<PAGE> 1
- --------------------------------------------------------------------------------
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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: SEPTEMBER 30, 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)
<TABLE>
<S> <C>
LUXEMBOURG NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
</TABLE>
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 November 11, 1999:
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
<S> <C>
Common 9,158,378
</TABLE>
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<PAGE> 2
THE CRONOS GROUP
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION............................. 3
Item 1 -- Financial Statements.............................. 3
Management Representation.............................. 3
Consolidated Statements of Operations.................. 4
Consolidated Balance Sheets............................ 5
Consolidated Statements of Cash Flows.................. 6
Consolidated Statements of Shareholders' Equity........ 7
Notes to the Consolidated Financial Statements......... 8
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations... 12
General................................................ 12
Three Months Ended September 30, 1999, Compared to
Three Months Ended September 30, 1998................. 14
Nine Months Ended September 30, 1999, Compared to Nine
Months Ended September 30, 1998....................... 15
Liquidity and Capital Resources........................ 16
Item 3 -- Quantitative and Qualitative Disclosures about
Market Risk............................................ 17
PART II -- OTHER INFORMATION................................ 18
Item 1 -- Legal Proceedings............................... 18
Item 2 -- Changes in Securities and Use of Proceeds....... 18
Item 3 -- Defaults Upon Senior Securities................. 18
Item 4 -- Submission of Matters to a Vote of Security
Holders................................................ 18
Item 5 -- Other Information............................... 19
Item 6 -- Exhibits and Reports on Form 8-K................ 19
</TABLE>
2
<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 annual 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 necessary to present fairly, the results for the interim periods.
Such adjustments consist of only normal recurring adjustments. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year.
3
<PAGE> 4
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
GROSS LEASE REVENUE........................... $ 32,307 $ 39,943 $ 99,139 $ 120,511
Commissions, fees and other income
US Limited Partnerships..................... 334 343 1,020 1,013
Unrelated parties........................... 1,665 1,025 4,267 3,542
Gain on marketable securities................. 1,200 -- 1,200 --
--------- --------- --------- ---------
TOTAL REVENUES................................ 35,506 41,311 105,626 125,066
--------- --------- --------- ---------
Direct operating expenses................... 7,365 9,836 23,228 27,051
Payments to container owners
US Limited Partnerships..................... 6,131 7,474 18,666 24,812
Unrelated parties........................... 10,297 11,104 29,535 32,847
Depreciation and amortization................. 3,991 4,576 12,376 14,028
Selling, general and administrative
expenses.................................... 4,175 5,515 12,314 16,741
Financing and recomposition expenses.......... -- 571 -- 1,055
Interest expense.............................. 2,288 4,132 8,444 12,422
--------- --------- --------- ---------
TOTAL EXPENSES................................ 34,247 43,208 104,563 128,956
--------- --------- --------- ---------
PROFIT (LOSS) BEFORE INCOME TAXES........... 1,259 (1,897) 1,063 (3,890)
Income taxes.................................. -- 67 -- 302
--------- --------- --------- ---------
NET PROFIT (LOSS)............................. $ 1,259 $ (1,964) $ 1,063 $ (4,192)
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE -- (BASIC AND
DILUTED).................................... $ 0.14 $ (0.22) $ 0.12 $ (0.47)
========= ========= ========= =========
BASIC AND DILUTED SHARES OUTSTANDING.......... 9,058,378 8,858,378 8,925,045 8,858,378
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
THE CRONOS GROUP
CONSOLIDATED BALANCE SHEETS
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 8,169 $ 9,281
Amounts due from lessees (net).............................. 27,619 33,215
Amounts receivable from container owners.................... 9,826 10,265
New container equipment for resale.......................... 10,084 315
Net investment in direct finance leases..................... 1,325 3,504
Investments................................................. 2,321 1,458
Container equipment (net)................................... 139,566 168,243
