Sotheby's and Lot Guarantees -SEC Form 8-K

Here is yesterdays SEC form 8-K filing by Sotheby's. The report deals with recent losses due to lot guarantees from the London and Hong Kong sales and the impact on Sothebys. On an Oct 16th AW Blog post I mentioned there was concern in the market place about auction house guarantees. To read the previous post click HERE.

The report 8-K report to the SEC states:

Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off Balance Sheet Arrangement

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 (an “auction guarantee”). In the event that the property sells for less than the minimum guaranteed price, the Company must perform under the auction guarantee by funding 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 guarantee must be paid, but the Company has the right to recover such amount through the future sale of the property.

In October 2008, the Company held an autumn sales series in Hong Kong and a sale of Contemporary Art in London. The aggregate amount of auction guarantees related to property offered at these sales was approximately $60 million. As a result of certain of the guaranteed property failing to sell or selling for less than the minimum guaranteed price, the Company incurred a principal loss of approximately $15 million (pre-tax). The Company will recognize this loss in the third quarter of 2008 as these auction guarantees were outstanding as of September 30, 2008. As a result of the guaranteed property that failed to sell in these auctions, the Company will own inventory currently valued at approximately $11 million, which had an original mid-estimate sale price of approximately $14 million.

Subsequent to the Hong Kong and London sales discussed above and as of October 23, 2008, the Company had outstanding auction guarantees totaling $285.5 million. The Company’s financial exposure under these auction guarantees is reduced by $63.3 million as a result of risk sharing arrangements with unaffiliated partners. Substantially all of the property related to such auction guarantees is being offered at auctions in the fourth quarter of 2008. As of October 23, 2008, $81.9 million of the guaranteed amount had been advanced by the Company.

The Company’s current financial exposure under auction guarantees represents a 50% reduction from one year ago. In light of the current uncertainty in the global economy and volatility in the financial markets, the Company expects to continue to substantially reduce its use of auction guarantees until stability is restored in the global economy and financial markets.