<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[X] Definitive Additional Materials
[X] Soliciting Material Pursuant to sec.240.14a-11(c) or 240.14a-12
</TABLE>
THE CRONOS GROUP
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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<PAGE> 2
[CRONOS LOGO]
THE CRONOS GROUP
Societe Anonyme
November 2, 1999 Dennis J. Tietz
Chairman
To Our Shareholders:
We are transmitting to each of our shareholders the annual report and
consolidated financial statements for the year ended December 31, 1998, the
unconsolidated financial statements for the year ended December 31, 1998 and
our most recent quarterly report for the second quarter ended June 30, 1999. I
had hoped to send these reports to you with our proxy statement for the 1999
annual shareholders' meeting, but for reasons discussed below, we have delayed
the 1999 annual meeting.
I became the CEO of Cronos on December 11, 1998, and Chairman of the
Board on March 30th of this year. Since becoming Chairman, I and my fellow
directors and the management team of Cronos have taken several measures to
restore stability to the management of Cronos and return the Company to
profitability. These measures include:
o The Establishment of an Independent Board. The Board now consists of
four Directors, myself and three independent Directors, Maurice
Taylor, Charles Tharp, and Nick Walker. Director EO Nedelmann, who
provided us with wise and prudent counsel for the past two years, is
not standing for reelection for the Board and has resigned to make way
for Nick Walker. At the 1999 annual meeting, we will also propose that
you elect Peter J. Younger, Chief Financial Officer of the Company as
a Director, and Robert M. Melzer as an additional outside Director.
o Improved Operating Results. For the first six months of 1998, Cronos
reported a net loss of $2.2 million or $0.25 per outstanding share of
Common Stock. For the first six months of 1999, we reduced the
Company's net loss by $2 million and, for the third calendar quarter
of 1999, we expect the Company will report a quarterly profit for the
first time in over two years.
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<PAGE> 3
o Reduction in Administrative Expenses. Prior to my appointment as
Chief Executive Officer of Cronos less than twelve months ago, the
Company's administrative expenses were running at approximately $21.2
million annually. Through officer and other overhead reductions, our
annual administrative expenses have been reduced by approximately $5
million, or 23% of last year's level.
o Reduction in Staff. As part of the Company's reorganization plan,
senior management carefully analyzed our staffing needs and concluded
that we could run our business more efficiently with fewer staff. We
have reduced the number of employees of Cronos from 128 to 108
worldwide, including the elimination of six officer positions, at an
estimated annual saving of $1.7 million.
o Sale of Windsor Facility. Cronos has a three-story, 22,000 square foot
facility located in Windsor, England. Having concluded that we no
longer need to own this building, we have put it on the market and
expect to realize from $10.7 million to $11.7 million from its sale.
o Refinancing of Short-Term Debt. When I took office, Cronos was
teetering on the brink of insolvency, having failed to pay, when due,
over $57.3 million of its indebtedness. Today, after a $50 million
refinancing of our debt, which closed in August of this year, Cronos
is in compliance with all of its debt covenants. Our debt-to-equity
ratio of two to one is the lowest it has been in two years, and is
less than the industry average.
o Interest Savings. As a result of the August refinancing, our annual
interest savings should be approximately $1.4 million per year.
o New Financing. Since April of this year, the Company has negotiated
over $21 million in new financing, which was used to purchase
approximately 16,000 TEU (twenty-foot equivalent units) of new
equipment. I believe this investment of capital sends a clear signal
of support for the policies and objectives of the Company's new
management team.
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<PAGE> 4
o Increase in Container Utilization. While the market for leased
containers remains weak, we have increased the percentage of our
container fleet on lease (referred to in the industry as
"utilization") from 72.6% at March 31, 1999 to 77% as of September 30,
1999.
o Removal of "Going Concern" Audit Opinion. Our auditor's opinions on
our 1997 and 1998 financial statements contained a "going concern"
opinion (raising substantial doubt about our ability to continue in
business), which adversely affected our credit standing and business
prospects. As a result of our refinancing and the other steps that we
have taken, we anticipate receiving a clean auditor's opinion on our
1999 financial statements.
o Selection of Deloitte & Touche. Subject to the shareholders' approval,
we have retained Deloitte & Touche LLP, a "Big-Five" accounting firm,
for our 1999 audit. While our current auditors, Moore Stephens, have
served us well these past three years, the engagement of Deloitte &
Touche is a further indication that Cronos has put behind it the
management turmoil that beset the Company over the past few years.
o SEC Investigation. We are confident of settling before the end of the
year the SEC investigation that was triggered by the actions of former
management. The conclusion of this investigation will provide
reassurance to Cronos' lenders, investors, stockholders and employees,
and I believe it will also bolster the Company's future business
prospects.
Cronos is turning the corner. The Company's management team is confident
that the steps it has taken will return Cronos to profitability. We invite you
to review our 1998 annual report and our second quarter report for further
details on our results for 1998 and the first two calendar quarters of 1999.
Interpool Proposal
Shortly before we were to send the notice of our 1999 annual shareholders'
meeting, one of our competitors, Interpool, Inc., proposed to acquire Cronos,
by merger with Interpool's 50%-owned subsidiary, Container Applications
International, Inc., for $5.00 per share in cash. Interpool gave us 24 hours to
respond to the proposal, which was unsolicited, and threatened to go directly
to our
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<PAGE> 5
shareholders if we did not provide Interpool with a "satisfactory" response.
Interpool has now filed with SEC preliminary proxy materials pursuant to which
it seeks to solicit each of you to elect an alternative slate of directors of
Cronos at the 1999 annual meeting, whose sole purpose would be to sell Cronos
to Interpool at $5.00 per share (or less).
The Board has carefully evaluated the Interpool proposal and, relying in
part upon the opinion of our financial advisors, First Union Securities, Inc.
("First Union"), unanimously decided to reject the Interpool proposal as
inadequate and as not in the best interest of Cronos or its shareholders. At
the same time, the Board has retained First Union to consider all strategic
alternatives available to the Company to enhance shareholder value, including
the possible sale of the Company. We hope to complete our review within a short
period of time, and will report to you on the results.
The Company has made substantial progress in its return to stability and
profitability. Now is not the time to sell Cronos to Interpool or to anyone else
for less than its true value. Interpool understands the progress the Company
has made: That is why it is seeking to buy the Company, just as we are making
tangible progress with our turnaround. Nevertheless, we owe it to each of you
to explore the alternatives available to us to provide value and liquidity to
our shareholders, and this we are doing.
In the short time since assuming the role of CEO of Cronos, I can proudly
point to the fact that, together with our dedicated management team, we have
succeeded on several fronts in terms of providing this Company with a new
direction and a revitalized spirit. I am confident that our many recent
successes, which are discussed above as well as in the Shareholder Letter
accompanying the enclosed 1998 Annual Report, will translate into stronger
earning potential and enhanced value for our shareholders.
We hope to reschedule our 1999 annual meeting in the near future. At that
time, we will transmit to each of you our proxy statement for the meeting, and
I look forward to meeting as many of you as can attend the meeting. In the
meantime, you may monitor developments concerning the Company at our website,
www.cronos.com.
Very truly yours,
/s/ Dennis J. Tietz
-----------------------------------
Dennis J. Tietz
Chairman of the Board and
Chief Executive Officer
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<PAGE> 6
[CRONOS LOGO]
1998 SHAREHOLDER LETTER
To Our Shareholders:
It is with pleasure that I am able to address you as Chairman and CEO of
The Cronos Group through my initial letter to the shareholders. The year ended
December 31, 1998 turned out to be the most challenging year the company has
endured in its 20-year history. This challenge manifested itself in two
divergent ways, and I would like to take this opportunity to discuss each in
more specific detail.
GLOBAL TRADE AND THE CONTAINER LEASING INDUSTRY
In terms of the container leasing market, 1998 was a year of volatility.
Opinions wavered between optimism that the fallout from the Asian crisis could
be contained and concern that it would widen and affect the broader global
economy. As these worries intensified, expectations for world economic growth
shifted downward. The growth of world containerized trade declined to 5% - 6%
during 1998, compared to 7% - 8% in recent past years, limiting the demand for
leased containers by the ocean carriers. At the same time, unprecedented trade
imbalances developed between Asia and the rest of the world. The devalued
currencies of many Asian countries gave rise to booming exports and, together
with restricted credit, curtailed the demand for imports from the West. These
shifting trade patterns prompted increased requirements for leased containers in
Asia but, at the same time, created a surplus of off-hire units in Europe and
the Americas.
During 1998, average utilization levels declined and per diem rental rates
continued to soften. Operating margins also were squeezed as the trade
imbalances with Asia resulted in significantly higher equipment repositioning
expenses. Other key trends that have been in evidence over the past few years
continued to affect the container leasing industry during 1998. They include
consolidation within the shipping and container leasing industries, increased
use of mega-size containerships, and the pooling of owned equipment by customers
in order to achieve even greater operating efficiencies.
If the long-term expectations for economic recovery and growth in most
Asian economies and Latin America are well founded, as I believe they are, we
should see an increase in world trade volumes over the next few years. While
operating in this challenging market environment, I believe it is also important
to maintain a global perspective by looking upon the financial concerns of Asia
in the broader context of the economic stability and market maturity of the
U.S., Canada and Europe. With this in mind, we have taken measures to strengthen
our operating margins by focusing on areas where trade volumes are prospering,
minimizing equipment repositioning costs, and promoting customer service. While
it will take some time to overcome the effects of current market conditions, I
believe that the container leasing industry will remain a growing component in
the movement of world trade.
COMPANY UPDATE
While 1998 ended on a more positive note than it had begun, the road was
not a smooth one. Within the company, the first six months of the year were
characterized by uncertainty and change with regard to corporate governance,
banking relationships, and regulatory investigation matters. In spite of the
difficulties surrounding the company's ex-Chairman, Stefan M. Palatin, the
investigation by the SEC, and attempts to restructure short-term debt, we were
determined to formulate a pragmatic, successful strategy for the future. It was
clear to me that the problems of the past two years had diverted attention away
from our core business.
<PAGE> 7
As the new Chairman and CEO of the company, my management philosophy is
driven by the straightforward notion that we must learn from our problems and
focus on proven business strategies for future growth. In December 1998 we
announced a corporate restructuring program, and we are now implementing
cost-cutting measures designed to refocus our attention on our core business,
improve net earnings and raise the return on capital. In conjunction with this
restructuring, we have set a goal to cut Selling, General & Administrative
expenses by approximately $5 - 6 million this year. Thereafter, we intend to
stabilize overheads at these levels to reflect the new organization and the
change in strategy. We are currently streamlining our operations by more
explicitly defining corporate authority and job responsibility. We have also
made significant strides in rebuilding our banking relationships and recently
completed a $50 million replacement funding transaction, the largest in the
company's history. The proceeds from this transaction were used to pay down
short-term debt, including all outstanding amounts due under the company's
primary banking facility. Furthermore, since the end of 1998, we have completed
several lease-financing transactions, the proceeds from which were used to pay
down additional short-term debt. Lastly, subject to shareholder approval, we
have reconfigured the Board to include four independent directors. The end of
1998 could be best characterized as a time during which Cronos began to make
significant progress in defining a new direction for itself, a direction that
would also use to full advantage those strategies that had proved successful
over its 20-year history. This new direction was solidified in shape and
substance at the beginning of 1999.
Given the mixed economic results throughout the world and the other factors
impacting the container leasing industry, maintaining a long-term perspective
can be both difficult and frustrating. The basic principles we work under are as
true today as they were when we entered the container fleet management business
20 years ago -- Focus on the fundamentals and on earnings growth using
management strength and foresight -- Focus on the business of the company, not
the distractions. In doing so, we believe that we can emerge from the
uncertainty of the market, re-energized, and well-positioned for the future.
Through prudent and conservative management, we will continue our best efforts
to enhance fleet performance and strengthen the company's earnings potential. We
appreciate your investment in the company, and we will remain always mindful of
the responsibilities we have to you, our shareholders.