Property and other equipment (net).......................... 12,142 13,273
Intangible assets........................................... 13,576 14,088
Amounts receivable from related parties (net)............... -- 5,500
Other assets including prepayments.......................... 20,610 20,837
-------- --------
TOTAL ASSETS................................................ $245,238 $279,979
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts payable to container owners......................... $ 26,261 $ 31,314
Amounts payable to container manufacturers.................. 10,119 101
Other amounts payable and accrued expenses.................. 17,965 23,159
Debt and capital lease obligations.......................... 113,891 148,466
Current and deferred income taxes........................... 7,467 8,085
Deferred income and unamortized acquisition fees............ 10,864 12,767
-------- --------
TOTAL LIABILITIES........................................... 186,567 223,892
-------- --------
SHAREHOLDERS' EQUITY
Common shares............................................... 18,317 17,717
Additional paid-in capital.................................. 49,928 49,108
Share subscriptions receivable.............................. (82) (123)
Deficit..................................................... (9,492) (10,615)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 58,671 56,087
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $245,238 $279,979
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 8,566 $10,466
-------- -------
INVESTING ACTIVITIES:
Purchase of container and other equipment................... (304) (2,914)
Proceeds from sales of container and other equipment........ 19,553 1,993
Proceeds from sale of marketable securities................. 308 --
Proceeds from sale of investment in finance lease
equipment................................................. 1,000 --
Repayment of amounts receivable from related party.......... 5,279 --
-------- -------
NET CASH PROVIDED (USED) FOR INVESTING ACTIVITIES........... 25,836 (921)
-------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of debt.............................. 50,208 1,889
Repayments of term debt and capital lease obligations....... (85,722) (15,609)
-------- -------
NET CASH USED BY FINANCING ACTIVITIES....................... (35,514) (13,720)
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (1,112) (4,175)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 9,281 14,455
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 8,169 $10,280
======== =======
Supplementary disclosure of cash flow information:
Cash paid during the period for:
interest............................................... $ 8,519 $12,898
income taxes........................................... 483 563
Cash received during the period for:
interest............................................... 416 904
income taxes........................................... 29 229
Non-cash investing and financing activities:
container equipment acquired under capital lease....... 1,257 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED RETAINED
ADDITIONAL SHARE OTHER RETAINED EARNINGS TOTAL
COMMON PAID-IN SUBSCRIPTIONS COMPREHENSIVE EARNINGS (DEFICIT) SHAREHOLDERS'
SHARES CAPITAL RECEIVABLE INCOME RESTRICTED UNRESTRICTED EQUITY
------- ---------- ------------- ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30,
1999
Balance, December 31, 1998..... $17,717 $49,108 $(123) $ -- $1,772 $(12,387) $56,087
Common share grant............. 600 615 -- -- 60 -- 1,275
Grant of common share
warrants..................... -- 246 -- -- -- -- 246
MEIP lapses.................... -- (41) 41 -- -- -- --
Net profit..................... -- -- -- -- -- 1,063 1,063
------- ------- ----- ------ ------ -------- -------
Balance, September 30, 1999.... $18,317 $49,928 $ (82) $ -- $1,832 $(11,324) $58,671
======= ======= ===== ====== ====== ======== =======
NINE MONTHS ENDED SEPTEMBER 30,
1998
Balance, December 31, 1997..... $17,717 $49,154 $(169) $1,159 $1,772 $ 4,080 $73,713
Net loss....................... -- -- -- -- -- (4,192) (4,192)
------- ------- ----- ------ ------ -------- -------
Balance, September 30, 1998.... $17,717 $49,154 $(169) $1,159 $1,772 $ (112) $69,521
======= ======= ===== ====== ====== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 8
THE CRONOS GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. The consolidated financial statements include the accounts of The Cronos
Group and its wholly-owned subsidiaries (the "Company"). All material
intercompany accounts and transactions have been eliminated.
The Company's accounting records are maintained in United States dollars
and the consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States.
