<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: __________ to ___________
Commission file number: 0-24464
THE CRONOS GROUP
(Exact name of Registrant as specified in its charter)
LUXEMBOURG NOT APPLICABLE
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16, ALLEE MARCONI, BOITE POSTALE 260, L-2120 LUXEMBOURG
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area codes:
(352) 453145
-------------------------
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 [ ]
THE NUMBER OF COMMON SHARES OUTSTANDING AS OF APRIL 30, 1999:
CLASS NUMBER OF SHARES OUTSTANDING
-------- ----------------------------
Common 8,858,378
<PAGE> 2
TABLE OF CONTENTS
THE CRONOS GROUP
<TABLE>
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1 -- Financial Statements..............................................................................1
Management Representation.................................................................................1
Consolidated Income Statements............................................................................2
Consolidated Balance Sheets...............................................................................3
Consolidated Statements of Cash Flows.....................................................................4
Consolidated Statements of Shareholders' Equity...........................................................5
Notes to the Consolidated Financial Statements............................................................6
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations............10
General..................................................................................................10
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998..........................11
Liquidity and Capital Resources..........................................................................12
PART II--OTHER INFORMATION
Item 5 -- Other Information................................................................................15
Item 6 -- Exhibits and Reports on Form 8-K.................................................................16
Item 7A - Quantitative and Qualitative Disclosures about Market Risk.......................................16
</TABLE>
<PAGE> 3
The Cronos Group
PART I--FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
MANAGEMENT REPRESENTATION
The interim financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that the disclosures are adequate to
make the information presented not misleading.
These financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's latest
Annual Report on Form 10-K.
This financial information reflects, in the opinion of management, all
adjustments consisting of only normal recurring adjustments necessary to present
fairly the results for the interim periods. The results of operations for such
interim periods are not necessarily indicative of the results to be expected for
the full year.
1
<PAGE> 4
The Cronos Group
CONSOLIDATED INCOME STATEMENTS
(US dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1999
---------- ----------
<S> <C> <C>
GROSS LEASE REVENUE $ 40,526 $ 34,750
Commissions, fees and other income 1,614 1,624
---------- ----------
TOTAL REVENUES 42,140 36,374
---------- ----------
Direct operating expenses 8,711 8,064
Payments to container owners 19,466 16,672
Depreciation and amortization 4,631 4,398
Selling, general and administrative expenses 5,355 4,126
Financing and recomposition expenses 242 --
Interest expense 4,243 3,207
---------- ----------
TOTAL EXPENSES 42,648 36,467
---------- ----------
LOSS BEFORE INCOME TAXES (508) (93)
Income taxes 167 --
---------- ----------
NET LOSS (675) (93)
========== ==========
LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.08) $ (0.01)
========== ==========
BASIC AND DILUTED SHARES OUTSTANDING 8,858,378 8,858,378
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
The Cronos Group
CONSOLIDATED BALANCE SHEETS
(US dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 9,281 $ 7,255
Amounts due from lessees, net 33,215 31,772
Container equipment, net 168,558 151,622
Property and investments, net 32,323 31,389
Other 36,602 31,991
--------- ---------
TOTAL ASSETS $ 279,979 $ 254,029
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts payable to container owners $ 31,314 $ 26,917
Debt and capital lease obligations 148,466 129,725
Current and deferred income taxes 8,085 7,897
Other liabilities 36,027 33,496
--------- ---------
TOTAL LIABILITIES 223,892 198,035
--------- ---------
SHAREHOLDERS' EQUITY
Common shares 17,717 17,717
Additional paid-in capital 49,108 49,108
Share subscriptions receivable (123) (123)
Retained earnings (10,615) (10,708)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 56,087 55,994
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 279,979 $ 254,029
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
The Cronos Group
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1999
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,200 $ 3,358
-------- --------
INVESTING ACTIVITIES:
Purchase of container and other equipment (692) (257)
Proceeds from sales of container and other equipment 543 14,553
-------- --------