Respectfully submitted,
/s/ DENNIS J. TIETZ
Dennis J. Tietz
Chairman and CEO
The Cronos Group
<PAGE> 8
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
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)
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<S> <C>
LUXEMBOURG NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NOT APPLICABLE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT.
COMMON SHARES, $2 PAR VALUE PER SHARE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. Yes [ ] No [X]
The aggregate market value of voting stock of the Registrant held by
non-affiliates as of March 26, 1999 (Common Shares) was approximately
$33,283,497.
The number of Common Shares outstanding as of March 29, 1999:
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES OUTSTANDING
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<S> <C>
Common 8,858,378
</TABLE>
Portions of the following documents have been incorporated by reference
into this report.
<TABLE>
<CAPTION>
DOCUMENT PARTS IN WHICH INCORPORATED
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<S> <C>
Registrant's Proxy Statement for the PART III
1999 Annual Meeting of Shareholders
</TABLE>
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<PAGE> 9
TABLE OF CONTENTS
THE CRONOS GROUP
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PAGE
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Introductory Note....................................................... ii
PART I
Item 1. Description of Business..................................... 1
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................. 16
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 25
PART III
Item 10. Directors and Officers of Registrant........................ 26
Item 11. Executive Compensation...................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV
Item 14. Exhibits, Finance Statement Schedules, and Reports of Form
8K.......................................................... 27
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<PAGE> 10
INTRODUCTORY NOTE
Unless the context indicates otherwise, the "Company" means The Cronos
Group and, where appropriate, includes its subsidiaries and predecessors, while
"Cronos" means The Cronos Group together with its subsidiaries and predecessors.
"TEU" means twenty-foot equivalent units, the standard unit of physical
measurement in the container industry. All references herein to "$" or "Dollars"
are to United States dollars.
This report discusses certain forward looking matters that involve risks
and uncertainties that could cause actual results to vary materially from
estimates. Risks and uncertainties include, amongst other things, changes in
international operations, including exchange rate risks, the Company's success
in refinancing its outstanding debt, changes in market conditions for the
Company's container lease operations and the Company's ability to provide
innovative and cost-effective solutions.
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<PAGE> 11
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
The Company is a limited liability company (societe anonyme) incorporated
in Luxembourg with its registered office at 16, Allee Marconi, Boite Postale
260, L-2120 Luxembourg (telephone (352) 453145). The Company is registered with
the Luxembourg Registrar of Companies under registration number R.C.S. Lux. B.
27489. Cronos Containers Limited, the Company's principal container leasing
subsidiary, is a U.K. corporation located at Orchard Lea, Winkfield Lane,
Winkfield, Windsor, Berkshire, SL4 4RU, England.
Cronos is the successor to Intermodal Equipment Associates ("IEA") and
Leasing Partners International ("LPI"). IEA began managing and leasing dry cargo
containers in 1978, primarily under master leases. LPI was established in 1983
to manage and lease refrigerated containers. In 1990, LPI acquired IEA and the
companies combined their operations under the new name Cronos. In December 1995
and January 1996, the Company and Barton Holding Ltd., a selling shareholder,
sold in a public offering (the "Public Offering") 3,643,000 Common Shares of the
Company.
Cronos is one of the world's leading lessors (by aggregate TEU capacity) of
intermodal marine containers in owning and managing a fleet of dry cargo,
refrigerated, tank and other specialized containers. Through an extensive global
network of offices and agents, Cronos leases both its own and other owners'
containers to over 400 ocean carriers and transport operators, including all of
the 20 largest ocean carriers. The Company is currently seeking to refinance
approximately $47.7 million due under the Bank Facility and the Company's other
credit facilities by securing new term debt financing and investment by managed
container owners. Until the refinancing is completed, there is substantial doubt
that the Company will be able to continue as a going concern. See Item
7 -- "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
INDUSTRY BACKGROUND
A marine cargo container is a reusable metal container designed for the
efficient carriage of cargo with a minimum of exposure to loss through damage or
theft. Containers are manufactured to conform to worldwide standards of
container dimensions and container ship fittings adopted by the International
Standards Organization ("ISO") in 1968. The standard container is either 20'
long x 8' wide x 8'6" high (one TEU) or 40' long x 8' wide x 8'6" high (two
TEU). Standardization of the construction, maintenance and handling of
containers allows containers to be picked up, dropped off, stored and repaired
effectively throughout the world. This standardization is the foundation on
which the container industry has developed.
Standard dry cargo containers are rectangular boxes with no moving parts,
other than doors and are typically made of steel or aluminum. They are
constructed to carry a wide variety of cargoes ranging from heavy industrial raw
materials to light-weight finished goods. Specialized containers include, among
others, refrigerated containers for the transport of temperature-sensitive
goods, tank containers for the carriage of liquid cargo and cellular palletwide
containers ("CPCs") with extra width. Dry cargo containers currently constitute
approximately 83% (in teu) of the worldwide container fleet. Refrigerated
containers and tank containers currently constitute approximately 7% (in teu) of
the worldwide container fleet, with open-tops and other specialized containers
constituting the remaining 10%.
One of the primary benefits of containerization has been the ability of the
shipping industry to effectively lower freight rates due to the efficiencies
created by standardized intermodal containers. Containers can be handled much
more efficiently than loose cargo and are typically shipped via several modes of
transportation, including truck, rail and ship. Containers require loading and
unloading only once and remain sealed until arrival at the final destination,
significantly reducing transport time, labor and handling costs and losses due
to damage and theft. Efficient movement of containerized cargo between ship and
shore reduces the amount of time that a ship must spend in port and reduces the
transit time of freight moves.
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<PAGE> 12
The logistical advantages and reduced freight rates brought about by
containerization have been major catalysts for world trade growth during the
last 25 years, resulting in increased demand for containerization. The world's
container fleet has grown from an estimated 270,000 TEU in 1969 to approximately
12.2 million TEU by mid-1998.
BENEFITS OF LEASING
Leasing companies own approximately 47% of the world's container fleet with
the balance owned predominantly by shipping lines. Shipping lines, which
traditionally operate on tight profit margins, often supplement their owned
fleet of containers by leasing a portion of their equipment from container
leasing companies and in doing so, achieve financial and operational benefits.
- Leasing allows the shipping lines to utilize the equipment they need
without having to make large capital expenditures;
- Leasing offers a shipping line an alternative source of financing in a
traditionally capital-intensive industry;
- Leasing enables shipping lines to expand their routes and market shares
at a relatively inexpensive cost without making a permanent commitment to
support their new structure;
- Leasing allows shipping lines to respond to changing seasonal and trade
route demands, thereby optimizing their capital investment and storage
costs.
TYPES OF LEASES
FINANCE LEASES are usually long term in nature and require relatively low
levels of customer service. They ordinarily require fixed payments over a
defined period and provide customers with an option to purchase the subject
containers at the end of the lease term. Per diem rates typically include an
element of repayment of capital and therefore are higher than rates charged
under either long-term or short-term leases.
MASTER LEASES are usually short-term leases under which a customer reserves
the right to lease a certain number of containers as needed under a general
agreement between the lessor and the lessee. Such leases provide customers with
greater flexibility by allowing customers to pick up and drop off containers
where and when needed, subject to restrictions and availability, on pre-agreed
terms. The commercial terms of master leases are negotiated annually. Master
leases also define the number of containers that may be returned within each
calendar month and the return locations and applicable drop-off charges. Due to
the increased flexibility they offer, master leases usually command higher per
diem rates and generate more ancillary fees (including pick-up, drop-off,
handling and off-hire fees) than term leases.
TERM LEASES are for a fixed period of time and include both long and short
term commitments, with most extending from three to five years. Term lease
agreements may contain early termination penalties that apply in the event of
early redelivery. In most cases, however, equipment is not returned prior to the
expiration of the lease. Term leases provide greater revenue stability to the
lessor, but at lower lease rates than master leases. Ocean carriers use
long-term leases when they have a need for identified containers for a specified
term. Short-term lease agreements have a duration of less than one year and
include one-way, repositioning and round-trip leases. They differ from master
leases in that they define the number and the term of the containers to be
leased. Ocean carriers generally use one-way leases to manage trade imbalances
(where more containerized cargo moves in one direction than another) by picking
up a container in one port and dropping it off at another location after one or
more legs of a voyage.
The terms and conditions of the Company's leases provide that customers are
responsible for paying all taxes and service charges arising from container use,
maintaining the containers in good and safe operating condition while on lease
and paying for repairs, excluding ordinary wear and tear, upon redelivery. Some
leases provide for a "damage protection plan" whereby lessees, for an additional
payment (which may be in the form of a higher per diem rate), are relieved of
the responsibility of paying some of the repair costs upon redelivery of the
containers. The Company has historically provided this service on a limited
basis to selected customers.
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<PAGE> 13
Repairs provided under such plans are carried out by the same depots, under the
same procedures, as are repairs to containers not covered by such plans.
Customers are also required to insure leased containers against physical damage,
loss and against third party liability for loss, damage, bodily injury or death.
The percentage of equipment on term leases as compared to master leases
varies widely among leasing companies, depending upon each company's strategy on
margins, operating costs and cash flows.
Lease rates depend on several factors including the type of lease, length
of term, maintenance provided, type and age of the equipment and market
conditions.
COMPANY STRATEGY
Cronos targets operating leases, with an emphasis on master leases for its
dry cargo containers and term leases for refrigerated and tank containers.
LEASE PROFILE
Cronos offers flexible leasing arrangements primarily through master leases
on dry cargo containers. Cronos' specialized containers are generally leased on
longer-term leases because the higher cost, value and complexity of this
equipment make it more expensive to redeliver and on-hire frequently.
<TABLE>
<CAPTION>
PERCENTAGE OF FLEET ON-HIRE
---------------------------------
TYPE OF LEASE DRY CARGO REFRIGERATED TANK
------------- --------- ------------ ----
<S> <C> <C> <C>
Master................................................. 76% 39% 9%
Term................................................... 16 56 91
Finance................................................ 8 5 --
--- --- ---
Total........................................ 100% 100% 100%
=== === ===
</TABLE>
CUSTOMERS
Cronos currently serves over 400 customers, consisting primarily of ocean
carriers. Cronos supplies containers to all of the 20 largest ocean carriers
worldwide. Cronos is not dependent upon any particular customer or group of
customers. None of the Company's customers accounts for more than 10% of its
revenue and the ten largest customers accounted for approximately 37.6% of the
total TEU fleet-on-hire. Substantially all of Cronos' customers are billed and
pay in United States dollars.
Cronos sets maximum credit limits for all customers, limiting the number of
containers leased to each customer according to established credit criteria.
Cronos continually tracks its credit exposure to each customer. Cronos' credit
committee meets quarterly to analyze the performance of existing customers and
to recommend actions to be taken in order to minimize credit risks. Cronos uses
specialist third party credit information services and reports prepared by local
staff to assess credit applications.
3
<PAGE> 14
FLEET PROFILE
Cronos focuses on supplying to its customers high-quality containers,
manufactured to specifications that exceed International Standards Organization
(ISO) standards and designed to minimize repair and operating costs. Cronos
operates primarily dry cargo and refrigerated containers but, since 1993, it has
diversified into tanks and other specialized containers. Cronos believes that
this fleet diversification enables it to increase business with its customers by
supplying a wide range of their equipment requirements.
<TABLE>
<CAPTION>
CRONOS CONTAINER FLEET (IN TEU THOUSANDS)
AT DECEMBER 31,
-----------------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Dry Cargo.................................. 211.5 250.2 322.0 345.9 337.8
Refrigerated............................... 14.6 14.3 16.2 16.0 14.7
Tank....................................... 0.4 1.0 1.7 2.0 2.0
Roll-Trailer............................... -- -- 1.7 2.0 2.2
CPCs....................................... -- -- -- 2.4 2.4
Other Dry Freight Specials................. 0.1 0.1 1.2 1.5 2.3
----- ----- ----- ----- -----
Total Fleet...................... 226.6 265.6 342.8 369.8 361.4
===== ===== ===== ===== =====
</TABLE>
Dry cargo containers are the most commonly used type of container in the
shipping industry. Over 95% of Cronos' dry cargo fleet is constructed of all
Corten(R) steel (i.e., Corten(R) roofs, walls, doors and undercarriage), which
is a high-tensile steel yielding greater damage and corrosion resistance than
mild steel. The Company believes that, among its major competitors, it has the
highest percentage of dry cargo containers constructed of all Corten(R) steel.