2. 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 SEPTEMBER 30, 1999
Gross lease revenue................................... $10,629 $14,063 $ 7,615 $ 32,307
Operating profit before indirect items................ 1,967 1,214 1,331 4,512
Operating profit...................................... 375 89 651 1,115
Segment assets........................................ 19,859 20,048 160,655 200,562
THREE MONTHS ENDED SEPTEMBER 30, 1998
Gross lease revenue................................... $13,652 $16,319 $ 9,972 $ 39,943
Operating profit before indirect items................ 2,849 1,658 -- 4,507
Operating profit (loss)............................... 818 (224) (1,222) (628)
Segment assets........................................ 24,898 22,427 194,190 241,515
NINE MONTHS ENDED SEPTEMBER 30, 1999
Gross lease revenue................................... $33,162 $41,841 $ 24,136 $ 99,139
Operating profit before indirect items................ 6,488 4,316 2,635 13,439
Operating profit...................................... 1,755 271 73 2,099
Segment assets........................................ 19,859 20,048 160,655 200,562
NINE MONTHS ENDED SEPTEMBER 30, 1998
Gross lease revenue................................... $42,141 $47,913 $ 30,457 $120,511
Operating profit before indirect items................ 8,589 5,740 702 15,031
Operating profit (loss)............................... 2,232 (94) (3,066) (928)
Segment assets........................................ 24,898 22,427 194,190 241,515
</TABLE>
Reconciliation of operating profit (loss) for reportable segments to profit
(loss) before taxes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1999 1998 1999 1998
------- -------- ------- -------
<S> <C> <C> <C> <C>
Operating profit (loss).............................. $1,115 $ (628) $ 2,099 $ (928)
Gain on marketable securities........................ 1,200 -- 1,200 --
Selling, general and administrative expenses......... (885) (555) (1,724) (1,468)
Amortization of intangibles.......................... (171) (143) (512) (439)
Financing and recomposition expenses................. -- (571) -- (1,055)
------ ------- ------- -------
Profit (loss) before income taxes.................... $1,259 $(1,897) $ 1,063 $(3,890)
====== ======= ======= =======
</TABLE>
8
<PAGE> 9
THE CRONOS GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EARNINGS PER COMMON SHARE
Basic earnings per share have been calculated by dividing net profit (loss)
available to common shareholders by the weighted average number of common shares
outstanding during each of the periods presented.
The average market price of the common shares during the period was less
than the exercise price of options and warrants to acquire common shares and
accordingly there was no dilution.
4. AMOUNTS RECEIVABLE FROM CONTAINER OWNERS
Amounts receivable from container owners include amounts due from related
parties of $6.6 million and $7.7 million at September 30, 1999 and December 31,
1998, respectively.
5. INVESTMENTS IN RELATED PARTIES
Investments in related parties comprise general partnership investments and
further limited partnership investments in ten sponsored funds. These general
and limited partner investments are accounted for on the equity method. The
subsidiary of the Company which acts as a general partner maintains insurance
for bodily injury, death and property damage for which a partnership may be
liable, and may be contingently liable for uninsured obligations of the
partnerships.
The investment in US Limited Partnerships was $0.1 million and $0.1 million
at September 30, 1999 and December 31, 1998, respectively.
6. CONTAINER EQUIPMENT
Container equipment is net of accumulated depreciation of $62.5 million and
$59.6 million at September 30, 1999 and December 31, 1998, respectively.
7. AMOUNTS PAYABLE TO CONTAINER OWNERS
Amounts payable to container owners include amounts payable to related
parties of $11.5 million and $13.3 million at September 30, 1999 and December
31, 1998, respectively.
8. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations include amounts due within twelve months
of $16.6 million and $87.3 million at September 30, 1999 and December 31, 1998,
respectively. On August 2, 1999, the Company closed a $50.0 million re-financing
transaction, the proceeds of which were used to refinance $47.8 million of
short-term debt. See also "Liquidity and Capital Resources-Capital Resources".