NET CASH (USED) PROVIDED FOR INVESTING ACTIVITIES (149) 14,296
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of term debt 1,889 --
Repayments of term debt and capital lease obligations (5,099) (19,680)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (3,210) (19,680)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,159) (2,026)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,455 9,281
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,296 $ 7,255
======== ========
Supplementary disclosure of cash flow information:
Cash paid during the period for:
- - interest $ 4,185 $ 3,386
- - income taxes 28 188
Cash received during the period for:
- - interest 276 195
- - income taxes -- --
Non-cash investing and financing activities:
- - container equipment acquired under capital lease -- --
- - container equipment acquired but unpaid at March 31 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 7
The Cronos Group
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Additional Share other Retained Total
Common paid-in subscriptions comprehensive earnings shareholders'
shares capital receivable income unrestricted equity
-------- ---------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
MARCH 31, 1998
Balance,
December 31, 1997 $17,717 $49,154 $(169) $1,159 $ 5,852 $73,713
Net loss -- -- -- -- (675) (675)
------- ------- ----- ------ -------- -------
Balance,
March 31, 1998 $17,717 $49,154 $(169) $1,159 $ 5,177 $73,038
======= ======= ===== ====== ======== =======
THREE MONTHS ENDED
MARCH 31, 1999
Balance,
December 31, 1998 $17,717 $49,108 $(123) $ -- $(10,615) $56,087
Net loss -- -- -- -- (93) (93)
------- ------- ----- ------ -------- -------
Balance,
March 31, 1999 $17,717 $49,108 $(123) $ -- $(10,708) $55,994
======= ======= ===== ====== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 8
The Cronos Group
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollar amounts in thousands, except per share amounts)
1. Operating segment data
Condensed segment information is provided in the tables below:
<TABLE>
<CAPTION>
Other
US Limited container Owned
Partnerships owners containers Total
------------ --------- ---------- --------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998
Gross lease revenue $14,427 $15,844 $ 10,255 $ 40,526
Operating profit before indirect items 2,960 2,339 247 5,546
Operating profit 751 496 (929) 318
Segment assets 26,923 23,226 210,578 260,727
THREE MONTHS ENDED MARCH 31, 1999
Gross lease revenue $11,795 $14,240 $ 8,715 $ 34,750
Operating profit before indirect items 2,366 1,610 542 4,518
Operating profit 771 143 (411) 503
Segment assets 22,337 20,965 165,928 209,230
</TABLE>
Reconciliation of operating profit for reportable segments to earnings before
taxes:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1999
------ ------
<S> <C> <C>
Operating profit $ 318 $ 503
Selling, general and administrative expenses (445) (425)
Amortization of intangibles (139) (171)
Financing and recomposition expenses (242) --
------ ------
Loss before income taxes $ (508) $ (93)
====== ======
</TABLE>
2. Container equipment
Container equipment is net of accumulated depreciation of $59,640 and $58,099 at
December 31, 1998 and March 31, 1999, respectively.
3. Amounts payable to container owners
Amounts payable to container owners include amounts payable to related parties
of $13,287 and $12,552 at December 31, 1998 and March 31, 1999, respectively.
6
<PAGE> 9
The Cronos Group
4. Debt and capital lease obligations
Debt and capital lease obligations include amounts due within twelve months of
$87,271 and $69,648 at December 31, 1998 and March 31, 1999, respectively.
5. Commitments and contingencies (to be read in conjunction with Note 21 to
the 1998 Consolidated Financial Statements)
i. Commitments
At March 31, 1999, the Company had commitments under operating leases
for office space and equipment which were not material.
The Company had no outstanding orders in respect of container equipment
at March 31, 1999.
ii. Contingencies - general
At December 1998, the Company had $1,598 held in escrow following the
sale in August 1997 of $15,974 of containers to an existing container owner. In
March 1999, this amount was repaid to the Company in return for a corporate
guarantee under the terms of which the Company may be liable to pay $1,598 to
the container owner if a qualified audit opinion is issued for either of the
years ended December 31, 1998 and 1999, respectively.
The Company has deposited $360 in a bank account under the control of
Austrian Courts. This deposit is intended to fulfill liabilities regarding the
operation of certain containers once the proper recipients have been determined
and is discussed further in iv below.
At December 1998, the Company had a further $4,090 deposited in escrow
bank accounts in order to fulfill liabilities in respect of specified containers
once certain issues had been resolved. In February 1999, the Company released
$2,703 of the escrow deposits. This matter is discussed further in iv below. In
March 1999, the Company deposited $550, with respect to another Managed
Container Owner, into an escrow bank account to fulfill liabilities.