Refrigerated containers are used to transport temperature-sensitive
products, such as meat, fruit, vegetables and photographic film. All of Cronos'
refrigerated containers have high-grade stainless steel interiors. The majority
of Cronos' 20' refrigerated containers have high-grade stainless steel walls,
while most of the Company's 40' refrigerated containers are steel framed with
aluminum outer walls to reduce weight. As with the dry cargo containers, all
refrigerated containers are designed to minimize repair and maintenance and
maximize damage resistance. Cronos' refrigerated containers are designed and
manufactured to include the latest generation refrigeration equipment, with the
most recently built units controlled by modular microprocessors. Cronos has not
purchased new refrigerated containers since early 1997 due to the weak
refrigerated container leasing market resulting from oversupply.
Cronos' tank containers are constructed in compliance with International
Maritime Organization ("IMO") standards and recommendations. The tanks purchased
by Cronos to date have all been IMO-1 type tanks constructed to comply with IMO
recommendations that require specific pressure ratings and shell thicknesses.
These containers are designed to carry highly-flammable materials, corrosives,
toxics and oxidizing substances. They are also capable of carrying non-hazardous
materials and foodstuffs. They have a capacity of 21,000-24,000 litres and are
generally insulated and equipped with steam or electrical heating.
Dry freight special containers, a small but growing segment of the world
container fleet, include rolltrailers, CPCs, open-top and flatrack containers.
Cronos diversified into dry freight specials in 1996, when it acquired
Intermodal Leasing AB, a Swedish company with a fleet of approximately 800
rolltrailers, a type of heavy-duty chassis used for moving cargo onto and off
ships. Cronos markets this product on a worldwide basis through its network of
offices and agents, and has increased its rolltrailer fleet to 2,200 TEU at the
end of 1998. Cronos owns the patents of the CPC, a specialized container
designed specifically for the carriage of European short sea cargo on
"Europallets". Since 1996, Cronos has added 2,400 TEU of CPCs into its container
fleet.
PURCHASING POLICY
Cronos' purchasing policy is driven by market requirements and anticipated
future demand, including demand generated by trade growth and the replacement of
containers retired from fleets around the world.
4
<PAGE> 15
The Company believes that the worldwide manufacturing capacity for all container
types is adequate to meet its current and near-term requirements.
Cronos purchases dry cargo containers from manufacturers in China, Korea,
Taiwan, Indonesia, Thailand, India, Malaysia, Turkey and South Africa as part of
its policy to source container production in locations where it can meet
customer demands most effectively. No single manufacturer supplies more than 30%
of Cronos' annual dry cargo container purchases.
Cronos' refrigerated containers were purchased mainly from Korean
manufacturers. The majority of its refrigeration units were purchased from
Carrier Transicold, the primary supplier of container refrigeration units in the
United States. To date, all of the Company's tank containers have been purchased
from United Kingdom and South African manufacturers.
REPAIR AND MAINTENANCE
All containers are inspected and repaired when redelivered by a customer,
and customers are obligated to pay for all damage repairs, excluding wear and
tear, according to standardized industry guidelines. Depots in major port areas
perform repair and maintenance that is verified by independent surveyors or the
Cronos technical and operations staff.
Before any repair or refurbishment is authorized on older containers in the
Cronos fleet, the Cronos technical and operations staff reviews the age,
condition and type of container and its suitability for continued leasing.
Cronos compares the cost of such repair or refurbishment with the prevailing
market resale price that might be obtained for that container and makes the
appropriate decision whether to repair or sell the container. Cronos is
authorized to make this decision for most of the owners for whom it manages
equipment and makes these decisions by applying the same standards to the
managed containers as to its own containers.
MARKET FOR USED CONTAINERS
Cronos estimates that the period for which a dry cargo or refrigerated
container may be used as a leased marine cargo container ranges from 10 to 15
years. Tank containers generally may be used for 12 to 18 years.
Cronos disposes of used containers in a worldwide market in which buyers
include wholesalers, mini-storage operators, construction companies and others.
The market for used refrigerated and tank containers is not as stable as the
market for used dry cargo containers. Although a used refrigerated container
will command a higher price than a dry cargo container, a dry cargo container
will achieve a higher percentage of its original price. Historically, the
Company has not derived a material proportion of its revenues from selling used
containers due to the age profile of its fleet.
OPERATIONS
Cronos' sales and marketing operations are conducted through Cronos
Containers Limited, a wholly-owned subsidiary based in the United Kingdom, with
support provided by area offices and dedicated agents located in San Francisco,
California; Iselin, New Jersey; Windsor, England; Hamburg; Antwerp; Genoa;
Gothenburg, Sweden; Singapore; Hong Kong; Sydney; Tokyo; Taipei; Seoul; Rio de
Janeiro; Shanghai and Auckland.
Cronos also maintains agency relationships with over 20 independent agents
around the world, who are generally paid a commission based upon revenues
generated in the region or the number of containers that are leased from their
area. These agents are located in jurisdictions where the volume of Cronos
business necessitates a presence in the area but is not sufficient to justify a
fully-functioning Cronos office or dedicated agent. Agents provide marketing
support to the area offices covering the region, together with limited
operational support.
In addition, Cronos relies on the services of over 300 independently owned
and operated depots around the world to inspect, repair, maintain and store
containers while off-hire. The Company's area offices authorize
5
<PAGE> 16
all container movements into and out of the depot and supervise all repairs and
maintenance performed by the depot. The Company's technical staff sets the
standards for repair of the Cronos fleet throughout the world and monitors the
quality of depot repair work. The depots provide a link to the Company's
operations, as the redelivery of a container into a depot is the point at which
the container is off-hired from one customer and repaired in preparation for
re-leasing to the next.
Cronos' global network is integrated with its computer system and provides
24-hour communication between offices and agents. The system allows Cronos to
manage and control its fleet on a global basis, providing Cronos with the
responsiveness and flexibility necessary to service the master lease market
effectively. This system is an integral part of Cronos' service, as it processes
information received from the various offices, generates billings to lessees and
generates a wide range of reports on all aspects of the Company's leasing
activities. The system records the life history of each container, including the
length of time on-hire, repair costs, as well as port activity trends, leasing
activity and equipment data per customer. The operations and marketing data is
fully interfaced with Cronos' finance and accounting system to provide revenue,
cost and asset information to management and staff around the world. Cronos
intends to continue to enhance its computer system as needs arise in the future.
COMPETITION
Competition among container leasing companies is based upon several
factors, including the location and availability of inventory, lease rates, the
type, quality and condition of the containers, the quality and flexibility of
the service offered and the confidence in and professional relationship with the
lessor. Other factors include the speed with which a leasing company can prepare
its containers for lease and the ease with which a lessee believes it can do
business with a lessor or its local area office. Not all container leasing
companies compete in the same market as some supply only dry cargo containers
and not specialized containers, while others offer only long-term leases. Cronos
has historically targeted three particular markets: the master lease dry cargo
container market, the refrigerated container market and the tank container
market. In recent years, however, the Company has expanded into other
specialized container products and other types of leases.
Cronos competes with various container leasing companies in the markets in
which it conducts business, including Transamerica Leasing, Genstar Container
Corp. (now GE Seaco), Triton Container International Ltd., Textainer Corp. and
others. In a series of recent consolidations, several major leasing companies,
as well as numerous smaller ones, have been acquired by competitors. Cronos
believes that the current trend toward consolidation in the container leasing
industry will continue, making economies of scale, worldwide operations,
diversity, size of fleet and financial strength increasingly important to the
successful operation of a container leasing business. Additionally, as
containerization grows, customers may demand more flexibility from leasing
companies regarding per diem rates, pick-up and drop-off locations, availability
of containers and other terms.
Some of Cronos' competitors may have greater financial resources than
Cronos and may be more capable of offering lower per diem rates on a larger
fleet. In Cronos' experience, however, ocean carriers will generally lease
containers from more than one leasing company in order to minimize dependence on
a single supplier.
OPERATING SEGMENTS
Cronos has three operating segments which are determined based on source of
container funding:
1. U.S. Public Limited Partnerships
2. Other Container Owners
3. Owned Containers
Cronos uses various financing programs within its three segments. These
financing programs enable Cronos to expand its fleet without being dependent
upon any single source of financing. Cronos believes it is important to
diversify its financing sources both by market and type of instrument. This
diversification reduces its reliance on individual financial markets and
provides for a more balanced financing structure.
6
<PAGE> 17
The following chart summarizes the composition of the Cronos fleet (based
on original equipment cost) at December 31 of each of the years indicated:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. Public Limited Partnerships.......................... 48% 45% 38% 35% 34%
Other Container Owners.................................... 28% 34% 29% 40% 41%
Owned Containers.......................................... 24% 21% 33% 25% 25%
--- --- --- --- ---
Total........................................... 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
As of December 31, 1998, no single owner (other than as specified above)
held more than 13% of the Cronos fleet (based upon original equipment cost).
All containers, whether owned or managed, are leased as part of a single
global fleet, without regard to ownership. No customer generates 10% or more of
a segment's revenues. The Company evaluates the performance of its operating
segments based on operating profit or loss. Substantially, all of the Group's
lease revenue is earned on containers used in global trade routes. This revenue
is deemed to be earned based on the physical location of the containers while on
lease. Accordingly, the Group believes that it does not possess discernible
geographic reporting segments as defined in Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information". See Note 2 to the 1998 Consolidated Financial Statements.
Segment revenues from external customers, operating profit or loss and
total assets are disclosed in the Company's Financial Statements and are
incorporated herein by reference.
U.S. PUBLIC LIMITED PARTNERSHIPS
Cronos has been raising capital through its investment syndication
activities since 1979 through the organization and sponsorship of public limited
partnership offerings. To date Cronos has sponsored 16 of these public limited
partnerships. Cronos has raised over $478 million from over 37,000 investors,
providing the means to purchase 181,000 TEU of dry cargo containers, 3,500 TEU
of refrigerated containers and 300 TEU of tank containers. A majority of the
limited partners in a partnership can remove the general partner, thereby
terminating the agreement with Cronos.
As an operating company, Cronos believes that its substantial experience in
the container leasing industry has been integral to the successful syndication
of public limited partnerships. However, no public offerings have been made in
the U.S. since early 1997. The Company is currently seeking to refinance
approximately $47.7 million of indebtedness. See Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". In addition, since early 1997
the Company has been the subject of an investigation by the U.S. Securities and
Exchange Commission. See Item 3 -- "Legal Proceedings". The Company's ability to
offer additional investor programs will likely require a satisfactory resolution
of these matters.
The U.S. Public Limited Partnerships provide compensation to Cronos
consisting of the following fees and commissions:
- Syndication commissions: equal to 10% of the gross proceeds from the
offering, of which approximately 8% is paid to independent
broker-dealers;
- Acquisition fees: equal to 5.0% of the original cost of equipment
purchased by the partnerships, recognized over a 12-year period;
- Base management fees: equal to 7% of gross lease revenue for operating
leases and 2% of gross lease revenue for direct financing leases;
- General partner share: equal to 5% of distributable cash generated by the
partnerships' operating activities;
7
<PAGE> 18
- Incentive fees: equal to 15% of distributable cash after the limited
partners have received a return of their adjusted capital contributions
and distributions in an amount equal to a cumulative compounded rate
between 8 to 10% per annum (depending on the program);
- Sales proceeds fees: equal to a 25% share of container sales proceeds
after limited partners have received a return equal to their adjusted
capital contribution plus 8% per annum for the leveraged programs; and
- Reimbursed administrative expenses: for certain overhead and operating
expenses.
Management and acquisition fees, as well as syndication commissions
(representing amounts earned on the sale of Limited Partnership interests)
earned by the Company, were $15.0 million, $12.0 million, and $11.3 million for
the years ended December 31, 1996, 1997 and 1998, respectively.