9
<PAGE> 10
THE CRONOS GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (TO BE READ IN CONJUNCTION WITH NOTE 21 TO THE
1998 CONSOLIDATED FINANCIAL STATEMENTS)
i. Commitments
The Company has placed orders with container manufacturers of $7.5 million
at September 30, 1999. These orders relate to containers to be purchased for
container owners and for the Company.
ii. Contingencies -- Austrian allegations
Since 1983, a subsidiary of the Company has managed containers for Austrian
investment entities sponsored by companies owned or controlled by Contrin
Holding S.A., a Luxembourg holding company ("Contrin"), and for Contrin itself.
The Company is in a dispute with Contrin over $2.6 million that Contrin
claims was remitted to the Company in 1994 for the purchase of containers, but
that the Company asserts that it did not receive.
The Company's former Chairman, Stefan M. Palatin, purportedly acknowledged
in 1995 the receipt of the $2.6 million for the purchase of containers, but the
monies were not deposited into a Company account. Prior to Contrin's allegation
that the former Chairman of the Company had acknowledged receipt of the $2.6
million, the Company's current management had not been aware of the Chairman's
purported acknowledgement. In addition, the Company has determined that a $0.4
million distribution to third party Contrin investors was paid by the Company in
December 1994 into the same bank account into which the $2.6 million was
apparently deposited.
Contrin has advised the Company that Contrin will commence proceedings
against the Company to collect the $2.6 million, plus interest, if this sum is
not paid by the Company to Contrin. While the Company believes that it has
meritorious defenses to Contrin's claims, the Company is unable to predict the
outcome of the dispute.
Contrin investors have also made claims with respect 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. Current management of
the Company believes that the Company was not involved in these transactions,
that the Company had 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 authorized representatives of the third
parties.
10
<PAGE> 11
THE CRONOS GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Special Litigation Committee of the Board is currently investigating
transactions between the Company and Mr. Palatin and entities, including
Contrin, that may be related to Mr. Palatin. The Committee anticipates
completing its investigation by the end of 1999. It has been granted the
authority by the Board to pursue appropriate remedies in the event that it
concludes that one or more present or former officers or directors of the
Company engaged in misconduct or improper self-dealing that has damaged the
Company.
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.
Management considers that prudent provision has been made in the financial
statements for the matters in this connection. 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. Details of the
provision are provided in Notes 1r and 3 to the 1998 Consolidated Financial
Statements.
iii. 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 that
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.
See also Note 14 to the 1998 Consolidated Financial Statements.
11
<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 September 30 for each of the periods indicated:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
U.S. Public Limited Partnerships............................ 34% 34%
Other Container Owners...................................... 44% 41%
Owned Containers............................................ 22% 25%
--- ---
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 September 30 for each of the periods
indicated:
<TABLE>
EQUIPMENT TYPE 1999 1998
- ------------------------------------------------------------ ----- -----
<S> <C> <C>
Dry cargo................................................... 341.7 340.0
Refrigerated................................................ 13.9 14.8
Tank........................................................ 2.0 2.0
Roll-Trailer................................................ 1.9 2.3
Cellular palletwide containers ("CPCs")..................... 2.5 2.4
Other dry freight specials.................................. 2.6 2.0
----- -----
Total fleet....................................... 364.6 363.5
===== =====
</TABLE>
12
<PAGE> 13
THE CRONOS GROUP
In recent months, economic reforms in Asia, as well as in Latin America,
have begun to produce gradual improvement in terms of world trade, and there are
preliminary indications that containerized trade volumes from North America and
Europe to Asia, in particular, may be increasing. Intra-Asian trade, which also
had stagnated since the Asia financial crisis began nearly two years ago, has
shown increased activity in recent months. These favorable signs, however, have
yet to produce any significant positive impact on the Company's operating
performance. In spite of the reduced redelivery of on-hire equipment by the
ocean carriers, per-diem rental rates have continued to decline as a result of
competitive market conditions and high inventories.