At December 31, 1998, Other assets included an amount of $793 that was
held in escrow, in respect of the sale in December 1996 of Cronos Investments
B.V., the release of which was dependent on the agreement of the 1992 to 1996
tax filings. In February 1999, the Dutch tax authorities issued final
assessments in respect of these years. The Company received an initial payment
of $619 and expects to receive a further payment of $42 in final settlement of
the escrow fund.
The Company does not believe it has any other contingent liabilities,
other than as disclosed in Note 14 to the 1998 Consolidated Financial Statements
and as set forth below.
iii. Contingency - SEC investigation
In February 1997, as reported in the Company's Form 6-K, Arthur
Andersen resigned as auditors to The Cronos Group and its subsidiaries and
related partnerships. In connection with its resignation, Arthur Andersen also
prepared a report pursuant to Section 10A of the Securities Exchange Act 1934
("the Act") citing its inability to obtain what it considered to be adequate
responses to its inquiries primarily regarding the payment of $1,500 purportedly
in connection with an obligation to pay professional fees relating to a proposed
strategic alliance. This sum was returned to the Company in January 1997. See
also Note 21 to the 1998 Consolidated Financial Statements. To date current
management has been unable to obtain an adequate explanation of the facts and
circumstances with respect to this payment and its subsequent return.
7
<PAGE> 10
The Cronos Group
The Securities and Exchange Commission ("SEC"), a United States
regulatory agency, subsequently commenced an investigation of the Company in or
about February 1997. The SEC's investigation could result in one or more of
civil, judicial and administrative proceedings against both the Company and
certain individuals, including the assessment of monetary penalties by the SEC
against the Company. Actions taken by the SEC do not preclude additional actions
by any other federal, civil, criminal authorities, by other regulatory
organizations or by other parties.
Based on the limited information available to it, the Company believes
that the investigation by the SEC may relate to possible violations of the
federal securities laws that could include but are not limited to the following
sections: S10b and Rule 10b-5 thereunder, of the Act, (pertaining to the
anti-fraud provisions); S10A of the Act, (pertaining to audit notification
requirements in the event the independent public accountant detects or otherwise
becomes aware of information indicating that an illegal act has or may have
occurred); S13(a) and 13(b) (2) (A) of the Act, (pertaining to the filing of
periodic and other reports with the SEC and pertaining to the implementation of
a system of internal accounting controls, respectively).
The SEC's investigation is still ongoing and some of the present and
former officers and directors and others associated with the Company have given
testimony. However, no conclusion of any alleged wrongdoing by the Company or
any individual has been communicated to the Company by the SEC. Accordingly,
management has not reached a conclusion regarding any possible liability of the
Company.
iv. Contingencies - Austrian allegations
Since 1983, as described in the prospectus dated December 7, 1995, a
subsidiary company has managed containers for Austrian investment entities,
including limited and unlimited partnerships and companies, sponsored by
companies owned by Contrin Holding S.A., a Luxembourg holding company
("Contrin"), and for that company itself. Mr S M Palatin, a former Chairman of
the Board of Directors and former Chief Executive Officer, has been a director
of Contrin. During 1994, ownership of the companies sponsoring these entities
was transferred by Contrin to Barton Holding Ltd, a Bahamian company, which has
owned preferred shares in the Company ("the former preferred shareholder"). See
Note 21 to the 1998 Consolidated Financial Statements for further details
regarding Barton Holding Ltd ("Barton") and transactions involving that company.
Some participants in a number of the aforementioned Austrian investment
entities have made allegations to the Company and Austrian government
authorities regarding the conduct of the investment entities, the sponsoring
companies and companies alleged to be connected to Mr Palatin and regarding Mr
Palatin himself.
Firstly, it is alleged, broadly, that not all container management
income due to participants in these investment entities ("third parties") has
been received by them.
In this connection, a bank account to which $360 was transferred by the
Company, following instructions which may have been falsified, regarding a
purported cash distribution to Austrian investment entities, is under the
control of the Austrian courts which will determine the recipients of the funds.
Management considers that no liability arises as a consequence of making this
transfer, as the funds are under the control of the Austrian courts. In March
1999, the Company together with the Austrian investment entities applied to the
Austrian courts for the release of the funds to the Austrian investment
entities.
Moreover, Austrian courts have initiated investigations against Mr
Palatin and additional persons, including Mr R J Weissenberger, a former
Chairman and director, and Mr A Friedberg, a former director. Mr Palatin and Mr
Friedberg have since been formally charged. Such investigations have not
resulted in any actions being taken against Mr Weissenberger and he has informed
the Company that he does not believe that there is any valid basis for any such
actions to be taken against him.