OTHER CONTAINER OWNERS
In addition to U.S. Public Limited Partnerships, Cronos manages containers
pursuant to agreements negotiated directly with corporations, partnerships and
private individuals located in Europe, Asia, the United States and South Africa.
Cronos' obligations to investors in the partnerships and the investor programs
are substantially similar. The terms of the agreements vary from 1 to 15 years.
The agreements generally contain provisions which permit earlier termination
under certain conditions upon 60-90 days' notice. Under the agreements with
Other Container Owners, the container owner can generally terminate the
agreement if average payments by Cronos are less than a certain percentage
(specified in each agreement) of total capital invested. Cronos believes that
early termination is unlikely in normal circumstances.
These management agreements generally provide compensation to Cronos
consisting of management fees between 5% and 20% of the net lease revenue
generated by the containers. Cronos also earns an acquisition fee of
approximately 2.5% to 5.0% of the aggregate original equipment cost of the
equipment managed for the owners where Cronos has negotiated the purchase of the
equipment. In certain cases, an incentive fee may also be earned. Acquisition
fees under the investor programs are generally recognized in Cronos' income
statements over periods ranging from 7 to 15 years.
Total fees earned by the Company were $7.4 million, $7.3 million and $7.4
million for the years ended December 31, 1996, 1997 and 1998, respectively.
All of the containers managed for these owners are combined into pools with
containers of similar age and type and are managed pursuant to generally similar
management agreements. Occasionally an owner will have its own pool, due to the
size of its fleet or to differences in the structure or terms of the management
agreement. The owners of the containers in each pool share revenues and
expenses, which are allocated pro rata in order to minimize the effect of
possible over-utilization or under-utilization of any particular containers.
Pooling was designed to minimize conflicts of interest and promote
administrative convenience.
Revenues and expenses are allocated among owners based upon the aggregate
original equipment cost of the containers owned by each owner and the number of
days that such containers were in the pool, compared to the total aggregate
original equipment cost of all containers in the pool and the total number of
days in the period.
OWNED CONTAINERS
Cronos uses various forms of debt funding to finance its owned fleet
including bank loans, private placements, and capital leases. Container
ownership provides the Company with the ability to generate lease revenues over
the life of the container, matched with relatively fixed costs of interest and
depreciation expenses. Most of the Company's long term debt facilities have
principal maturities of less than seven years, after which containers financed
under such facilities provide increased cash flows. In general, the Company
believes that container ownership is more profitable over the life of the
container when compared to the corresponding profits generated from container
management. However, unlike container management, container ownership can often
require an initial cash investment in order to secure cost effective debt
8
<PAGE> 19
financing. Until the Company completes its short term debt refinancing,
additional investment in container ownership will be restricted. See Item
7 -- "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Cronos also owns containers on a temporary basis until such time that the
containers are sold to its U.S. Limited Partnerships and Other Container Owner
Programs. Most containers targeted for transfer to managed programs are
purchased new by Cronos, and sold to a managed container owner within six
months. This strategy allows Cronos more flexibility to negotiate and buy
containers strategically, based on market conditions and later sell these
containers to third party owners after the initial lease profile is established
for a particular group of containers. Cronos also intends to use managed
container programs to help it refinance containers held under short-term debt
agreements, some of which it has completed in the first quarter of 1999.
ENVIRONMENTAL
Countries that are signatories to the Montreal Protocol on the environment
agreed in November 1992 to restrict the use of environmentally destructive
refrigerants, banning production (but not use) of chlorofluorocarbon compounds
("CFCs") beginning in January 1996. CFCs are used in the operation, insulation
and manufacture of refrigerated containers. All of Cronos' refrigerated
containers purchased since June 1993 use non-CFC refrigerant gas in the
operation and insulation of the containers, although a reduced quantity of CFCs
is still used in the container manufacturing process. The replacement
refrigerant used in the Company's new refrigerated containers may also become
subject to similar governmental regulations. Depending on market pressures and
future governmental regulations, many of the Company's refrigerated containers
may require retrofitting with non-CFC refrigerants. Cronos' technical staff has
cooperated with refrigeration manufacturers in conducting investigations into
the most effective and economical retrofit plan. In the future, the Company may
bear the costs related to retrofitting its Owned Containers, which constitute
approximately 25% of its total refrigerated container fleet. Cronos believes
that any such further expenses, should they be required, would not be material
to its financial position or results of operations. In addition, refrigerated
containers that are not retrofitted may command lower prices in the used
container market.
EMPLOYEES
As of December 31, 1998, Cronos had 139 employees worldwide, 32 were
located in the United States, 80 in Europe and 27 in Asia. None of Cronos'
employees are covered by a collective bargaining agreement.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Dennis J. Tietz..................................... Chief Executive Officer 46
Peter J. Younger.................................... Chief Financial Officer 42
Stephen J. Brocato.................................. President of Leasing Division 46
</TABLE>
A brief summary of the recent business and professional experience of each
executive officer is set forth below:
DENNIS J. TIETZ. Mr. Tietz, 46, was elected Chief Executive Officer of The
Cronos Group in December 1998 and Chairman of the Board of Directors in March
1999. Since 1986, Mr. Tietz has been responsible for the organization and
marketing and after-market support of investment programs managed by Cronos
Capital Corp. ("CCC"), a subsidiary of the Company. Mr. Tietz was a regional
manager for CCC, responsible for various container leasing activities in the
U.S. and Europe from 1981 to 1986. Prior to joining CCC in December 1981, Mr.
Tietz was employed by Trans Ocean Leasing Corporation as Regional Manager based
in Houston, with responsibility for all leasing and operational activities in
the U.S. Gulf. Mr. Tietz holds a B.S. degree in Business Administration from San
Jose State University and is a Registered Securities Principal with the National
Association of Securities Dealers ("NASD").
PETER J. YOUNGER. Mr. Younger, 42, was elected Chief Financial Officer of
The Cronos Group in March, 1997, and is based in the United Kingdom. Mr. Younger
was appointed Vice President and Controller
9
<PAGE> 20
of Cronos in 1991. He joined IEA in 1987 and served as Director of Accounting
and Vice President and Controller, based in San Francisco. Prior to 1987, Mr.
Younger was a certified public accountant and a principal with the accounting
firm of Johnson, Glaze and Co. in Salem, Oregon. Mr. Younger holds a B.S. degree
in Business Administration from Western Baptist College.
STEPHEN J. BROCATO. Mr. Brocato, 46, was elected President of the Leasing
Company's container division in June 1997, and is based in the United Kingdom.
Mr. Brocato has held various positions since joining Cronos including, Vice
President -- Corporate Affairs and Director of Marketing -- Refrigerated
Containers for Cronos in North and South America. Prior to joining Cronos, Mr.
Brocato was a Vice President for ICCU Containers from 1983 to 1985 and was
responsible for dry cargo container marketing and operations for the Americas.
From 1981 to 1983, he was Regional Manager for Trans Ocean Leasing Ltd. On March
31, 1999 Mr. Brocato resigned from his position as President of the Leasing
Company's container division and has left the Company to pursue other interests.
INSURANCE
Cronos' lease agreements typically require lessees to obtain insurance to
cover all risks of physical damage and loss of the equipment under lease, as
well as public liability and property damage insurance. However, the precise
nature and amount of the insurance carried by each ocean carrier varies from
lessee to lessee.
In addition, Cronos has purchased secondary insurance effective in the
event that a lessee fails to have adequate primary coverage. This insurance
covers liability arising out of bodily injury and/or property damage as a result
of the ownership and operation of the containers, as well as insurance against
loss or damage to the containers, loss of lease revenues in certain cases and
costs of container recovery and repair in the event that a customer goes into
bankruptcy. Cronos believes that the nature and amounts of its insurance are
customary in the container leasing industry and subject to standard industry
deductions and exclusions.
ITEM 2. PROPERTIES
Cronos owns the real property known as Orchard Lea, located west of London,
England. Orchard Lea consists of a 22,000 square foot office building on four
acres of land. Orchard Lea is the head office of Cronos' container leasing
operations. It is subject to a mortgage and other liens and encumbrances. Cronos
leases approximately 12,160 square feet of office space in San Francisco,
California, where its U.S. Limited Partnership activities are based. Cronos also
conducts container leasing operations from offices in Iselin, New Jersey;
Hamburg; Antwerp; Genoa; Gothenburg, Sweden; Hong Kong; Singapore; Sydney;
Tokyo; Rio de Janeiro; Shanghai and Auckland, generally under shorter term
leases of varying durations. The containers owned and managed by Cronos are
described under Item 1 -- "Description of Business -- Company Strategy -- Fleet
Profile, Operating Segments -- U.S. Public Limited Partnerships, Other Container
Owners and Owned Containers", above. As of December 31, 1998, Cronos owned
50,487 TEU dry cargo containers, 7,537 TEU refrigerated containers, 671 TEU tank
containers, 2,419 TEU CPC containers and 2,309 TEU of other specialized
equipment. As of December 31, 1998, Cronos managed a total of 287,339 TEU dry
cargo containers, 7,165 TEU refrigerated containers, 1,341 TEU tank containers
and 2,171 TEU of other specialized equipment.
ITEM 3. LEGAL PROCEEDINGS
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 of 1934 citing
its inability to obtain what it considered to be adequate responses to its
inquiries primarily regarding the payment of $1.5 million purportedly in respect
of professional fees relating to the proposed strategic alliance referred to in
Note 17 to the 1998 Consolidated Financial Statements.
The Securities and Exchange Commission ("SEC"), a United States regulatory
agency, subsequently commenced an investigation of the Company. The SEC's
investigation can result in several types of civil or
10
<PAGE> 21
administrative sanctions against the Company and individuals associated with the
Company, including the assessment of monetary penalties against the Company.
Actions taken by the SEC do not preclude additional actions by any other
federal, civil or criminal authorities or by other regulatory organizations or
by third parties.
The SEC's investigation is continuing, and some of the Company's 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.
Since 1983, the Company has managed equipment for Austrian entities
sponsored by various Contrin companies. Contrin was formed in 1976 by Mr Rudolf
J. Weissenberger, a former Chief Executive Officer, Chairman and Director of the
Company. Subsequently, Mr Palatin, a former Chief Executive Officer, Chairman
and Director of the Company, joined Mr Weissenberger in the ownership and
management of Contrin. Mr Axel Friedberg, a former non-executive Director of the
Company from 1997 to March 1999, served as legal counsel to Mr Weissenberger and
some of the Contrin entities. Mr Weissenberger and Mr Palatin terminated their
respective positions with Contrin in 1991. Since then, Cronos has continued to
manage equipment for Contrin under Management Agreements.
Certain of the Contrin entities were liquidated in 1996 with alleged losses
to the investors in some of the Austrian entities that had provided financing.
Investigations that involved allegations of fraudulent dealings in respect of
Contrin were initiated against various persons and entities in the Provincial
Court of Vienna, Austria (Criminal Division) upon the complaint of certain of
the Contrin companies. In September 1997 the Provincial Court of Vienna entered
a temporary injunction that froze a payment being made by Cronos Containers NV
of 4,617,835 Austrian schillings (approximately $0.36 million) pending the
outcome of further legal proceedings. In December 1997 the Vienna Court of
Appeal (Criminal Division) sustained the temporary injunction. In its opinion,
the Court of Appeal noted that, upon motion of the Public Prosecutor,
investigations were then pending against, among others, Mr Palatin. The Court
also said that investigations were being initiated against additional persons,
including Mr Weissenberger and Mr Friedberg. Mr Palatin and Mr Friedberg have
since been formally charged. Such investigations, which are still pending, have
not resulted in any actions being taken against Mr Weissenberger, who has
informed the Company that he does not believe that there is any valid basis for
any such actions to be taken against him.
In May 1998, Mr Palatin was taken into custody by Austrian governmental
authorities pending further hearings on the allegations of fraud in connection
with various Contrin transactions. See Notes 17 and 21 to the 1998 Consolidated
Financial Statements. In June 1998, the Company's Board of Directors removed Mr
Palatin from his position as Chief Executive Officer. Mr Palatin resigned from
the Board of Directors on July 3, 1998.