The Company continues to take advantage of its marketing resources in order
to seek out leasing opportunities during this period. The short-term objective
is to improve utilization by offering greater leasing incentives and actively
repositioning equipment to higher-demand locations. While this short-term
strategy will increase repositioning expenses, it may also minimize those
expenses related to storing off-hire containers. These measures will also
provide the longer-term advantage of placing the containers where the demand is
greatest.
The following chart summarizes the combined utilization of the Cronos fleet
(based on approximate original equipment cost) at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1999 1998 1998
------------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Utilization............. 77.0% 75.2% 72.6% 75.3% 78.3%
</TABLE>
In the first nine months of 1999, the Company implemented a strategy that
was designed to reduce overhead expenses and to refinance short-term debt.
Firstly, the Company has made significant reductions to selling, general
and administrative expenses under a program that involved the reorganization of
key activities together with the termination of certain employee positions.
Secondly, in the first half of the year the Company reduced its short-term
debt by $20.6 million under a program that involved the sale of container
equipment to third party investor programs. The refinancing plan was completed
in August with the closure of a $50 million transaction, the proceeds of which
were used to refinance $47.8 million of debt and capital lease obligations. See
also "Liquidity and Capital Resources-Capital Resources".
13
<PAGE> 14
THE CRONOS GROUP
THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Operating profit for the three months ended September 30, 1999, was $1.1
million compared to a loss of $0.6 million during the corresponding period of
1998. Reduced income from both the owned and managed fleet was more than offset
by lower selling, general and administrative expenses, interest expense and
depreciation expense and higher commission, fees and other operating income.
Gross lease revenue of $32.3 million in the three months ended September
30, 1999, was $7.6 million, or 19.1%, lower than in the corresponding period of
1998. Of this decline, $7.3 million can be attributed to the combined effect of
reduced utilization and lower per diem rates and $0.3 million is attributable to
a smaller fleet size.
Commissions, fees and other income of $2.0 million were $0.6 million, or
46.1%, higher than in the same period of 1998. Increased income from specialized
container products and fees earned on container disposals were partly offset by
lower finance lease income.
Gain on marketable securities represents the profit recognized on shares
which were released from escrow further to the partial resolution of
post-closing reports and adjustments in connection with an Agreement and Plan of
Merger (see Note 9 to the 1998 Consolidated Financial Statements).
Direct operating expenses of $7.4 million for the three months to September
30, 1999, were $2.5 million, or 25.1%, lower than the third quarter of 1998.
Lower charges for doubtful accounts, repositioning, repairs and handling were
partly offset by higher storage expenses.
Payments to container owners of $16.4 million during the three months ended
September 30, 1999, were $2.2 million, or 11.6%, lower when compared to the
corresponding period in 1998.
Payments to U.S. Limited Partnerships amounted to $6.1 million, a decline
of $1.3 million or 18.0%, when compared to the corresponding period in 1998.
Lower average utilization and per-diem rates, as well as a smaller container
fleet resulted in a decline in gross lease revenue for this segment.
Payments to Other Container Owners were $10.3 million during the three
months to September 30, 1999, a decrease of $0.8 million, or 7.3%, when compared
to the corresponding period of 1998 as lower average utilization and per-diem
rates more than offset a larger 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 during the first half of the year
together with $13.5 million of new container production in the third quarter of
1999.
Depreciation and amortization decreased by $0.6 million, or 12.8%, in the
three months to September 30, 1999, to $4.0 million due to container sales from
the Owned to the Other Container Owner segment.
Selling, general and administrative expenses decreased to $4.2 million for
the three months ended September 30, 1999, from $5.5 million for the three
months to September 30, 1998, a decrease of $1.3 million or 24.3%. The decrease
was caused by reductions in manpower and manpower-related costs, together with
lower costs related to professional services and information technology.
During the three months ended September 30, 1999, the Company incurred a
total of $0.2 million of non-operating manpower and professional services costs.
Interest expense of $2.3 million for the three months ended September 30,
1999, declined by $1.8 million or 44.6%, when compared to the corresponding
period in 1998. This decrease is due to a reduction in the average debt balance
from $156.8 million to $114.4 million between the third quarters of 1998 and
1999, respectively together with a reduction in the average interest rate
reflecting the effect of refinanced debt.