Management has been unable to obtain definitive information regarding
the relationships suggested in the allegations by the third parties.
8
<PAGE> 11
The Cronos Group
Secondly, it is alleged that funds may have been remitted to the
Company, which were not deposited in a Company bank account and are not
reflected in the Company's accounting records. Specifically, it is alleged that
Mr Palatin acknowledged receipt of funds in the amount of $2,600 during the year
ended December 31, 1995, yet it appears that these funds were received into a
non-Company bank during the year ended December 31, 1994. Previous to these
allegations, the Company's current management was not aware of the receipt of
the $2,600, nor was it aware of Mr Palatin's acknowledgement. The Company has
determined that a $400 distribution, to third party investors, was paid by the
Company in December 1994, into the same bank account into which the $2,600 was
apparently deposited. Management is investigating these allegations and is
continuing to seek definitive information regarding the non-Company bank account
and the receipt and disbursement of the $2,600.
Thirdly, claims relate to alleged transactions between third parties
and companies alleged to be connected to Mr Palatin, involving the purchase and
sale of containers in a manner designed to secure a tax mitigation advantage to
those third parties. It is alleged that sums remain owing to the third parties
by one or more of these companies in connection with the pre-arranged trading in
containers. It is the view of management that the Company was not involved in
these transactions, that the Company has no access to the records of the alleged
transactions and, so far as the Company has managed the containers, the Company
has acted in accordance with instructions from authorised representatives of the
third parties. Management has been unable to quantify the extent, if any, that
the Company might be held to be liable should the claims prove to be
substantiable. The mechanisms, if any, and jurisdictions for initiation of any
claims are also unclear.
Certain of the companies which have sponsored Austrian investment
entities have, under the terms of the relevant management agreement, arranged
for examination of Company records pertaining to the management of containers
owned by those investment entities. Some inquiries were made by representatives
of the third parties. Management is not aware of any unresolved issues in this
respect.
In response to the actions taken by Contrin, the Company terminated
certain of its management agreements with Contrin entities in 1998. Discussions
are taking place between Contrin and the Company and it is anticipated that
these agreements will be reinstated.
Management considers that prudent provision has been made in the
financial statements for the matters in this connection. Details of the
provision are provided in Notes 1r and 3 to the 1998 Consolidated Financial
Statements.
v. Contingencies - Arbitration
Under the terms of the relevant management agreement, an arbitration
process was commenced on or around February 1997 by one of the companies which
had sponsored Austrian entities in respect of distributions made, by the
Company, through its Austrian attorney. In December 1998, the arbitration panel
found that the management agreements with the Austrian investment entities were
valid. The Company has made provision for anticipated legal expenses arising
from the arbitration.
vi. Contingencies and commitments - overall
There is a reasonable possibility that a material change could occur in
respect of commitments and contingencies within one year of the date of these
financial statements.
9
<PAGE> 12
The Cronos Group
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company generates revenues by leasing to ocean carriers marine
containers that are owned either by third-party container owners or by the
Company itself. These leases, which generate most of the Company's revenues, are
generally operating leases.
The following chart summarizes the composition of the Cronos fleet
(based on original equipment cost) at March 31 for each of the periods
indicated:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
U.S. Public Limited Partnerships 35% 34%
Other Container Owners 40% 43%
Owned Containers 25% 23%
Total 100% 100%
</TABLE>
All containers, whether owned or managed, are operated as part of a
single fleet. The Company has discretion over which ocean carriers, container
manufacturers and suppliers of goods and services it deals with. Since the
Company's management agreements with the Managed Container Owners meet the
definition of leases in Statement of Financial Accounting Standards No. 13, they
are accounted for in the Company's financial statements as leases under which
the container owners are lessors and the Company is lessee. The agreements with
container owners generally provide that the Company will make payments to the
container owners based upon the rentals collected from ocean carriers after
deducting direct operating expenses and a management fee. The majority of
payments to container owners are therefore contingent upon the leasing of the
containers by the Company to ocean carriers and the collection of lease rentals.
Minimum lease payments on the minority of agreements that have fixed payment
terms are presented in Note 14(c) to the 1998 Consolidated Financial Statements.