In response to actions taken by Contrin, the Company terminated certain of
its Management Agreements with the various Contrin entities in 1998. Discussions
are taking place between Contrin and the Company and it is possible these
agreements may be reinstated.
Based on the information available to it, the Company considers that
prudent provision has been made in the 1997 and 1998 Financial Statements for
all matters concerning Contrin. See Note 17 to the Company's 1998 Consolidated
Financial Statements for additional information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on October 29, 1998. The
following is a summary of the matters voted on at the meeting:
Resolution 1: to receive and approve the reports of the independent auditor
and of the Board of Directors; votes for 2,502,708; votes against 1,340,140;
abstentions 1,075,200. Consequently, the resolution was passed.
11
<PAGE> 22
Resolution 2: to ratify the appointment by the Board of Directors of Mr
Maurice Taylor on July 9, 1998 to fill a vacancy on the Board; votes for
2,502,508; votes against 1,339,140; abstentions 1,076,400. Consequently, Mr
Taylor's appointment by the Board of Directors was ratified.
Resolution 3: to approve the Consolidated and Unconsolidated Financial
Statements of the Company for the year ended December 31, 1997; votes for
2,173,108; votes against 1,340,940; abstentions 1,404,000. Consequently, the
Consolidated and Unconsolidated Financial Statements of the Company for the year
ended December 31, 1997 were approved.
Resolution 4: to discharge the Board of Directors (other than Mr Palatin)
pursuant to Article 74 of the Company Law (August 10, 1915) for the execution of
their mandate for the year ended December 31, 1997; votes for 2,496,098; votes
against 1,343,000; abstentions 1,078,950. Consequently, the discharge as
proposed was granted.
Resolution 5: election of Directors
<TABLE>
<CAPTION>
VOTES
-----------------------------------
NOMINEE TERM FOR AGAINST ABSTENTIONS
------- ---- --------- --------- -----------
<S> <C> <C> <C> <C>
E. A. Eriksen........................................... 2001 487,371 3,352,277 1,078,400
R. J. Weissenberger..................................... 2001 2,160,208 1,586,440 1,171,400
M. Taylor............................................... 2001 2,500,608 913,890 1,503,550
N. Walker............................................... 2001 708,010 1,337,840 2,872,198
</TABLE>
Mr Friedberg and Mr Ernst Otto Nedelmann continued to serve as Directors
following the meeting.
Resolution 6: to rescind the authorization granted at the 1997 annual
meeting of shareholders of the Company to pay out dividends of up to 35% of
consolidated net earnings for the year ended December 31, 1996; votes for
3,732,958; votes against 106,040; abstentions 1,079,050. Consequently, the
authorization was rescinded.
Resolution 7: to approve the appointment of Moore Stephens S.a.r.l. as the
Company's independent auditor for the fiscal year 1998 and to authorize the
Directors to fix the independent auditors remuneration; votes for 3,499,348;
votes against 343,000; abstentions 1,075,700. Consequently, Moore Stephens
S.a.r.l was reappointed.
Resolution 8: to approve any dividends and allocate the results for the
year ended December 31, 1997; votes for 2,169,008; votes against 1,673,840;
abstentions 1,075,200. Consequently, it was decided not to pay dividends.
12
<PAGE> 23
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As at March 29, 1999, there were outstanding 8,858,378 Common Shares. They
were held of record by 16 holders, including five non-U.S. persons holding an
aggregate of 2,857,017 shares.
Prior to December 1995, there was no trading market for the Company's
Common Shares. Since the Company's Public Offering, the Common Shares have been
quoted and traded over-the-counter on the NASDAQ National Market System under
the symbol "CRNSF". In March 1999 the Company announced that it would comply
with the reporting requirements applicable generally to U.S. public companies
and would therefore trade under the symbol "CRNS". There is no trading market
for the Common Shares outside the United States. The table below shows the high
and low reported bid prices for the Common Shares on the NASDAQ National Market
System for the last two years for the quarterly periods ending on the dates
indicated. Bid prices are market quotations and reflect inter dealer prices,
without retail mark up, mark down or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
PRICE RANGE
(DOLLARS)
-------------- TRADING VOLUME
HIGH LOW (# OF COMMON SHARES)
----- ----- --------------------
<S> <C> <C> <C>
March 31, 1997.................................. 7.375 2.750 2,704,887
June 30, 1997................................... 6.875 4.000 1,833,200
September 30, 1997.............................. 8.125 6.250 1,671,623
December 31, 1997............................... 7.375 4.500 1,092,334
March 31, 1998.................................. 7.250 5.125 1,397,942
June 30, 1998................................... 7.125 5.000 552,233
September 30, 1998.............................. 5.969 4.875 1,101,394
December 31, 1998............................... 6.625 3.375 297,081
February 28, 1999............................... 5.938 3.500 137,290
</TABLE>
There are currently no Luxembourg foreign exchange control restrictions on
the payment of dividends on the Common Shares or on the conduct of Cronos'
operations. In addition, there are no limitations on holding or voting
applicable to foreign holders of Common Shares, imposed by law, by the Company's
Articles of Incorporation or otherwise, other than those restrictions which
apply equally to Luxembourg holders of Common Shares. The company is, under a
credit agreement, restricted in declaring or making dividend distributions
except in the case where such declarations or distributions are made solely and
limited to an amount equal to 35% of Consolidated Net Earnings of any year. No
dividend declarations have been made by the Company since its Initial Public
Offering in December 1995.
The following summary of the material Luxembourg tax consequences is not a
comprehensive description of all of the tax considerations that are applicable
to the holders of Common Shares, and does not deal with the tax consequences
applicable to all categories of holders, some of which may be subject to special
rules.
Under present Luxembourg law, as long as the Company maintains its status
as a holding company, no income tax, withholding tax (including with respect to
dividends), capital gains tax or estate inheritance tax is payable in Luxembourg
by shareholders in respect of the Common Shares, except for shareholders
domiciled, resident (or, in certain circumstances, formerly resident) or having
a permanent establishment in Luxembourg. The reciprocal tax treaty between the
United States and Luxembourg limiting the rate of any withholding tax is
therefore inapplicable.
13
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated financial information for the
Company as of and for the periods noted. The balance sheet and income statement
data for the five years ended December 31, 1998, have been derived from the
consolidated financial statements of the Company. The table should be read in
conjunction with Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the 1998 Consolidated Financial
Statements and related notes thereto included elsewhere in this Annual Report.
The Company is facing material financial uncertainties in connection with its
refinancing that may cause this data not to be indicative of future financial
condition or results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gross lease revenue......................... $124,658 $150,429 $154,011 $160,848 $157,546
Commissions, fees and other operating
income.................................... 5,667 6,942 7,460 5,545 4,955
Interest income............................. 255 1,329 1,333 1,685 1,154
Equity in earnings of affiliates............ 1,445 1,895 1,397 -- --
Gain on conversion of investment in
affiliate................................. -- -- 5,260 321 --
-------- -------- -------- -------- --------
Total Revenues and Non-Operating Income..... 132,025 160,595 169,461 168,399 163,655
-------- -------- -------- -------- --------
Direct operating expenses................... 23,783 26,938 34,535 34,217 35,318
Payments to container owners................ 62,288 77,073 72,894 73,945 75,527
Depreciation and amortization............... 8,711 10,676 14,258 19,033 18,714
Selling, general and administrative
expenses.................................. 20,148 24,133 23,834 22,683 21,164
Financing and recomposition
expenses(1)(2)............................ 1,900 -- 2,149 7,384 5,375
Interest expense............................ 8,229 11,238 11,368 17,758 15,718
Provision against amounts receivable from
related parties(3)........................ -- -- -- 4,733 --
Provision against available for sale
securities(4)............................. -- -- -- -- 1,500
Impairment losses(5)........................ -- -- -- 11,668 6,500
-------- -------- -------- -------- --------
Total Expenses.............................. 125,059 150,058 159,038 191,421 179,816
-------- -------- -------- -------- --------
Earnings (Loss) Before Income Taxes......... 6,966 10,537 10,423 (23,022) (16,161)
Income taxes................................ 3,031 3,175 2,441 -- 306
-------- -------- -------- -------- --------
Net Income (Loss)........................... 3,935 7,362 7,982 (23,022) (16,467)
-------- -------- -------- -------- --------
Preferred dividends......................... 900 856 -- -- --
-------- -------- -------- -------- --------
Earnings available for common shares........ $ 3,035 $ 6,506 $ 7,982 $(23,022) $(16,467)
-------- -------- -------- -------- --------
Earnings (loss) per common share............ $ 0.58 $ 1.21 $ 0.90 $ (2.60) $ (1.86)
-------- -------- -------- -------- --------
Dividends per common share.................. $ .19 $ -- $ -- $ -- $ --
-------- -------- -------- -------- --------
Shares used in per share calculations(6).... 5,215 5,383 8,853 8,858 8,858
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................... $ 7,493 $ 24,243 $ 17,278 $ 14,455 $ 9,281
Total assets................................ 222,337 266,485 399,301 327,145 279,979
Long-term debt and capital lease
obligations............................... 93,578 89,600 141,435 88,682 61,195
Total debt and capital lease obligations.... 109,696 106,620 198,989 171,399 148,466
Shareholders' equity........................ 53,186 85,349 95,576 73,713 56,087
</TABLE>
- ---------------
(1) In 1994, $1.9 million ($.37 per share) of costs incurred in preparation for
the Company's Public Offering were written off because the offering,
originally planned for the summer of 1994, was postponed for more than 90
days. These costs were non-deductible for tax purposes.
(2) In 1996, 1997 and 1998 the Company incurred costs in connection with certain
financing and other transactions and the restructuring of the Board of
Directors and other employee positions. Costs incurred
14
<PAGE> 25
and accrued were charged to the income statement where the Company
determined that no future benefit would be derived from such costs.
(3) As of December 31, 1997 the Company provided $4.7 million against a loan and
associated interest to the then Chairman due to concern over its
collectability and the Company's ability to exercize the pledge over shares
put up as collateral for the loan.
(4) As of December 31, 1998 the Company provided $1.5 million against the escrow
holding certain Transamerica shares pending final determination of
post-closing reports and adjustments.
(5) As of December 31, 1997 and 1998 the Company recorded accounting charges
relating to the impairment of certain long-lived assets as required by the
Statement of Financial Accounting Standards 121.
(6) Weighted average number of shares outstanding during the year.
15
<PAGE> 26
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the 1998 Consolidated Financial
Statements and the notes thereto and the other financial and statistical
information appearing elsewhere in this Annual Report. The 1998 Consolidated
Financial Statements have been prepared in accordance with US Generally Accepted
Accounting Principles.
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 segment information presented in Note 2 of the Notes to the Company's
1998 Consolidated Financial Statements relates to the portions of the Company's
fleet owned by the Company itself ("Owned Containers") or by the Company's
managed container programs, U.S. Public Limited Partnerships ("U.S. Limited
Partnerships") and Other Container Owners ("Other Container Owners") and
together with U.S. Limited Partnerships, "Managed Container Owners". Owned
Containers include containers held for resale, the financing costs of which are
borne by the Company prior to the sale of such containers to Managed Container
Owners, and are accounted for in the Owned Container segment. The Company bears
the risk of ownership with respect to containers in Owned Containers but not
with respect to the majority of containers in the Managed Container Owners
segments, although the Company bears the risk that the management agreements
could be terminated, resulting in the removal of the corresponding managed
containers from the fleet. At December 31, 1998, approximately 34%, 41% and 25%
of the Company's fleet (by original equipment cost) was related to U.S. Limited
Partnerships, Other Container Owners and Owned Containers, respectively.
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. Substantially all
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 which have fixed payment
terms are presented in note 14(c) of the notes to the Company's 1998
Consolidated Financial Statements. Substantially all payments to container
owners represent a percentage of the rentals collected from the ocean carriers
to whom containers are leased by the Company.