14
<PAGE> 15
THE CRONOS GROUP
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Operating profit of $2.1 million for the nine months to September 30, 1999,
was $3.0 million higher than the $0.9 million loss for the corresponding period
in 1998 due primarily to reductions in selling, general and administrative
expenses.
Gross lease revenue of $99.1 million in the nine months to September 30,
1999, was $21.4 million, or 17.7%, lower than in the corresponding period in
1998. This decline can be attributed to the combined effect of lower per diem
rates, reduced utilization and a smaller fleet size representing approximately
$10.0 million, $8.6 million and $2.8 million of the reduction respectively.
Commissions, fees and other income of $5.3 million during the nine months
ended September 30, 1999, were $0.7 million, or 16.1%, higher than in the same
period of 1998. Increased income, primarily from specialized container products,
was partially offset by reduced finance lease and investment income.
Direct operating expenses of $23.2 million were $3.8 million, or 14.1%,
lower than in the first nine months of 1998. Increased storage, reflecting a
larger off-hire fleet, was more than offset by reductions in charges for
doubtful accounts, repositioning, repairs, and handling.
Payments to container owners decreased to $48.2 million during the nine
months ended September 30, 1999, a decrease of $9.5 million, or 16.4%, compared
to the corresponding period in 1998.
Payments to U.S. Limited Partnerships of $18.7 million were $6.1 million,
or 24.8%, lower than in the nine months to September 1998 reflecting lower
average utilization and per-diem rates, as well as a smaller container fleet.
Payments to Other Container Owners were $29.5 million during the nine
months to September 30, 1999, a decrease of $3.3 million, or 10.1%, when
compared to the corresponding period in 1998, as lower average utilization and
per-diem rates more than offset a larger average fleet size. The increase in the
average fleet size was due to transactions involving the sale of equipment from
both the U.S. Limited Partnerships and Owned segments to the Other Container
Owners segment.
Depreciation and amortization decreased by $1.7 million, or 11.8%, during
the nine months ended September 30, 1999, to $12.4 million due to container
sales from the Owned to the Other Container Owners segment.
Selling, general and administrative expenses decreased to $12.3 million in
the nine months to September 30, 1999, from $16.7 million in the corresponding
period of 1998, a decrease of $4.4 million or 26.4%. The decrease was due to a
$2.2 million reduction in manpower and manpower-related costs together with
reductions in costs related to information technology, professional services and
communications.
Selling, general and administrative costs for the nine months ended
September 30, 1999, included a total of $0.3 million of non-operational manpower
and professional services costs.
Interest expense of $8.4 million for the nine months to September 30, 1999,
was $4.0 million, or 32.0%, lower than in the corresponding period of 1998 due
to reductions in the average debt balance and in the average interest rate.
15
<PAGE> 16
THE CRONOS GROUP
LIQUIDITY AND CAPITAL RESOURCES
Cash from Operating Activities: Net cash provided by operating activities
was $8.6 million and $10.5 million during the nine months of 1999 and 1998,
respectively. The net cash generated in 1999 reflected earnings from operations
together with the release of $5.6 million of deposits which had been held in
escrow, of which $3.2 million was utilized to make payments to third party
container owners. The net cash generated in 1998 reflected earnings from
operations together with a $8.0 million decrease in new container equipment for
resale which were partly offset by payments of $7.6 million to manufacturers.
Cash from Investing Activities: Net cash provided by investing activities
was $25.8 million in the first nine months of 1999 reflecting sales of $19.6
million of container equipment to third party container owners and the receipt
of $5.3 million in respect of a related party loan. Net cash used for investing
activities was $0.9 million in the nine months to September 30, 1998, reflecting
purchases of container and other equipment of $2.9 million, which was partly
offset by proceeds from equipment sales.