The majority of payments to container owners represent a percentage of the
rentals collected from the ocean carriers to whom containers are leased by the
Company.
The following chart summarizes the composition of the Cronos fleet
(based on TEU thousands), by equipment type, at March 31 for each of the periods
indicated:
<TABLE>
<CAPTION>
Equipment Type 1998 1999
- -------------- ------ ------
<S> <C> <C>
Dry cargo 344.7 335.3
Refrigerated 15.5 14.6
Tank 2.0 2.0
Roll-Trailer 2.1 2.2
Cellular palletwide containers ("CPCs") 2.4 2.4
Other dry freight specials 1.7 2.5
Total fleet 368.4 359.0
</TABLE>
10
<PAGE> 13
The Cronos Group
Utilization of the Company's containers declined in 1998 and during the
first three months of 1999, reflecting the economic position in Asian, South
American and other markets. However, recent growth in intra-Asian trade and
improving lease-out activity in other key locations have expanded the
requirement for leased containers in certain locations. As a result of these
slowly improving trends, trade volumes in several markets have increased and
utilization of the Company's equipment has been improving in recent weeks.
However, per-diem rental rates remain unchanged and container imbalances are
expected to continue for the remainder of 1999. The Company will selectively
reposition available equipment to higher demand locations when it believes that
the impact will have a positive effect on operations.
The following chart summarizes the combined utilization of the Cronos
fleet (based on approximate original equipment cost) at the dates indicated:
<TABLE>
<CAPTION>
March 31 March 31 April 30
1998 1999 1999
<S> <C> <C> <C>
Utilization 82.1% 72.6% 73.0%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
During the first three months of 1999, the Company made significant
reductions to selling, general and administrative expenses in line with a
restructuring program that was announced in late 1998. This program involves the
reorganization of the Company's key activities together with the termination of
certain employee positions and is expected to be substantially completed by June
1999. Also, the Company reduced short-term debt by $14.9 million in accordance
with its strategy to refinance certain short-term debt obligations and thereby
reduce the cost of debt financing. To date, this strategy has resulted in the
sale of container equipment to various third party investor programs and
additional transactions are anticipated in the second quarter of 1999.
Operating profit of $0.5 million in the first quarter of 1999 was $0.2
million higher than in the corresponding period of 1998. Reductions in selling,
general and administrative expenses, interest expense and depreciation expense
more than offset reduced income from both the owned and managed container
fleets.
Gross lease revenue of $34.8 million in the first quarter of 1999 was
$5.8 million, or 14.3%, lower than in the corresponding prior year period due to
the combined effect of reduced utilization and per-diem rates, which represented
approximately $4.9 million of the decrease, together with a lower fleet size
that accounted for approximately $0.9 million of the reduction.
Commissions, fees and other income of $1.6 million in the three months
to March 31, 1999 were almost unchanged from the corresponding period in 1998.
Increased income, primarily from specialized container products, was partially
offset by reduced fees from the disposal of containers and lower finance lease
income.
Direct operating expenses were $8.1 million in the first quarter of
1999, a decrease of $0.6 million, or 7.4%, compared to the corresponding quarter
in 1998. Increased storage and repositioning costs of $0.8 million, reflecting a
larger off-hire fleet, were more than offset by a $1.3 million reduction in
charges in respect of doubtful accounts.
Payments to container owners decreased to $16.7 million in the three
months ended March 31, 1999, a decrease of $2.8 million, or 14.4%, compared to
the corresponding period in 1998.
Payments to U.S. Limited Partnerships decreased by $1.9 million to $6.8
million, a 21.5% decrease compared to the first quarter of 1998. The decline in
net lease revenue for this segment was caused by lower average utilization and
per-diem rates as well as a smaller container fleet. The U.S. Limited
Partnership fleet declined from 137,009 TEU at March 31, 1998, to 127,902 TEU at
March 31, 1999 as a result of the disposal of older container equipment
including sales of equipment to the Other Container Owner segment.
11
<PAGE> 14
The Cronos Group
Payments to Other Container Owners were $9.9 million in the first
quarter of 1999, a decrease of $0.9 million, or 8.6%, compared to the same
period of 1998 as lower average utilization and per-diem rates more than offset
a higher average fleet size. The increase in the average fleet size was due to
transactions involving the sale of equipment from the Owned to the Other
Container Owner segment in the first quarter of 1999.
