldwide art auction market has two principal selling seasons, spring
and fall. During the summer and winter, sales are considerably lower. The
table below demonstrates that approximately 80% of the Company's auction
sales are derived from the second and fourth quarters of the year.
Percentage of Annual
Auction Sales
---------------------------
1999 1998 1997
---- ---- ----
January - March 11% 13% 11%
April - June 35% 37% 35%
July - September 6% 8% 8%
October - December 48% 42% 46%
---- ---- ----
100% 100% 100%
==== ==== ====
8. SPECIAL CHARGES
During the first quarter of 2000, the Company recorded special charges of
$1.8 million consisting primarily of legal and other professional fees
related to the investigation by the Department of Justice, other
governmental inquiries and investigations, and related civil lawsuits as
discussed in Note 5.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The worldwide auction business is highly seasonal in nature, with two
principal selling seasons, spring and fall. Accordingly, first and third
quarter results reflect lower auction sales and lower operating margins
than the second and fourth quarters due to the fixed nature of many of the
Company's operating expenses. (See Note 7 of Notes to the Consolidated
Financial Statements for additional information.)
Following is a geographical breakdown of the Company's auction sales for
the three months ended March 31, 2000 and 1999 (in thousands):
For the Three Months
Ended March 31,
2000 1999
------------------------
North America $127,296 $133,439
Europe 48,760 101,034
Asia 0 1,200
-------- --------
Total $176,056 $235,673
======== ========
For the quarter ended March 31, 2000, worldwide auction sales of $176.1
million decreased $59.6 million, or 25%, compared to the first quarter
of 1999. The decrease in worldwide sales was due to a 20% decrease in
the number of lots sold and a 7% decrease in the average selling price
per lot sold in first quarter of 2000 as compared to the same period in
1999. The decrease in North America was primarily due to the lack of sales
in 2000 comparable to the 1999 single-owner sale of the Collection of
Alberto Pinto and the sale of the Important Judaica comprised of books,
manuscripts, silver, works of art and paintings. This decrease was
partially offset by an increase in Old Master Paintings and the
Americana single-owner sale. The sales decrease in Europe was primarily
attributable to the lack of sales in 2000 comparable to the 1999
single-owner sale of Important French and Italian Furniture, Porcelain,
Paintings, Silver and Decorative Arts from the Estate of Dr. Giuseppe
Rossi. The decrease in Asia was due to the timing of the Southeast Asia
Paintings sale, which was held during the first quarter of 1999 but
occurred in the second quarter in the current year. Auction sales
recorded by the Company's foreign operations were not materially
affected by translation into U.S. dollars for the first quarter of 2000.
For the first quarter of 2000, worldwide auction and related revenues
decreased $11.3 million, or 22%, compared to 1999. This
<PAGE>
decrease was principally due to lower buyer's premium and seller's
commission revenues and a decrease in expense recoveries offset in part
by increases in principal activities (activities by the Company for its
own account) and private treaty sales. The decrease in buyer's premium
and seller's commission revenues and expense recoveries was primarily
due to the decreased sales discussed above and, to a lesser extent,
sales mix. The increase in principal activities was primarily due to an
increase in net gains on sales of inventory.
On February 29, 2000, the Company announced a new commission structure
for both buyers and sellers at its principal auction locations. The
Company's new seller's commission represents a reduction in the fees
charged to its sellers for all levels of aggregate transactions over
$100,000. For buyers in most collecting categories, the Company now
charges an increased buyer's premium of 20% of the hammer price on the
first $15,000, 15% on the next $85,000 up to $100,000 and 10% on any
amount over $100,000 on property sold. The buyer's premium on Internet
purchases is 10% of the hammer price.
Other revenue increased $2.8 million, or 25%, in the first quarter of 2000
compared to the same quarter of 1999. This increase was due to higher Real
Estate and Finance revenues. The increase in Real Estate revenues was
primarily due to increased unit sales from Company-owned brokerage
offices. The increase in Finance revenues was a result of a slightly
higher average loan portfolio balance as well as higher interest rates
charged on outstanding loans in the first quarter of 2000 compared to same
period in 1999.
The Company cannot at present determine the impact on future sales and
future revenues due to the Department of Justice investigation and other
related investigations and civil lawsuits, as discussed in more detail
below. (See Statement on Forward Looking Statements).
Total expenses, excluding special charges, increased $18.6 million, or
24%, in the first quarter of 2000 compared to 1999.