Cash from Financing Activities: Net cash used by financing activities was
$35.5 million during the first nine months of 1999 compared to $13.7 million in
the corresponding period of 1998. The Company utilized the proceeds of a $50
million loan to refinance $47.8 of indebtedness. In addition to this, debt and
capital lease obligations included $20.6 million of repayments that were
generated from proceeds of container equipment sales together with a repayment
of $5.3 million following the sale of the Company's stock held as collateral
against related party loans. In 1998, debt repayments of $15.6 million from
operating cash were partly offset by $1.9 million of additional funding.
CAPITAL RESOURCES
On August 2, 1999, the Company refinanced approximately $47.8 million of
its short-term and other indebtedness by establishing a Loan Facility (the "Loan
Facility") with MeesPierson N.V., a Dutch financial institution, as agent for
itself and First Union National Bank (collectively, the "Lenders"). The borrower
under the Loan Facility was Cronos Finance (Bermuda) Limited, a newly-organized,
wholly-owned, special purpose subsidiary of the Company ("Cronos Finance").
Cronos Finance borrowed $50.0 million under the Loan Facility for the purpose of
acquiring containers from three other direct or indirect wholly-owned
subsidiaries (the"Sellers") of the Company and paying certain fees associated
with the establishment of the Loan Facility and the fees of certain former
lenders. The Sellers utilized the cash proceeds from the sale of the containers
to Cronos Finance to repay $47.8 million in principal due by the Sellers to
eight different creditors or groups of creditors of the Group, including all
indebtedness owed to a group of banks for which Fleet Bank, N.A. acted as agent.
In conjunction with the new facility, the Company has agreed to new
financial covenant levels with all of its current lenders and has obtained
waivers of non-compliance under current financial covenants. In addition, as
part of the facility, all lenders have agreed that the new covenant levels will
not be tested until the first quarter of 2000.
YEAR 2000
The Company's computer systems have undergone 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 required modification. The Company has completed all the necessary changes
and testing in a dedicated year 2000 environment. All compliant code was made
live in August 1999. The Company has contacted all of its critical business
suppliers and has been advised that their systems are year 2000 compliant. The
Company has also confirmed the compliance of its suppliers' products through its
own extensive testing. 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.
16
<PAGE> 17
THE CRONOS GROUP
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.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk: outstanding borrowings are subject to interest rate
risk. Approximately 70% and 65% of total borrowings had floating interest rates
at September 30, 1999, and December 31, 1998, 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.
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.
17
<PAGE> 18
THE CRONOS GROUP
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
SEC Investigation
As the Company has previously reported, in February 1997, the Company's
former independent auditors, Arthur Andersen LLP ("Arthur Andersen"), resigned
as auditors to the Company, its subsidiaries, and related partnerships. In
connection with its resignation, Arthur Andersen prepared a report pursuant to
Section 10A of the Securities Exchange Act of 1934, as amended, for filing by
the Company with the Securities and Exchange Commission ("SEC"). In its report,
Arthur Andersen cited, as a reason for its resignation, its inability to obtain
what it believed to be adequate responses to its inquiries of former management
regarding the payment and subsequent return of $1.5 million paid by the Company
purportedly for professional fees in connection with a proposed strategic
alliance of the Company. The Arthur Andersen report constituted a "reportable
event" under the SEC's Regulation S-K in that it constituted advice to the
former management of the Company that information had come to Arthur Andersen's
attention that had made it unwilling to be associated with the financial
statements prepared by the former management of the Company.
As a result of the Arthur Andersen report, the SEC commenced a private
formal investigation of the Company on February 10, 1997. The focus of the
investigation has been to determine whether the Company and persons associated
with the Company violated the federal securities laws administered by the SEC.
Current management of the Company has been in discussions with the SEC with a
view to settling the investigation as to the Company. The Company is hopeful of
reaching a settlement of the investigation by the end of 1999. The Company does
not believe that any current director or officer of the Company is a subject of
the investigation.