Depreciation and amortization decreased by $0.2 million, or 5.0%, in
the first three months of 1999 to $4.4 million due to container sales from the
Owned to the Other Container Owner segment in the three months ended March 31,
1999.
Selling, general and administrative expenses decreased to $4.1 million
for the three months ended March 31, 1999 from $5.4 million for the three months
ended March 31, 1998, a decrease of $1.2 million or 23.0%. The decrease was due
to reductions of $0.7 million in manpower and manpower related costs together
with lower information technology, professional services and communications
costs.
Interest expense of $3.2 million for the three months ended March 31,
1999 was $1.0 million lower, or 24.4%, compared to the same period a year ago
due primarily to a reduction in the average debt balance from $170.0 million to
$140.1 million between the first quarters of 1998 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash from Operating Activities: Net cash provided by operating
activities was $3.4 million and $2.2 million in first three months of 1999 and
1998, respectively. The net cash generated in 1999 reflected earnings from
operations together with the release of $4.9 million of deposits which had been
held in escrow, of which $2.7 million was utilized to make payments to third
party container owners. The net cash generated in 1998 reflected earnings from
operations together with a $5 million decrease in new container equipment for
resale.
Cash for Investing Activities: Net cash provided by investing
activities was $14.3 million in the first three months of 1999 reflecting sales
of container equipment to third party container owners. Net cash used for
investing activities was $0.1 million in the first quarter of 1998 reflecting
purchases of container and other equipment of $0.7 million, which was partly
offset by proceeds from equipment sales.
Cash from Financing Activities: Net cash used by financing activities
was $19.7 million in the first quarter of 1999 compared to $3.2 million in the
corresponding period of 1998. In the first three months of 1999, repayments of
debt and capital lease obligations included $14.9 million of short-term debt
repayments that were generated from proceeds of container equipment sales. In
1998, debt repayments of $5.1 million from operating cash were partly offset by
$1.9 million of additional funding.
CAPITAL RESOURCES
In 1993, the Company entered into a Credit Agreement with a group of
banks for which Fleet Bank, N.A. acts as Agent. This Credit Agreement, as
subsequently amended, is herein called the "Bank Facility". All borrowings under
the Bank Facility are secured by container equipment purchased with funds drawn
under it. The Bank Facility imposes certain financial covenants on the Company,
including requirements not to exceed a specific leverage ratio and to maintain a
minimum consolidated tangible net worth, a minimum debt service coverage ratio,
a fixed charge coverage ratio and other earnings related covenants.
An Amended and Restated Credit Agreement was executed in June 1997,
subject to various actions being taken by the Company including the provision of
additional collateral. This Agreement was further amended in July 1997 and
converted the facility to a term loan, payable in installments, with a final
maturity date of May 31, 1998. This Agreement was again amended in December 1997
to amend the covenants relating to maintenance of various financial ratios.
12
<PAGE> 15
The Cronos Group
The Company did not repay the Bank Facility at the amended maturity
date of May 31, 1998. On June 30, 1998, the Company entered into a Third
Amendment to the Bank Facility (the "Third Amendment"). Under the Third
Amendment, the remaining principal amount of approximately $36.8 million was to
be amortized in varying monthly installments, beginning July 31, 1998 and ending
January 8, 1999, including a payment of approximately $27.2 million on September
30, 1998. These installments were subject to acceleration upon the occurrence of
an event of default. Interest was payable monthly at a rate per annum equal to
2.5% over the higher of (i) Fleet Bank's prime rate or (ii) the Federal Funds
Rate plus 50 basis points. Also, under the Third Amendment, the Company agreed
to provide the Banks with a security interest in certain shares of Transamerica
Corporation when they are released to the Company under a 1996 escrow agreement.
See Note 9 to the 1998 Consolidated Financial Statements.
The principal payments due under the Third Amendment on September 30,
1998 and January 8, 1999 were not made. The balance outstanding on the facility
at December 31, 1998 was $33.1 million. In the first three months of 1999, the
Company repaid $7.3 million of the Bank Facility leaving an outstanding balance
of $25.8 million. In March 1999, the Company and the Banks entered into a
Forbearance Agreement and Fourth Amendment to the Bank Facility with a final
maturity date of September 1999 and with varying principal payments due between
April and September. The Fourth Amendment became effective as of March 31, 1999
subject to the satisfaction by April 15, 1999 of various conditions. This date
was extended to April 30, 1999. The Company furnished the required legal
opinions and other loan documentation by April 30 and these are now under
review.