Gross lease revenue represents revenue from operating leases, excluding
billings in advance. These amounts are billed in U.S. dollars on a monthly
basis. Amounts due under master leases are calculated by the Company at the end
of each month and billed approximately 6 to 8 days thereafter. Amounts due under
short-term and long-term leases are set forth in the respective lease agreements
and are generally payable monthly. Changes in gross lease revenue depend
primarily upon fleet growth, utilization rates and average per diem rates.
The Company has expanded its fleet since December 31, 1994 from 226,600 TEU
to 361,400 TEU at December 31, 1998. Between 1994 and 1998 the owned and managed
fleets have grown from 36,700 TEU to 63,400 TEU and from 189,900 TEU to 298,000
TEU, respectively. During this period, the Company added containers having an
original equipment cost of $233 million and $135 million, respectively, net of
disposals, to its owned and managed fleet, increasing the total original
equipment cost of the fleet to $991 million. During 1997 and 1998 the ability of
the Company to purchase new equipment for both the owned and managed fleets was
constrained by the levels of finance available to the company.
Utilization of the Company's containers declined in 1996 as a result of the
increasing fleet size, an oversupply of containers in the industry, relatively
slow growth in world trade and increased competition.
16
<PAGE> 27
During 1997, utilization experienced steady growth due to marketing efforts and
improved inventory management. In 1998, utilization declined reflecting the
deteriorating economic position in Asian, South American and other markets.
The Company's average per diem rates have fallen consistently throughout
1996, 1997 and 1998. This reflects the rationalization in the global shipping
industry and the resultant lowering of freight rates.
Commissions, fees and other operating income includes acquisition fees
relating to the Company's managed container programs, syndication fees relating
to the Company's limited partnership offerings, income from direct financing
leases (principally containers leased under lease-purchase arrangements), fees
from the disposal of used containers and miscellaneous other fees and income.
This item is affected by the size of new managed programs, the purchase price of
containers purchased for new managed programs, the number and value of direct
financing leases and income from disposals of used containers. Although
acquisition fees are generally received in cash at the inception of a managed
container program and are non-refundable, they are amortized in the income
statement on a straight-line basis over the period of the managed container
agreement to which they relate.
Direct operating expenses are direct costs associated with leasing
containers, both owned and managed. These expenses include depot costs such as
repairs, maintenance, handling and storage, non-depot expenses such as
insurance, agent fees and repositioning costs, and other expenses such as
provisions for doubtful accounts and legal costs. Direct operating expenses are
affected primarily by fleet size and utilization. The majority of direct
operating expenses relate to off-hire containers, and therefore these costs are
sensitive to the quantity of off-hire containers as well as the frequency at
which containers are re-delivered.
Payments to container owners reflect the amounts due to Managed Container
Owners, computed in accordance with the terms of the individual agreements.
Selling, general and administrative expenses include all employee and
office costs, professional fees and computer systems costs.
Operating profit or loss includes items directly attributable to specific
containers in each of the Company's operating segments, as well as items not
attributable to any specific container but instead are allocated across
operating segments. Items directly attributable to operating segments include
gross lease revenues, direct operating costs, payments to container owners,
container interest and depreciation expense. Indirect items allocated across
segments include selling, general and administrative expenses, interest,
depreciation and impairment charges on the Company's non-container assets.
RESULTS OF OPERATIONS
The following chart represents certain key performance measurements,
expressed as a percentage of gross lease revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Direct operating expenses.................................. 22.4% 21.3% 22.4%
Selling, general and administrative expenses............... 15.5 14.1 13.4
Depreciation and amortization(1)........................... 9.3 11.8 11.9
Interest expense........................................... 7.4 11.0 10.0
</TABLE>
- ---------------
(1) Depreciation and amortization in 1996 includes the amortization of goodwill
on the acquisition of capital stock of an affiliate. In the income statement
data, this amortization is netted in calculating equity in earnings of
affiliates.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During 1998, the size of the total fleet decreased by 8,400 TEU
representing disposals of 11,200 TEU net of new container production of 2,800
TEU. Total new container production in 1998 represented an investment
17
<PAGE> 28
of $9.8 million compared with $92.0 million in 1997. Approximately $3.8 million,
or 39%, of the new container investment before disposals related to dry cargo
containers, compared to $68.0 million, or 74%, in 1997. Of the remaining new
container purchases, $2.7 million was invested in flatracks, $2.0 million was
invested in roll-trailers and $1.3 million in tank containers.
Approximately 85% of new container investment in 1998 was financed within
the Managed Container Owners segments, compared to 69% in 1997. The remaining
balance of 15% in 1998 and 31% in 1997 was financed within the Owned Container
segment by operating cash flow and borrowings.
Based on current market conditions and expected new container prices in
1999, the Company intends to allocate the majority of its 1999 production
funding to new dry cargo containers, and the balance to dry freight specials and
tank containers. The majority of new funding in 1999 is expected to come from
the Other Container Owner segment, most of which is expected to be used for new
production, with the balance targeted to purchase used containers currently
owned by the Company.
Operating profit, see Note 2 to the 1998 Consolidated Financial Statements,
from U.S. Limited Partnerships declined by approximately $0.3 million, or 11%,
from $2.2 million in 1997 to $1.9 million in 1998 due to lower net lease
revenues generated from a smaller fleet size, offset partially by lower
allocations of selling, general and administrative expenses.
Other Container Owners generated an operating loss of $0.7 million in 1998,
compared to an operating profit of $0.9 million in 1997. Increased net lease
revenues resulting from an increased fleet size, were offset by higher
allocations of selling, general and administrative expenses and an allocation of
impairment losses in 1998 of $0.8 million related to the Company's real property
in England. Operating profit before allocations of indirect items increased
slightly due to a larger fleet under management. The Company expects this trend
to continue in 1999, both from the funding for new containers purchases, as well
as for used containers currently owned by the Company. In the first quarter of
1999, third party container owners purchased approximately $14.4 million in
container assets from the Company. The Company anticipates additional
transactions of this kind throughout the first half of 1999. In all cases, the
assets will continue to be managed by the Company as part of its Other Container
Owner programs.
Owned Containers generated a loss from operations in 1998 of $8.1 million
compared to a loss of $6.3 million in 1997. Lower net lease revenues resulting
from a softer leasing market as well as a smaller owned fleet and higher
interest rates on container debt contributed to the decline in this segment's
performance. Additionally, the Company took an impairment charge of $4.5 million
in 1998 on selected refrigerated and dry containers, in anticipation of a sale
of these assets to various third party investor programs in the first half of
1999. These sales reflect the Company's strategy of refinancing its short term
debt and reducing the Company's cost of debt financing. In 1997 the Company
booked a $7.4 million impairment charge to write down the carrying value of
refrigerated containers.
Total allocations of selling, general and administrative expenses between
all segments in 1999 are expected to decline as a result of the Company's
announced restructuring program.
Gross lease revenue decreased by approximately 2% in 1998, primarily due to
lower average utilization rates on dry containers, a smaller average
refrigerated container fleet and lower average per diem rates on most product
types. Gross lease revenue from dry cargo containers decreased by 2% in 1998 and
represented approximately 73% of the overall total, unchanged from 1997.
Refrigerated container gross lease revenue declined by $2.8 million, or 9%, to
$29.9 million in 1998 due to a reduction in average fleet size following a
program of targeting uneconomic equipment for disposal during the year.
Refrigerated container gross lease revenue represented 19% of the overall total
compared to 20% in 1997. Gross lease revenue from tank containers increased by
$1.2 million to $8.3 million, an increase of 17% over 1997, due to improved
utilization and a higher average fleet size. The roll-trailer fleet contributed
$2.9 million, or 2%, to total gross lease revenue in 1998 compared to $2.8
million, or 2%, in 1997.
Commissions, fees and other operating income decreased to $5.0 million in
1998, a decrease of $0.6 million, or 11%, over 1997. This was primarily due to
reduced income from direct financing leases which was partly offset by increased
fees from the disposal of containers and increased property rental income.
18
<PAGE> 29
Direct operating expenses increased to $35.3 million in 1998, an increase
of $1.1 million, or 3%, over 1997. Reductions in storage, repositioning,
handling and agent costs were more than offset by increases in repair costs and
in charges in respect of dry cargo and refrigerated container legal expenses and
doubtful accounts. Dry container storage costs decreased by $1.0 million, or
10%, to $8.9 million reflecting stronger exchange rates and the negotiation of
lower storage rates in several locations. As a percentage of gross lease
revenue, direct operating expenses increased to 22% in 1998 from 21% in 1997.
Payments to container owners increased to $75.5 million in 1998, an
increase of $1.6 million, or 2%, over the prior year. Payments to Other
Container Owners were $43.6 million in 1998, an increase of $6.1 million, or
16%, over 1997 due to a higher average fleet size which more than offset lower
average dry utilization and per diem rates. The increase in the average fleet
size was mainly due to transactions involving the sale of equipment from the
Owned to the Other Container Owner segment in the second half of 1997 together
with new container production. Payment to US Limited Partnerships decreased by
$4.6 million to $31.9 million, a 12% decrease compared to 1997. The $6.6 million
reduction in gross lease revenue for the segment was caused by lower average
utilization and per diem rates and a smaller dry container fleet which more than
offset a $1.3 million reduction in direct operating expenses. The US Limited
Partnership fleet declined from 138,600 TEU at December 1997 to 128,700 TEU at
December 1998 as a result of the disposal of older container equipment including
sales of equipment to the Other Container Owner segment. At December 1998, the
managed container fleet comprised 75% of the total fleet by original equipment
cost which was almost unchanged from 1997.
Depreciation and amortization decreased slightly to $18.7 million in 1998,
a reduction of $0.3 million, or 2%, compared to 1997, due to a lower average
Owned Container fleet which was partly offset by an increase in the depreciation
charge for refrigerated containers following a change in the depreciation policy
at the beginning of 1998.
Selling, general and administrative expenses were $21.2 million in 1998,
compared to $22.7 million in 1997, a decrease of $1.5 million, or 7%, due to
lower manpower, professional service and communication costs.
Financing and recomposition expenses decreased to $5.4 million in 1998, a
reduction of $2.0 million, or 27%. During 1998, $3.4 million of charges were
incurred in respect of professional and financing fees together with a $2.0
million provision in connection with a restructuring plan. Charges incurred
during 1997 comprised a $3.4 million provision against a contingent liability
(see Notes 3 and 17 to the 1998 Consolidated Financial Statements) and $4.0
million of costs in respect of professional and financing fees.
Interest expense decreased to $15.7 million in 1998, a decrease of $2.0
million, or 12%, over 1997 due to a lower average debt balance which was partly
offset by a higher average interest rate. The average debt balance was $160.9
million in 1998 compared to $185.1 million in 1997, a decrease of $24.2 million.
The reduction in the average debt balance was due to debt repayments of $22.1
million from operating cash during 1998 together with container sales from the
Owned Container fleet to the managed container fleet in the second half of 1997.
Provision against available for sale securities represented a $1.5 million
charge to reduce the anticipated proceeds from investment securities presently
held in escrow accounts.
Impairment losses of $6.5 million in 1998 comprised a $4.5 million charge
in respect of container equipment and a $2.0 million adjustment to record a
property at estimated market value.
Income taxes of $0.3 million in 1998 represented charges against profits
arising in European and Asian marketing offices. There was no income tax charge
in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
During 1997, the Company added 27,000 TEU of dry and special purpose
containers to the fleet, compared with 77,200 TEU in 1996, net of disposals.
This represented an investment of $92.0 million in new containers in 1997
compared with $253.0 million in 1996. Approximately 74% of the new container
investment before disposals related to dry cargo containers, compared to 81% in
1996. Refrigerated container investment
19
<PAGE> 30
was $10.0 million in 1997 compared to $50.0 million in 1996. Of the remaining
new container purchases, $6.0 million was invested in tank containers, $4.0
million was invested in palletwide containers, $2.0 million was invested in
roll-trailers and $1.0 million in flatracks.
Approximately 69% of new container investment in 1997 was financed within
the Managed Container Owners segments, compared to 50% in 1996. The remaining
balance of 31% in 1997 and 50% in 1996 was financed within the Owned Container
segment by operating cash flow and borrowings.