Direct costs of services (which consist largely of catalogue production
and distribution costs as well as corporate marketing and sale marketing
expenses) increased $5.7 million, or 44%, during the first quarter of 2000
compared to the same period of 1999. This increase was primarily due to
increased marketing expenses, a direct result of the Company's Internet
initiative partially offset by a decrease in direct costs associated with
auction sales due to the decrease in the number of lots sold as discussed
above.
Excluding special charges, all other operating expenses (which include
salaries and related costs, general and administrative expenses as well as
depreciation and amortization) totaled $77.7 million for the first quarter
of 2000, an increase of 20% compared to the first quarter of 1999. This
increase was principally due to a $5.8 million, or 16%, increase in
salaries and related costs, a $4.3
<PAGE>
million, or 17% increase in general and administrative expenses and a $2.8
million, or 82%, increase in depreciation and amortization. The increase
in salaries and related costs was primarily the result of the Internet
initiative. The increase in general and administrative expenses was
primarily due to Internet related expenses, higher costs associated with
the York Property, and increased Information Technology costs. The
increase in depreciation was primarily related to the commencement of
depreciation on the York Property in the fourth quarter of 1999 and other
capital projects that were placed in service subsequent to the first
quarter of 1999.
Internet related expenses for the three months ended March 31, 2000
amounted to $19.2 million as compared to $2.3 million in 1999. These
expenses include primarily marketing, salary and related costs and
technology costs. The Company continues to evaluate its current costs and
future expenditures for sothebys.com and sothebys.amazon.com. These
investments will continue to have a dilutive effect on the Company's
results in the near term.
In May 1997, the Antitrust Division of the United States Department of
Justice began an investigation of certain art dealers and major auction
houses, including the Company and its principal competitor, Christie's.
Among other matters, the investigation has reviewed whether Sotheby's and
Christie's had any agreement regarding the amounts charged for commissions
in connection with auctions. The Company has met and is continuing to meet
with the Department of Justice in order to discuss a prompt and
appropriate resolution of this investigation. The European Commission has
also commenced an inquiry and the Australian Competition Commission an
investigation, regarding commissions charged by the Company and Christie's
for auction services.
A number of private civil complaints, styled as class action complaints,
have also been filed against the Company alleging violation of the federal
and state antitrust laws based upon alleged agreements between Christie's
and the Company regarding commission pricing. In addition, several
shareholder class action complaints have been filed against the Company
and certain of its officers, alleging failure to disclose the alleged
agreements and their impact on the Company's financial condition and
results of operations. And, a number of shareholder derivative suits have
been filed against the Directors of the Company based on allegations
related to the foregoing lawsuits and investigations. Although the outcome
of the investigation by the Department of Justice, other governmental
inquiries and investigations and these various lawsuits cannot presently
be determined, any loss resulting from these matters could well have a
material impact on the Company's financial condition and/or results of
operations. For the first quarter of 2000, the Company recorded special
charges of $1.8 million primarily for legal
<PAGE>
and other professional fees relating to the foregoing investigations and
lawsuits. (See Statement on Forward Looking Statements.)
Net interest expense increased $1.4 million in the first quarter of 2000
as compared to the comparable period in 1999. This increase was primarily
a result of lower capitalized interest related to the York Property in
2000 and an additional month of interest expense in 2000 related to the
bonds issued in February 1999.
The consolidated effective tax rate was 36% for the first quarter of 2000
compared to 37% for the same period in 1999.
For the first quarter of 2000, the Company's net loss was ($29.1) million
compared to a net loss of ($9.5) million in the first quarter of 1999.
Diluted loss per share for the first quarter of 2000 was ($0.49) per share
compared to ($0.17) per share for the first quarter of 1999. The impact on
diluted loss per share related to the Company's Internet operating loss
was ($0.19) and ($0.03) per share for the quarter ended March 31, 2000 and
1999, respectively. The impact of the special charges on diluted loss per
share was ($0.02) for the first quarter in 2000. The Company expects
that its continued investments in the Internet initiative, lack of
scheduled significant single-owner sales and costs related to the
investigation by the Department of Justice, other governmental
inquiries and investigations and civil lawsuits will continue to have a
dilutive effect on the Company's results in the near term.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net debt position (total debt, which includes short-term
borrowings, commercial paper and long-term debt, less cash and cash
equivalents) totaled $150.5 million at March 31, 2000 compared to a net
debt position of $72.7 million at March 31, 1999. The Company had a net
debt position of $58.0 million at December 31, 1999. The increase in the
net debt position as of March 31, 2000 compared to March 31, 1999 was
primarily due to the use of proceeds from borrowings under the Credit
Agreement, as defined below. The increase as compared to December 31, 1999
was also due to the use of proceeds from borrowings under the Credit
Agreement as well as the seasonal nature of the business. Working capital
(current assets less current liabilities) at March 31, 2000 was $192.8
million compared to $145.5 million and $159.5 million at March 31, 1999
and December 31, 1999, respectively.