In connection with the July 1997 amendment, the Company assigned to the
Banks as additional collateral certain promissory notes of Mr Palatin, together
with certain shares of the Company's stock that had been pledged by Mr Palatin
as collateral for the promissory notes. See Note 14 to the Company's 1998
Consolidated Financial Statements. Mr Palatin has defaulted on these notes and
the Banks have notified the Company of their intention, depending on market
conditions, to exercise their rights to sell all or part of 1,463,636 shares
under the collateral assignment in order to satisfy, to the extent of the net
proceeds, Mr Palatin's obligations under these notes. Any resulting payments on
these notes will reduce the Company's obligations under the Bank Facility.
In December 1994, the Company borrowed $20.0 million under a Note
Purchase Agreement with Sun Life Insurance Company of America ("Sun").
Initially, the loan became due and payable in equal quarterly installments
ending January 2003. However, during 1997, the Company was not in compliance
with a financial ratio covenant, and on November 1, 1997, the Agreement was
amended, in exchange for a waiver, to provide that the loan would become due and
payable on May 31, 1998. The Company did not repay the $13.9 million balance of
the loan on that date. In July 1998, the Company agreed and executed an
Amendment to the Note Purchase Agreement with the current holders of the Notes
(as assignees of Sun). Under the Amendment, 70% of the principal amount became
due and payable on September 30, 1998 and the balance on January 31, 1999.
Prepayments were required in the event of certain issuances of stock, sales of
assets or refinancing by the Company. Interest was payable monthly at the
Citibank, N.A. prime rate plus 2%.
The Company did not make the principal payments due on September 30,
1998 and January 31, 1999 and the balance outstanding under the facility at
December 31, 1998 was $13.9 million. A second Amendment to the Note Purchase
Agreement was executed in January 1999 that extends the final maturity date to
September 1999 and also provides for interim principal payments to be made in
April and July. $1.2 million was repaid in February 1999 in lieu of the April
payment.
In March 1999, the Company agreed an amendment to a $20.0 million short
term revolving credit facility which had a maturity date of March 31, 1999,
under which $10.3 million was outstanding at December 31, 1998. The amendment
converted the facility to a short-term loan with a final maturity date of
November 1999 and with varying principal payments due between April and November
1999. Payments totalling $2.0 million have been made in the second quarter of
1999.
The directors believe they are taking the necessary action to secure
alternative sources of finance and believe that refinancing will be arranged to
meet the Company's amended payment obligations.
13
<PAGE> 16
The Cronos Group
At March 31, 1999 the Company was not in compliance with various financial
covenants with various lenders. Waivers of the covenant breaches will be
requested and the Company believes that these will be granted.
YEAR 2000
The Company's computer systems are currently undergoing modifications
in order to render the systems ready for the year 2000. The Company has
completed a detailed inventory of all software and hardware systems and has
identified all components that need to be modified. The Company has completed
all the necessary changes and is now performing the required tests in a
dedicated year 2000 environment. The Company anticipates that all testing will
be completed by mid 1999. The Company has contacted all of its critical business
suppliers and has been advised that their systems are year 2000 compliant.
Expenses associated with addressing the year 2000 issues are being recognized as
incurred. Management has not yet assessed the year 2000 compliance expense but
does not anticipate the costs incurred to date or to be incurred in the future
to be in excess of $0.5 million. The Company believes it will be able to resolve
any major year 2000 issues.
The Company is aware of the implications of a year 2000 computer system
failure and is currently in the process of developing its contingency plans.
Whilst management believes the possibility of a year 2000 system failure to be
remote, if the Company's internal systems or those of its critical business
suppliers fail, the Company's consolidated financial position, liquidity or
results of operations may be adversely affected.
The Company has assessed the introduction of a single European
Currency, the Euro, and believes that it will not be materially affected. In the
past, the effects of inflation on administrative and operating expenses have
been largely offset by the Company's ability to increase the operational
economies of scale through expansion of the fleet.