Operating profit, see Note 2 to the 1998 Consolidated Financial Statements,
for US Limited Partnerships decreased by $0.1 million, or 3%, compared to 1996.
Net lease revenue net of payments to US Limited Partnerships was $2.4 million,
or 19%, lower than prior year due to a reduced fleet size and lower per diem
rates which were partly offset by improved utilization. The allocation of
indirect items decreased by $2.9 million, or 23%, reflecting lower commissions
on the sale of limited partnership units and a decrease in selling, general and
administrative expense allocations. Operating profit for Other Container Owners
increased by $0.3 million, or 55%. Net lease revenue net of payments to
container owners increased by $0.3 million, or 5%, due to a higher average fleet
size under management and improved utilization which was partly offset by lower
per diem rates. The average fleet size increased as a result of investment in
new containers during 1997 and purchases of containers from the Owned Container
segment in the second half of 1997. The Owned Container segment experienced an
operating loss of $6.3 million compared to an operating profit of $6.3 million
in 1996 as a result of increased interest and depreciation charges and a charge
in respect of a reduction in the carrying value of refrigerated containers of
$7.4 million.
Gross lease revenue increased to $160.8 million in 1997, an increase of
$6.8 million, or 4%, due to the expanded fleet size under management and higher
average utilization on dry containers which were partly offset by lower average
per diem rates. Dry cargo containers comprised 71% of the total fleet by
original equipment cost compared to 70% in 1997. Gross lease revenue from this
product type in 1997 remained unchanged from 1996, comprising 73% of the overall
total. Gross lease revenue from tank containers increased by $1.8 million to
$7.1 million, an increase of 34% over 1996. The roll-trailer fleet contributed
$2.8 million, or 1.7%, to total gross lease revenue in 1996.
Commissions, fees and other operating income decreased to $5.5 million in
1997, a decrease of $1.9 million, or 26%, over 1996. This was due to lower fees
from the disposal of containers and lower syndication commissions resulting from
a reduction in the sale of U.S. Limited Partnership units.
Gain on conversion of investment in affiliate was $0.3 million in 1997
compared to $5.3 million in 1996. The gain resulted from the conversion of the
investment in Trans Ocean Limited in 1996. See Note 9 to the 1998 Consolidated
Financial Statements.
Direct operating expenses decreased to $34.2 million in 1997, a reduction
of $.3 million, or 1%, over 1996. Lower repositioning expenses reflecting the
continuing improvement in the dry container market were partly offset by higher
storage and handling costs and an increased provision for doubtful accounts.
Although storage and handling costs decreased in each quarter in 1997 as dry
utilization improved, the total cost for 1998 was $1.0 million higher than in
1996. As a percentage of gross lease revenue, direct operating expenses
decreased to 21.3% in 1997 from 22.4% in 1996.
Payments to container owners increased to $73.9 million in 1997, an
increase of $1 million, or 1%, over the prior year. Payments to Other Container
Owners was $37.5 million in 1997, an increase of $4.9 million over 1996 due to a
higher average fleet size and higher dry utilization which more than offset
reduced per diem rates. Payment to US Limited Partnerships decreased by $3.9
million to $36.5 million, a 10% decrease compared to the prior year. The
decrease in average fleet size and reduction in per diem rates more than offset
the improvement in dry utilizations. The size of the total managed container
fleet increased from 242,700 TEU at December 31, 1996 to 303,100 TEU at December
31, 1997, an increase of 60,400 TEU, or 25%.
Depreciation and amortization increased to $19.0 million in 1997, an
increase of $4.8 million, or 33%, over 1996, due to a higher average Owned
Container fleet.
20
<PAGE> 31
Selling, general and administrative expenses were $22.7 million in 1997,
compared to $23.8 million in 1996, a decrease of $1.1 million, or 5%, due to
lower employee costs and lower commissions paid on the sale of limited
partnership units, partly offset by higher professional fees.
Financing and recomposition expenses increased to $7.4 million in 1997, an
increase of $5.2 million over the prior year due to a $3.4 million provision
against a contingent liability (see Notes 3 and 17 to the 1998 Consolidated
Financial Statements) and higher levels of professional fees incurred in
connection with certain financing and other transactions.
Interest expense increased to $17.8 million in 1997, an increase of $6.4
million, or 56%, over 1996 due to higher average debt balances, a higher average
interest rate and increased loan fees. The average debt balance was $185.1
million in 1997 compared to $129.0 million in 1996, an increase of $56.1
million, reflecting a higher 1997 beginning debt position as a result of
significant additions to the Owned Container fleet in the second half of 1996.
The total debt balance decreased by $32.1 million between June 30, 1997 and
September 30, 1997 as a result of container sales from the Owned Container fleet
to the managed container fleet. The conversion of the Group's primary revolving
credit facility to a term loan resulted in a higher interest rate and increased
loan fees.
Provision against amounts receivable from related parties of $4.7 million
in 1997 represents an adjustment in respect of outstanding loans and unpaid
interest. See Note 21 to the 1998 Consolidated Financial Statements.
Impairment losses of $11.7 million were recorded in 1997 in respect of
certain long-lived assets in accordance with Statement of Financial Account
Standards No. 121. A $7.4 million impairment loss was recognized in respect of
refrigerated container equipment to record the assets at fair value. A $4.3
million adjustment in respect of goodwill reflects the impairment of the Group's
ability to organize future public limited partnerships in the U.S. See Note 3 to
the 1998 Consolidated Financial Statements.
Income taxes: there was no income tax charge in 1997 reflecting the loss
before income taxes. In 1996 the charge was $2.4 million representing an
effective tax rate as a percentage of earnings before income taxes of 23.4%.
LIQUIDITY AND CAPITAL RESOURCES
The funding sources available to the Company and its consolidated
subsidiaries include operating cash flow and borrowings. The Company's operating
cash flow is derived from lease revenues generated by the Company's fleet and
fee revenues from its managed container programs. The Company's working capital
requirements generally relate to day-to-day fleet support and servicing the
current portion of long-term debt outstanding. The parent company derives all of
its operating income and cash flow from its subsidiaries. Dividends of $4.4
million and $3.2 million were paid to the parent company by its subsidiaries
during 1996 and 1998, respectively.
The Company purchases new containers for its own account and for resale to
its managed container programs. In recent years the Company has purchased
containers to take advantage of strategic purchasing and leasing opportunities.
These containers are held for periods of up to six months by the Company until
sold to one of the programs. If they are not sold, the Company retains them for
its own account. The Company believes that this activity allows the Company to
take advantage of opportunistic buying and increases the likelihood that the
containers will already be generating revenues at the time they are acquired by
the managed container programs, thereby providing managed container programs
with more attractive container prices and operating performance. The Company is
not obligated to continue this activity in the future. During 1997 and 1998 its
ability to purchase new containers was limited by the reduced levels of
financing available to the Company.
Cash from Operating Activities. Net cash provided by operating activities
was $19.1 million and $15.2 million in 1996 and 1998, respectively. Net cash
used by operating activities was $20.6 million in 1997. The net cash generated
in 1996 reflected earnings from operations together with a decrease in new
container equipment for resale of $6.4 million. The net cash used in 1997
reflected a payment to container
21
<PAGE> 32
manufacturers of $26.4 million together with the addition of new container
equipment for resale of $6.7 million. The net cash generated in 1998 reflected
cash generated from operations and $7.9 million of proceeds from new container
equipment for sale.
Cash for Investing Activities. The Company uses cash for investing
activities to acquire containers for its owned fleet, to purchase property and
other assets related to the operation of its worldwide office network and on
occasion to acquire subsidiaries and other investments. Net cash used for
investing activities was $121.2 million and $1.4 million in 1996 and 1998,
respectively. Net cash provided by investing activities was $44.6 million in
1997. Included in cash paid in 1996 was $3.4 million relating to the acquisition
of Intermodal Management AB and Intermodal Leasing AB, operators of a fleet of
roll-trailers and other roll-on roll-off terminal handling equipment. Also
included in cash paid in 1996 was $142.6 million relating to the purchase of
owned container equipment, $26.4 million relating to the purchase of container
equipment leased out under a lease purchase agreement, recorded in the Company's
balance sheet as Investment in direct financing leases, and $1.5 million in
respect of professional fees relating to a proposed strategic alliance. See Note
21 to the 1998 Consolidated Financial Statements. Cash received in 1996 related
to proceeds from the sale of container equipment of $36.4 million, and proceeds
from the conversion and subsequent sale of the investment in Trans Ocean Limited
of $19.3 million. Included in cash paid in 1997 was $38.7 million relating to
the purchase of owned container equipment and $3.7 million relating to loans
made to the then Chairman. See Note 21 to the 1998 Consolidated Financial
Statements. Cash received in 1997 related to proceeds from the sale of container
equipment of $61.5 million and proceeds from the sale of an investment in
finance lease equipment of $25.1 million made in 1996. Also included in cash
received in 1997 was the return of $1.5 million paid by the Company purportedly
in respect of professional fees relating to a proposed strategic alliance. Cash
payments in 1998 included acquisitions of roll-trailer and computer equipment of
$1.6 million and $1.1 million respectively. Cash receipts in 1998 included $1.1
million in respect of container equipment to a third party container owner.
Cash from Financing Activities. The Company uses cash from financing
activities to fund capital acquisition requirements and short-term purchasing
requirements of new containers held for resale. Net cash provided by financing
activities was $95.1 million in 1996. Net cash used by financing activities was
$26.7 and $19.0 million in 1997 and 1998, respectively. Included in the net cash
provided in 1996 was $2.1 million in net proceeds from the exercizing of options
on 243,000 shares by the underwriters following the Company's Public Offering.
In 1998, net cash used by financing activities included $22.1 million of debt
and capital lease repayments from operating cash.
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 instalments, 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.
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 instalments, beginning July 31, 1998 and ending January 8, 1999,
including a payment of approximately $27.2 million on September 30, 1998. These
instalments 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
22
<PAGE> 33
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
Group 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 thereafter of various conditions.
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 exercize 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 instalments 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 refinancings 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
has been executed in January 1999 which 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.
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.
Excluding the Bank Facility and the Sun Life Notes, as of December 31,
1998, the Company had total debt outstanding of $101.5 million secured by
specific containers and the headquarters of the Company's container leasing
operations. During the year ended December 31, 1998, interest rates on this debt
ranged from 6.6% to 9.8% and as of December 31, 1998, the debt bore an average
interest rate of 8.3% per annum. To the extent these facilities include
financial covenants, they are generally less restrictive than those imposed
under the Bank Facility. At December 31, 1998 the Company was not in compliance
with various financial covenants with various lenders. Waivers of the covenant
breaches have been received.
The Company manages equipment for third-party container owners and also
owns containers. Managed container programs have allowed the Company to expand
its fleet significantly without the capital expenditures required for container
ownership. Although container ownership may be more profitable for the
23
<PAGE> 34
Company than the managed container programs over the life of the container, the
managed programs provide the company with revenue that is less sensitive to
declines in utilization and per diem rates.
Capital Expenditures and Commitments
Capital expenditures for containers in 1996, 1997 and 1998 were $142.6
million, $38.7 million and $1.8 million, respectively. Other capital
expenditures in 1996, 1997 and 1998 were $0.7 million, $0.6 million and $1.1
million, respectively. During the year ended December 31, 1996, the Company
advanced $5.5 million to the then Chairman of the Group, of which $5.5 million
was outstanding as of December 31, 1996. In January 1997, the Company advanced a
further $3.7 million. As at December 31, 1997, no payments had been received
against these loans. See Item 13 -- "Certain Relationships and Related
Transactions" and Note 21 of the Notes to the 1998 Consolidated Financial
Statements. In October 1996, $1.5 million was placed into an escrow account,
purportedly in respect of professional fees relating to a proposed strategic
alliance. This alliance did not take place and the escrow funds were released to
the Company in January 1997. See Item 13 -- "Certain Relationships and Related
Transactions" below and Note 21 to the 1998 Consolidated Financial Statements.