The Company's client loan portfolio decreased to $182.6 million at March
31, 2000 from $190.8 million at December 31, 1999. These amounts include
$75.6 million and $42.5 million of loans which have a maturity of more
than one year at March 31, 2000 and December 31,
1999, respectively.
The Company relies on internally generated funds and borrowings to meet
its financing requirements. As a result of the events related to the
Department of Justice investigation and other related investigations and
civil lawsuits, as discussed previously, the
<PAGE>
Company amended and restated its $300 million Bank Credit Agreement during
the first quarter of 2000. Under the amended and restated Bank Credit
Agreement (the "Credit Agreement"), the Company has up to $300 million of
committed senior secured financing with an international banking syndicate
arranged through the Chase Manhattan Bank available through July 11, 2001.
The Company's obligations under the Credit Agreement are secured by
substantially all the assets of the Company and its domestic subsidiaries.
In addition, borrowings by the Company's U.K. based affiliates are secured
by the Company's U.K. loan portfolio. The Company incurred arrangement and
amendment fees of $3.6 million, which will be amortized over the expected
term of the commitment. The Company may also issue up to $300 million of
short-term notes pursuant to its U.S. commercial paper program. At March
31, 2000 there was no commercial paper outstanding. The Company supports
any short-term notes issued under its U.S. commercial paper program with
its committed credit facility under the Credit Agreement. The amount
available for borrowings under the Credit Agreement is reduced by the
outstanding commercial paper. Additionally, the Company has a $200 million
shelf registration with the Securities and Exchange Commission for issuing
senior unsecured debt securities, under which $100 million was available
for issuance as of March 31, 2000. During the first quarter of 2000,
Moody's Investors Service, Standard and Poor's Rating Group and other
credit agencies downgraded the Company's long-term and short-term credit
ratings. Both ratings remain on review.
For the three months ended March 31, 2000, the Company's primary sources
of liquidity were derived from collections of outstanding accounts
receivables and from borrowings under the Credit Agreement. The most
significant cash uses during the first three months of 2000 were payments
to consignors, Internet spending and capital expenditures.
Capital expenditures, consisting primarily of costs associated with the
construction of the York Property, as defined below, totaled $9.7 million
and $18.1 million for the first three months of 2000 and 1999,
respectively. The decrease in expenditures in 2000 as compared to 1999 was
due primarily to lower spending on the York Property construction and
computer and software costs during the first quarter of 2000. The capital
expenditures relating to the construction of the Company's current
facility on York Avenue ("the York Property") are currently estimated to
be in the range of $151 million, of which the Company has paid
approximately $108.4 million through May 3, 2000. As of May 3, 2000, the
Company had financial commitments in relation to this project of
approximately $8.9 million. In September 1999, York Avenue Development,
Inc. ("York"), a wholly owned subsidiary of Sotheby's Inc. (itself a
wholly owned subsidiary of the Company), exercised its right, under its
operating lease, to purchase the York Property. The closing of this
purchase will take place no later than July 2000. The Company believes
that
<PAGE>
it has sufficient capital resources to carry out planned capital spending
relating to this project.
While the Company paid shareholder dividends in the first quarter of 1999,
due to the significant cash needs required for the funding of the Internet
initiative, the completion of the construction of the York Property, as
well as uncertainties surrounding the Department of Justice investigation
and other related investigations and civil lawsuits, the Company did not
declare a cash dividend for the first quarter of 2000. Management believes
that this is an appropriate decision due to the Company's present and
anticipated cash needs. Management will continue to assess the dividend in
conjunction with operating results, capital spending needs, internet
spending requirements and developments in the Department of Justice
investigation and other related investigations and civil lawsuits.
From time to time, the Company has off-balance sheet commitments to
consignors that property will sell at a minimum price and legally binding
lending commitments in conjunction with the client loan program. (See Note
5 in the Notes to the Consolidated Financial Statements for additional
information.) The Company does not believe that material liquidity risk
exists relating to these commitments.