Special Litigation Committee:
The Board of Directors of the Company established a Special Litigation
Committee ("Committee") of the Board in July 1998 to examine the relationships
between Stefan M. Palatin, the former Chairman of the Board and Chief Executive
Officer of the Company, and Contrin Holding S.A. ("Contrin"), Barton Holding Ltd
("Barton"), and affiliated persons. The Committee is also investigating
transactions between the Company and its present and former officers and
directors for the period from January 1, 1995, to determine whether improper
self-dealing occurred between the Company and such persons. The Committee
intends to complete its investigation by the end of 1999. The Committee has the
power, for and on behalf of the Company, and in consultation with counsel, to
pursue the recovery of any damages the Committee concludes may have been
suffered by the Company as a result of the transactions or conduct the Committee
investigates.
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
18
<PAGE> 19
THE CRONOS GROUP
ITEM 5 -- OTHER INFORMATION
CAUTIONARY STATEMENTS FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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, including, without limitation, (a) the outcome of contingent
Austrian allegations as detailed in Note 9, of this document, to the
Consolidated Financial Statements; (b) the statements in Management's Discussion
and Analysis of Financial Condition and Results of Operations concerning (i)
preliminary indications that trade volumes from North America and Europe to Asia
may be increasing; (ii) the Company's expectation that its repositioning
strategy will place container equipment in higher demand locations and that it
will improve utilization; (c) the statements under Year 2000 concerning (i) the
Company's belief that it will be able to resolve any major year 2000 issues;
(ii) the Company's belief that the possibility of a year 2000 failure is remote;
(d) the statement in Quantitative and Qualitative Disclosures about Market Risk
concerning the Company's belief that it will not be materially affected by the
introduction of the single European Currency and (e) the statements under Legal
Proceedings concerning (i) the Company's hope of settling the SEC investigation
by the end of 1999; (ii) the Company's belief that current officers or directors
are not subjects of the SEC investigation; and (iii) the potential outcome of
the investigation of the Special Litigation Committee.
Forward-looking statements are based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
Company. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on the Company will be those anticipated by management. 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 under Item 2, Management's Discussion and Analysis of Financial Condition
and Results of Operations in the discussion of the marine container leasing
business; Item 3, Quantitative and Qualitative Disclosures about Market Risk and
under Part II -- Item 1, Legal Proceedings and Item 5, Other Information and
those risks and uncertainties detailed from time to time in the filings of the
Company with the Securities and Exchange Commission.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On August 20, 1999, a Current Report on Form 8-K was filed by the Company
reporting the Company's decision to replace its independent auditors, Moore
Stephens.
On August 23, 1999, an Amendment was filed to the Report on Form 8-K filed
on August 20, 1999, due to the inadvertent omission of the signature to the
filing.
On August 27, 1999, an Amendment No. 2 was filed to the Report on Form 8-K
filed on August 20, 1999, for inclusion by way of exhibit of a letter from Moore
Stephens affirming their agreement with the statements in the filing concerning
their firm.
19
<PAGE> 20
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, November 11, 1999
- ------------------------------------ Chief Financial Officer and
Peter J. Younger Chief Accounting Officer
(Principal Financial and Accounting
Officer)
</TABLE>
20
<PAGE> 21
THE CRONOS GROUP
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at September 30, 1999, and the consolidated income
statement for the nine months ended September 30, 1999, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,169
<SECURITIES> 918
<RECEIVABLES> 31,901
<ALLOWANCES> 4,282
<INVENTORY> 10,084
<CURRENT-ASSETS> 66,188
<PP&E> 225,459
<DEPRECIATION> 73,751
<TOTAL-ASSETS> 245,238
<CURRENT-LIABILITIES> 74,577
<BONDS> 113,891
0
0
<COMMON> 18,317
<OTHER-SE> 40,362
<TOTAL-LIABILITY-AND-EQUITY> 245,238
<SALES> 99,139
<TOTAL-REVENUES> 105,626
<CGS> 0
<TOTAL-COSTS> 71,429
<OTHER-EXPENSES> 24,690
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,444
<INCOME-PRETAX> 1,063
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,063
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
</TABLE>