14
<PAGE> 17
The Cronos Group
PART II -- OTHER INFORMATION
ITEM 5 -- OTHER INFORMATION
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements relating to
future results of the Company, including certain projections and business
trends, that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projected as a result of certain risks and uncertainties, including
but not limited to changes in: economic conditions; trade policies; demand for
and market acceptance of leased marine cargo containers; competitive utilization
and per-diem rental rate pressures; as well as other risks and uncertainties,
including but not limited to those described above in the discussion of the
marine container leasing business under Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations; and those detailed
from time to time in the filings of the Company with the Securities and Exchange
Commission.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management of the Company has been informed that, in addition to the
persons disclosed in the Company's Form 10-K/A, the following persons are also
the beneficial owners of five percent or more of the Company's voting
securities:
<TABLE>
<CAPTION>
Title of Class Identity of Person or Group Amount owned(1) Percent of Class
- -------------- --------------------------- --------------- ----------------
<S> <C> <C> <C>
Common Shares, par value $2 Paul W Blavin, 635,000 7.2%
29621 N. Western Highway,
Southfield, MI 48034
Waveland Partners,L.P., 539,500 6.1%
333 West Wacker Drive,
Chicago, IL 60606
Lawrence A Heller, 452,600 5.1%
6 East 45th Street, Suite 805
New York, NY 10019
</TABLE>
(1) Except as otherwise specifically noted, the number of shares stated as
being owned beneficially includes (a) all options and warrants under
which persons could acquire Common Shares currently and within 60 days
following the date hereof and (b) shares held beneficially by spouses,
minor children or grandchildren.
Information with respect to beneficial ownership of the Company's
Common Stock is based in part upon information contained in filings with the
Securities and Exchange Commission and in part on information obtained directly
from the holders. The percentage shown in the foregoing table have been computed
on the basis of shares outstanding on April 30, 1999.
15
<PAGE> 18
The Cronos Group
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On March 15, 1999, a Current Report on Form 8-K was filed by the
Company announcing that it would be complying with the reporting requirements
applicable generally to U.S. public companies and that its Common Stock would be
traded under the symbol "CRNS".
On April 1, 1999, a Current Report on Form 8-K was filed by the Company
announcing the resignation of Rudolf J Weissenberger, Chairman of the Board of
Directors and non-executive director, and Axel Friedberg, non-executive
director. Dennis J Tietz and Charles Tharp were appointed Chairman and
non-executive director, respectively.
On April 13, 1999, a Current Report on Form 8-K was filed by the
Company announcing the resignation of Stephen J Brocato, president of the
Company's leasing division.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk: outstanding borrowings are subject to interest rate
risk. Approximately 65% and 64% of total borrowings had floating interest rates
at December 31, 1998 and March 31, 1999, respectively.
Exchange rate risk: Substantially all of the Company's revenues are
billed and paid in U.S. dollars and a significant portion of costs are billed
and paid in U. S. dollars. Of the remaining costs, the majority are individually
small, unpredictable and incurred in various denominations and thus are not
suitable for cost effective hedging. From, time to time, Cronos hedges a portion
of the expenses that are predictable and are principally in U.K. pounds
sterling. In addition, almost all of the Company's container purchases are paid
for in U.S. dollars.
As exchange rates are outside of the control of the Company, there can
be no assurance that such fluctuations will not adversely effect its results of
operations and financial condition.
16
<PAGE> 19
The Cronos Group
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CRONOS GROUP
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
By /s/ P J Younger Executive Vice President, Chief Financial May 11, 1999
------------------ Officer and Chief Accounting Officer
Peter J. Younger (Principal Financial and Accounting Officer)
</TABLE>
17
<PAGE> 20
The Cronos Group
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
27. Financial Data Schedule 19
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND THE CONSOLIDATED INCOME
STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,255
<SECURITIES> 1,403
<RECEIVABLES> 35,831
<ALLOWANCES> 4,059
<INVENTORY> 189
<CURRENT-ASSETS> 71,700
<PP&E> 232,925
<DEPRECIATION> 68,620
<TOTAL-ASSETS> 254,029
<CURRENT-LIABILITIES> 123,583
<BONDS> 129,725
0
0
<COMMON> 17,717
<OTHER-SE> 38,277
<TOTAL-LIABILITY-AND-EQUITY> 254,029
<SALES> 34,750
<TOTAL-REVENUES> 36,374
<CGS> 0
<TOTAL-COSTS> 24,736
<OTHER-EXPENSES> 8,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,207
<INCOME-PRETAX> (93)
<INCOME-TAX> 0
<INCOME-CONTINUING> (93)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (93)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