The Company currently believes that current cash balances, operating
cash flows and borrowings under the Credit Agreement will be adequate
to meet its short-term (twelve months) and long-term working capital
requirements, which include the funding of the Company's client loan
program, peak working capital requirements, other short-term
commitments to consignors, the project on the York Property and the
Company's Internet initiative, subject to the resolution of the
Department of Justice investigation and other related investigations
and civil lawsuits, as discussed previously. (See Statement on Forward
Looking Statements).
EUROPEAN MONETARY UNION
The European Monetary Unit ("the euro") was introduced on January 1, 1999
as a wholesale currency. The eleven participating European Monetary Union
member countries established fixed conversion rates between their existing
currencies and the euro. The existing currencies will continue to be used
as legal tender through January 1, 2002; thereafter, on July 1, 2002, the
existing currencies will be cancelled and euro bills and coins will be
used for cash transactions in the participating countries.
<PAGE>
The Company's European financial and cash management operations affected
by the euro conversion were adequately prepared for its introduction. For
the transition period and the period after January 1, 2002, the Company's
management will continue to analyze the potential business implications of
converting to a common currency. The Company is unable to determine the
ultimate financial impact, if any, of the euro conversion on its
operations given that the impact will be dependent upon the competitive
situations that exist in the various regional markets in which the Company
participates. (See Statement on Forward Looking Statements).
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which is required to be
adopted for fiscal quarters of fiscal years beginning after June 15, 2000.
The Company expects to adopt SFAS No. 133 effective January 1, 2001. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company is currently evaluating
the impact that the adoption of this statement will have on its financial
position and results of operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company continuously evaluates its market risk associated with its
financial instruments and forward exchange contracts during the course of
its business. The Company's financial instruments include cash and cash
equivalents, notes receivable, short-term borrowings and long-term debt.
The market risk of the Company's financial instruments has not changed
significantly as of March 31, 2000 from that set forth in the Form 10-K.
At March 31, 2000, the Company has $35 million of notional value forward
currency 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 contracts. The carrying amount of
these contracts approximates their fair value at March 31, 2000.
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
<PAGE>
performance of the Company, particularly with respect to the adequacy of
working capital as well as additional capital necessary for the continued
construction of the York Property. Such statements are only predictions
and involve risks and uncertainties, resulting in the possibility that the
actual events or performance will differ materially from such predictions.
Major factors which the Company believes could cause the actual results to
differ materially from the predicted results in the forward-looking
statements include, but are not limited to, the following, which are not
listed in any particular rank order:
(1) The Company's business is seasonal, with peak revenues and operating
income occurring in the second and fourth quarters of each year as a
result of the traditional spring and fall art auction season.
(2) The overall strength of the international economy and financial
markets and, in particular, the economies of the United States, the United
Kingdom, and the major countries of continental Europe and Asia
(principally Japan and Hong Kong).
(3) Competition with other auctioneers and art dealers.
(4) The volume of consigned property and the marketability at auction of
such property.
(5) The expansion of the York Property.
(6) The resolution of the Department of Justice investigation and other
related investigations and civil lawsuits.
(7) The European Monetary Union.
(8) The Company's success in developing and implementing its Internet
auction strategy.
(9) The demand for art-related financing.
(10)The effects of Market Risk.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1997, the Antitrust Division of the United States Department of
Justice began an investigation of certain art dealers and major auction houses,
including the Company and its principal competitor, Christie's. Among other
matters, the investigation has reviewed whether Sotheby's and Christie's had any
agreement regarding the amounts charged for commissions in connection with
auctions. The Company has met and is continuing to meet with the Department of
Justice in order to discuss a prompt and appropriate resolution of this
investigation. The European Commission has also commenced an inquiry, and the
Australian Competition Commission an investigation, regarding commissions
charged by the Company and Christie's for auction services.
A number of private civil complaints, styled as class action
complaints, have also been filed against the Company alleging violation of
federal and state antitrust laws based upon alleged agreements between
Christie's and the Company regarding commission pricing. In addition, several
shareholder class action complaints have been filed against the Company and
certain of its directors and officers, alleging failure to disclose the alleged
agreements and their impact on the Company's financial condition and results of
operations. And, a number of shareholder derivative suits have been filed
against the directors of the Company based on allegations related to the
foregoing lawsuits and investigations. Although the outcome of the investigation
by the Department of Justice, other governmental inquiries and investigations
and these various lawsuits cannot presently be determined, any loss resulting
from these matters could well have a material impact on the Company's financial
condition and/or results of operations. The amount of any such loss is not
currently estimable. (See Statement on Forward Looking Statements contained in
Part I).
