March 24, 2006
Sea Containers to quit ferries, delays filing 10-K
Sea Containers Ltd (NYSE: SCRA , NYSE: SCRB) is to delay filing its 10-K annual report with the SEC.
The news comes just days after the company's founder and president, James B. Sherwood, announced his retirement.
The company is now to withdraw completely from the ferry business. It will take charges for the fourth quarter of 2005 that will reduce its net worth by $475 million. It will thus be out of compliance with various bank borrowing requirements, which must now be renegotiated.
Back in November, 2005, Sea Containers announced it was restructuring its ferry division, and had put its Helsinki-based Silja Oy Ab up for offers. It also announced its intention to sell or charter out several additional ferry vessels and to entertain offers for its SeaStreak business in New York. As a result of this restructuring, the company announced an impairment charge of $99 million, of which $19 million was recorded in the 2005 third quarter results. It says these amounts were preliminary and subject to adjustment, based on changes in the restructuring plan.
"At the time of the November announcement," says Sea Containers, "it was uncertain whether Silja would be sold and, if so, what price could be obtained for the business. Subsequent to the announcement, the sale process was begun. Indications of interest and independent valuations of the Silja business were received, and preliminary bids for Silja's core business were received in January."
Sea Containers also announced in November that it had identified specific containers to be sold, obsolete spare parts and manufacturing machinery no longer required and stated that, as a result, it would take an asset impairment charge of $30 million.
As a result of the proposed Silja sale, the management of the company began to consider the possibility of withdrawing completely from the ferry business and "engaged in the process of evaluating the recoverability of all of its long-lived ferry assets." It also "began a process to evaluate the recoverability of all of its container assets."
At a board meeting on March 20, 2006, management proposals were approved as result of which the company will recognize a non-cash pre-tax charge of approximately $500 million in the fourth quarter 2005, which includes the previously estimated fourth quarter 2005 impairment charge of $112 million. Of the $500 million, approximately $415 million relates to the ferry business, and $85 million to the container business.
Sea Containers says it has obtained an indication of the range of sales prices likely to be achieved for the Silja business, which will now be classified as "held for sale" at December 31, 2005; the related assets will be written down to fair value, less cost to sell. The operations of the Silja business, including related impairments, will be presented as discontinued operations in the company's 2005 financial statements.
Because of the possibility of withdrawing completely from the ferry business, it was more likely than not at December 31, 2005 that there would be disposals of the company's other six vessels in the ferry division prior to the end of their previously estimated useful lives. For this reason, an impairment review of these vessels was undertaken and impairment charges will be recorded on these vessels at December 31, 2005.
The total impairment of ferry assets to be recorded in the fourth quarter 2005 is estimated to be approximately $415 million on a pre-tax basis. The write-down is non-cash in nature.
Subsequent to its November announcement, the company has identified additional containers being held for sale at December 31, 2005, which has increased the previously estimated charge to approximately $40 million. The expected loss on these sales initiated an impairment review on the Company's entire container fleet. This review was done at a container-class level and determined that the carrying amount of one class of containers, refrigerated containers, was not fully recoverable. It has been estimated that an impairment charge will be recognized on these containers of approximately $40 million. In addition, $5 million of goodwill relating to container operations will be written off.
The total impairment of container assets to be recorded in the fourth quarter 2005 is thus estimated to be approximately $85 million on a pre-tax basis. The write-down is non-cash in nature.
The asset impairment charges will reduce the company's net worth by approximately $475 million a, with the result that it will not be able to comply with certain net worth covenants in certain of its bank borrowing agreements.
Sea Containers says it is currently in discussions with the bank lenders regarding appropriate covenant waivers or amendments. and that professional advisors have been appointed to assist it.
On March 20, 2006, the Sea Containers concluded that it would restate its condensed consolidated financial statements for the three months ended March 31, 2005, the six months ended June 30, 2005 and the nine months ended September 30, 2005 to correct the accounting related to the sale in March 2005 of shares in its Orient-Express Hotels investment, which was accounted for in the company's financial statements in accordance with the equity method of accounting. The correction reduces the gain on the sale of Orient-Express Hotels shares by $10.3 million for the three months ended March 31, 2005, the six months ended June 30, 2005 and the nine months ended September 30, 2005 from the previously reported $41.1 million to $30.8 million. The company says the correction is "the result of an error in the accounting for the release of accumulated foreign currency exchange reserves related to this equity method investment. The change increases net losses in these periods, but has no impact on previously reported shareholders' equity and is a non-cash charge."
As a result of the correction, says Sea Containers, "the condensed consolidated financial statements for the interim periods ended March 31, 2005, June 30, 2005 and September 30, 2005, previously filed with the U.S. Securities and Exchange Commission, should no longer be relied upon."
Sea Containers says it expects to reflect the effects of these restatements in the comparative unaudited quarterly financial statements presented in its consolidated financial statements for the year ended December 31, 2005 and in the comparative financial information for March 31, 2005, June 30, 2005 and September 30, 2005 which will be included in the company's quarterly reports on Form 10-Q during 2006.
Robert MacKenzie, President and Chief Executive of Sea Containers, said, "The additional write-downs announced today reflect decisions made by the Sea Containers Board following a rigorous management-driven process of analyzing the company's businesses, in the light of changing market conditions, recent trading performance and with a focus on future sustainable cash flows. Our objective is to reduce the central cost structure and direct management attention on the core independent businesses of marine container leasing, including GE SeaCo, and our GNER rail franchise. The Board will continue to review opportunities for the disposal of its non-core activities.
"We are in dialogue with the company's banks in order to amend or waive compliance with covenants. Management has been encouraged by the initial response from these institutions to work with us to resolve these matters.
"At a commercial level there is progress. Silja's core business has attracted a range of highly qualified bidders with the second round of bids due shortly. Indications are that a sale of the core business can be completed in the second quarter, with the sale of most or all of the remaining ferry assets contemplated during the course of the year.
"The filing of the Company's 2005 Form 10-K annual report with the U.S. Securities and Exchange Commission will be delayed into April in order to allow adequate time to resolve the various bank covenant issues and finalize outstanding accounting matters. The report will be filed as soon as practicable," he concluded.