Included in the lawsuits described above are more than fifty purported
class action lawsuits that have been filed against the Company and/or its
wholly-owned subsidiary, Sotheby's, Inc., beginning January 30, 2000, alleging
violations of the federal antitrust laws. Christie's International PLC or
Christie's Inc. (collectively "Christie's") has also been named as a defendant
in these actions. All of these federal antitrust actions are currently pending
in the United States District Court for the Southern District of New York. The
complaints in these lawsuits purport to be brought on behalf of individuals that
purchased and/or sold items auctioned by the defendants during various periods
from January 1, 1992, to the present. The complaints generally allege, among
other things, that the Company along with Christie's conspired to fix and raise
the commissions charged to purchasers and sellers of art and other items at
auction. The complaints seek treble damages, injunctive relief, attorneys' fees
and costs.
On February 23, 2000, the United States District Court for the Southern
District of New York entered an Order consolidating all of the actions filed in
that court. Pursuant to the Court's consolidation Order, plaintiffs filed a
consolidated complaint on March 15, 2000, captioned IN RE AUCTION HOUSE
ANTITRUST LITIGATION, No. 00 Civ. 0648. On April 12, 2000, Sotheby's filed an
answer to the consolidated complaint, denying the material allegations contained
therein. On April 14, 2000,
<PAGE>
plaintiffs filed a Second Consolidated Amended Complaint. The Company has not
yet answered or otherwise responded to this amended complaint.
On April 20, 2000, the Court granted plaintiffs' motion to certify the
consolidated litigation as a class action. The Court is currently engaged in
determining who will act as lead counsel in the consolidated action.
In addition, five indirect purchaser class action lawsuits have been
filed against the Company, its subsidiary, Sotheby's, Inc., and Christie's in
the Superior Court of the State of California, City and County of San Francisco,
alleging violations of the Cartwright Act, California's antitrust statute, and
the California Unfair Competition Act. The complaints are captioned CHRISTENSEN
V. CHRISTIE'S INTERNATIONAL PLC, ET AL., No. 310313 (filed Feb. 29, 2000);
HOWARD V. CHRISTIE'S INTERNATIONAL PLC, ET AL., No. 310362 (filed March 1,
2000); LANG V. CHRISTIE'S INTERNATIONAL PLC ET AL., No. 310616 (filed March 10,
2000); PACIFIC WESTERN TRADERS V. CHRISTIE'S INTERNATIONAL PLC, ET AL., No.
310629 (filed March 13, 2000); and DANIELS AND WOLFSON V. CHRISTIE'S
INTERNATIONAL PLC ET AL., No. 311888 (filed May 3, 2000). The complaints in
these lawsuits purport to be brought on behalf of individuals that indirectly
purchased items in California from one or more of the defendants. The complaints
generally allege, among other things, that the Company along with Christie's
conspired to fix and raise the commissions charged to buyers and sellers of art
and other items at auction, and that, as a result, such indirect purchasers paid
more for art and other items than they otherwise would have paid in the absence
of defendants' conduct. The complaints seek, among other things, treble damages
in unspecified amounts, interest, disgorgement of gains, equitable relief,
attorneys' fees and costs. The Company filed a demurrer to these complaints on
May 10, 2000.
The shareholder class action complaints referred to above are
captioned: WEISS V. SOTHEBY'S HOLDING INC., ET AL., No. 00 Civ. 1041 (S.D.N.Y.)
(filed February 10, 2000); GOLDFEIN V. SOTHEBY'S HOLDINGS INC., ET AL., 00 Civ.
1125 (S.D.N.Y.) (filed February 15, 2000); PATEL V. SOTHEBY'S HOLDINGS INC., ET
AL., No. 00 Civ. 1258 (S.D.N.Y.) (filed February 18, 2000); SLOAN V. SOTHEBY'S
HOLDINGS INC., ET AL., No. 00 Civ. 1412 (S.D.N.Y.) (filed February 24, 2000);
MCGEEVER V. SOTHEBY'S HOLDINGS INC., ET AL., 00 Civ. 1570 (S.D.N.Y) (filed
February 29, 2000); MAZZARINO V. SOTHEBY'S HOLDINGS, INC., 00 Civ. 1605
(S.D.N.Y) (filed March 2, 2000); EVERITT V. SOTHEBY'S HOLDINGS INC., ET AL., 00
CV7 0872DT (E.D. Mich.) (filed February 16, 2000); LAKE V. SOTHEBY'S HOLDINGS
INC., ET AL., No. 00 Civ. 1936 (S.D.N.Y.) (filed March 10, 2000); CALDWELL V.
SOTHEBY'S HOLDINGS, INC., ET AL., No. 00 Civ. 71216DT (E.D. Mich.) (filed March
7, 2000); LEONARD, ET AL. V. SOTHEBY'S HOLDINGS, INC., ET AL., No. 00 Civ. 2003
(S.D.N.Y.) (filed March 15, 2000); and EVANS V. SOTHEBY'S HOLDINGS INC., ET AL.,
No. 00 Civ. 2289 (S.D.N.Y.) (filed March 27, 2000).
<PAGE>
These complaints allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder.
Plaintiffs seek to recover damages in unspecified amounts on behalf of
themselves and all other purchasers of the Company's common stock during
different class periods, most commonly February 11, 1997 through February 21,
2000. The Company has not yet answered or otherwise responded to these
complaints.
The shareholder derivative actions referred to above are styled CRANDON
CAPITAL PARTNERS, L.P. V. TAUBMAN, ET AL., No. 00 Civ. 1373 (S.D.N.Y.) (filed
February 23, 2000); HUSCHER V. CURLEY, Case No. 00-021379-CZ (Mich. Cir. Ct.
Oakland County) (filed March 3, 2000); and GRABELL V. BROOKS, ET AL., No. 00
Civ. 2442 (S.D.N.Y.) (filed March 31, 2000). They name as defendants certain of
the Company's directors, and the Company as a nominal defendant. The CRANDON
complaint also names Sotheby's, Inc., a subsidiary of the Company, as a nominal
defendant. These complaints allege various breaches of fiduciary duties, gross
mismanagement and constructive fraud arising from the alleged agreements between
the Company and Christie's. The CRANDON complaint also seeks indemnification
from the defendants on behalf of the Company and Sotheby's Inc. to the extent
that the Company and/or Sotheby's, Inc. is found liable for the individual
defendants' failure to act in compliance with state law. The complaints seek
damages in unspecified amounts on behalf of the Company (and in CRANDON, also on
behalf of Sotheby's, Inc.). The Company has not yet answered or otherwise
responded to these complaints.
In addition, the Company's Board of Directors has recently received
three letters on behalf of putative shareholders (including one letter from the
plaintiff in the HUSCHER action), requesting that the Company investigate and
commence litigation against the individuals responsible for the possible damage
to the Company and Sotheby's, Inc. resulting from the alleged agreements between
the Company and Christie's.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
(i) On February 21, 2000, the Company reported on Form
8-K the announcement of a number of management changes
and developments relating to the investigation by the
United States Department of Justice, other governmental
inquiries and investigations and related civil lawsuits.
<PAGE>
SOTHEBY'S HOLDINGS, INC.
AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed this the 11th day of May, 2000, on its
behalf by the undersigned, thereunto duly authorized and in the capacity
indicated.
SOTHEBY'S HOLDINGS, INC.
By: /s/ Michael L. Gillis
Michael L. Gillis
Vice President, Controller
and Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27. Financial Data Schedule
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 48,814
<SECURITIES> 0
<RECEIVABLES> 337,450
<ALLOWANCES> 12,078
<INVENTORY> 21,577
<CURRENT-ASSETS> 445,253
<PP&E> 234,702
<DEPRECIATION> 74,686
<TOTAL-ASSETS> 818,620
<CURRENT-LIABILITIES> 252,465
<BONDS> 0
0
0
<COMMON> 5,890
<OTHER-SE> 341,108
<TOTAL-LIABILITY-AND-EQUITY> 818,620
<SALES> 0
<TOTAL-REVENUES> 54,770
<CGS> 0
<TOTAL-COSTS> 18,748
<OTHER-EXPENSES> 79,502
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,895
<INCOME-PRETAX> (45,449)
<INCOME-TAX> (16,361)
<INCOME-CONTINUING> (29,088)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,088)
<EPS-BASIC> (.49)
<EPS-DILUTED> (.49)
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