The Company intends to refinance $47.7 million of amounts due under the
Bank Facility and the Company's other credit facilities by securing new term
debt financing and new investments by managed container owners. See "Liquidity
and Capital Resources -- Capital Resources" above and Note 14 to the 1998
Consolidated Financial Statements. Until the refinancing has been completed,
there is substantial doubt that the Company will be able to continue as a going
concern.
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 which 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 believe 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.
INFLATION
Management believes that inflation has not had a material adverse effect on
the Company's results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item should be read in conjunction with and by reference to Note 15 of
the notes to the 1998 Consolidated Financial statements.
24
<PAGE> 35
Interest rate risk: outstanding borrowings are subject to interest rate
risk. At December 31, 1998 65% of total borrowings had floating interest rates.
The Company performed an analysis of borrowings with variable interest rates to
determine their sensitivity to interest rate changes. In this analysis, the same
change was applied to the current balance outstanding leaving all other factors
constant. It was found that if a 10% increase was applied to market rates, the
expected effect would be to reduce annual cash flows by $0.8 million.
Exchange rate risk: substantially all of the Company's revenues are billed
and paid in U.S. dollars and approximately 79% of costs in 1998 were incurred
and paid in U.S. dollars. Of the remaining costs, approximately 81% 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. By reference to 1998, it is estimated that
for every 10% fall in value of the U.S. dollar, the effect would be to reduce
cash flows by $1.9 million in any similar year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in this Item 8 are set forth herein
beginning on page F1.
Report of Independent Public accountants
Consolidated Balance Sheets -- At December 31, 1997 and 1998
Consolidated Statements of Income for the Years Ended December 31, 1996,
1997 and 1998
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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. See Item 3 -- "Legal Proceedings".
Arthur Andersen did not permit the inclusion of their audit report to the
1995 Consolidated Financial Statements for The Cronos Group in the form 20-F for
the year ended December 31, 1997.
In April 1997, Moore Stephens were appointed as auditors to The Cronos
Group and its primary subsidiaries and related partnerships.
In the Audit Report to the 1997 Consolidated Financial Statements, Moore
Stephens drew attention to the fact that The Cronos Group was negotiating the
refinancing of certain loans and was not in compliance with the terms of an
escrow agreement. Moore Stephens advised that this and other factors raised
substantial doubt that the Group would be able to continue as a going concern.
In the Audit Report to the 1998 Consolidated Financial Statements, Moore
Stephens drew attention to the fact that The Cronos Group was negotiating the
refinancing of certain loans. Moore Stephens advised that these conditions raise
substantial doubt that the Group will be able to continue as a going concern.
In addition, Moore Stephens drew attention to certain notes to the 1997 and
1998 Consolidated Financial Statements relating to Financing and recomposition
expenses, Items affecting fourth quarter results of operations, Commitments and
contingencies and Related party transactions. Moore Stephens advised that
allegations had been made which could result in the Group becoming defendants in
lawsuits alleging various financial improprieties in the operation of certain
third party Austrian investment entities and their sponsoring companies.
25
<PAGE> 36
PART III
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
Information required by this Item 10 is to be included in and is hereby
incorporated by reference from the registrant's definitive proxy statement which
is to be used in connection with the registrant's 1999 annual meeting of
shareholders and which is to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934. Information relating to the registrant's executive officers is set forth
on page 10 herein.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is to be included in and is hereby
incorporated by reference from the registrant's definitive proxy statement which
is to be used in connection with the registrant's 1999 annual meeting of
shareholders and which is to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is to be included in and is hereby
incorporated by reference from the registrant's definitive proxy statement which
is to be used in connection with the registrant's 1999 annual meeting of
shareholders and which is to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is to be included in and is hereby
incorporated by reference from the registrant's definitive proxy statement which
is to be used in connection with the registrant's 1999 annual meeting of
shareholders and which is to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934.
26
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCE STATEMENT SCHEDULES, AND REPORTS OF FORM 8K
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
- ------ ------- ----
<S> <C> <C>
3.1 Coordinated Articles of Incorporation (designated in the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464) as exhibit 1.1)
10.1 Amended and Restated Credit Agreement, dated as of June 24,
1997, by and among Cronos Containers N.V., Cronos Containers
Ltd., Cronos Equipment Ltd., Cronos Containers Inc., Cronos
Capital Corp., and Cronos Equipment (Bermuda) Limited, as
joint and several borrowers, each of the banks that is or
may become a party thereto, Fleet Bank, N.A., as agent for
the banks, and The Cronos Group, as guarantor (the "Credit
Agreement") (designated in the Company's Annual Report on
Form 20-F for the year ended December 31, 1997 (File No.
0-24464) as exhibit 1.2)
10.2 First Amendment to the Credit Agreement, dated as of July
14, 1997 (designated in the Company's Annual Report on Form
20-F for the year ended December 31, 1997 (File No. 0-24464)
as exhibit 1.3)
10.3 Second Amendment to the Credit Agreement, dated as of
December 3, 1997 (designated in the Company's Annual Report
on Form 20-F for the year ended December 31, 1997 (File No.
0-24464) as exhibit 1.4)
10.4 Third Amendment to the Credit Agreement, dated as of June
30, 1998 (designated in the Company's Annual Report on Form
20-F for the year ended December 31, 1997 (File No. 0-24464)
as exhibit 1.5)
10.5 Confirmation of Guaranties, Agreement and Power of Attorney
by the Cronos Group, dated June 30, 1998, pertaining to the
Credit Agreement. (designated in the Company's Annual Report
on Form 20-F for the year ended December 31, 1997 (File No.
0-24464) as exhibit 1.6)
10.6 Deed in lieu of foreclosure relating to shares given as E1
collateral to the Palatin loans.
10.7 Forbearance Agreement and Fourth Amendment to Amended and E6
Restated Credit Agreement dated March 31, 1999.
10.8 Note Purchase Agreement among Cronos Equipment (Bermuda)
Limited, The Cronos Group and Sun Life Insurance Company of
America, dated as of December 29, 1994 (the "Sun Agreement")
(designated in the Company's Annual Report on Form 20-F for
the year ended December 31, 1997 (File No. 0-24464) as
exhibit 1.7)
10.9 Amendment to the Sun Agreement, dated as of November 1, 1997
(designated in the Company's Annual Report on Form 20-F for
the year ended December 31, 1997 (File No. 0-24464) as
exhibit 1.8)
10.10 Second Amendment to the Sun Agreement dated as of January E14
26, 1999.
10.11 The Cronos Group Management Equity Investment Plan, dated as E22
of July 25, 1994.
10.12 Lambert Confirmation, Acknowledgement and Consent of E39
Collateral Assignment
10.13 Amendment to the Revolving Credit Facility between Cronos E43
Containers Limited and China International Marine Containers
(Group) Company Limited, dated March 24, 1999
10.14 Employment Agreement dated August 14, 1998, between Cronos E44
and Eivind A Eriksen.
10.15 Employment Agreement dated January 24, 1996, between Cronos E60
and Stephan M Palatin.
10.16 Employment Agreement dated May 20, 1998, between Cronos and E69
Admico SA.
10.17 Employment Agreement dated July 1, 1998, between Cronos and E73
Peter J Younger.
10.18 Employment Agreement dated August 25, 1998, between Cronos E80
and Stephen J Brocato.
10.19 Employment Agreement dated December 11, 1998, between Cronos E119
and Dennis J Tietz
21.1 List of principal wholly-owned subsidiaries at December 31, E159
1998
27. Financial Data Schedule
</TABLE>
27
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: April 8, 1999 By: /s/ D J TIETZ
------------------------------------
Dennis J. Tietz
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By /s/ D J TIETZ Chairman of the Board and Chief April 8, 1999
- ----------------------------------------------------- Executive Officer (Principal
Dennis J. Tietz Executive Officer)
By /s/ P J YOUNGER Chief Financial Officer and Chief April 8, 1999
- ----------------------------------------------------- Accounting Officer (Principal
Peter J. Younger Financial and Accounting Officer)
By/s/ C THARP Director April 8, 1999
- -----------------------------------------------------
Charles Tharp
By/s/ M TAYLOR Director April 8, 1999
- -----------------------------------------------------
Maurice Taylor
By/s/ E O NEDELMANN Director April 9, 1999
- -----------------------------------------------------
Ernst-Otto Nedelmann
</TABLE>
28
<PAGE> 39
THE CRONOS GROUP
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1998 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS............... F-2
CONSOLIDATED INCOME STATEMENTS YEARS ENDED DECEMBER 31,
1996, 1997 AND 1998......................................... F-3
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1998...... F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER
31, 1996, 1997 AND 1998................................... F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED
DECEMBER 31, 1996, 1997 AND 1998.......................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-7
</TABLE>
29
<PAGE> 40
THE CRONOS GROUP
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-1
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of The Cronos Group:
We have audited the accompanying consolidated balance sheets of The Cronos
Group (a Luxembourg holding company) as of December 31, 1997 and 1998, and the
related consolidated statements of income, cash flows and shareholders' equity
for the three years ended December 31, 1996, 1997 and 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Cronos Group as of December 31, 1997 and 1998 and the consolidated results
of their operations and their cash flows for the years ended December 31, 1996,
1997 and 1998 in conformity with generally accepted accounting principles in the
United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
14 to the consolidated financial statements, The Cronos Group is currently
negotiating the refinancing of a loan of approximately $25.8 million, which had
a final maturity date of January 8, 1999 and loans of $12.7 million and $9.2
million which have final maturity dates of September 30 and November 30, 1999,
respectively, to permit the realization of assets and the liquidation of
liabilities in the ordinary course of business. The Company cannot predict what
the outcome of the negotiations will be. These conditions raise substantial
doubt that the group will be able to continue as a going concern. Management
plans in respect of this matter are also described in note 14. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
We draw attention also to notes 1r, 3, 17 and 21 in the financial
statements. Allegations have been made which may result in the Group becoming
defendants in lawsuits alleging various financial improprieties in the operation
of certain third party Austrian investment entities and their sponsoring
companies.
/s/ MOORE STEPHENS
Moore Stephens
St. Pauls House
Warwick Lane
London EC4P 4BN
April 8, 1999
F-2
<PAGE> 42
THE CRONOS GROUP
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES 1996 1997 1998
----- -------- -------- --------
<S> <C> <C> <C> <C>
Gross Lease Revenue.................................... $154,011 $160,848 $157,546
Commissions, fees and other operating income:
US Limited Partnerships.............................. 1,941 1,384 1,347
Other related parties................................ 21 132 20 --
Unrelated parties.................................... 5,387 4,141 3,608
Interest income:
Other related parties................................ 21 460 824 --
Unrelated parties.................................... 873 861 1,154
Equity in earnings of affiliates....................... 1,397 -- --
Gain on conversion of investment in affiliate:
Realized............................................. 9 1,621 321 --
Unrealized........................................... 9 3,639 -- --
-------- -------- --------
Total Revenues and Non-Operating Income...... 169,461 168,399 163,655
-------- -------- --------
Direct operating expenses.............................. 34,535 34,217 35,318
Payments to container owners:
US Limited Partnerships.............................. 40,338 36,478 31,922
Other related parties................................ 21 3,985 -- --
Unrelated parties.................................... 28,571 37,467 43,605
Amortization of intangible assets...................... 11 489 742 683
Depreciation........................................... 13,769 18,291 18,031
Selling, general and administrative expenses........... 23,834 22,683 21,164
Financing and recomposition expenses................... 1r 2,149 7,384 5,375
Interest expense....................................... 11,368 17,758 15,718
Provision against amounts receivable from related
parties.............................................. 21 -- 4,733 --
Provision against available for sale securities........ 3,9 -- -- 1,500
Impairment losses...................................... 1u,3 -- 11,668 6,500
-------- -------- --------
Total Expenses............................... 159,038 191,421 179,816
-------- -------- --------
Earnings (Loss) Before Income Taxes.................... 10,423 (23,022) (16,161)
Income taxes........................................... 4 2,441 -- 306
-------- -------- --------
Net Income (Loss)...................................... 7,982 (23,022) (16,467)
Other comprehensive income, net of tax:
Unrealized holding gain (loss) on available for sale
security.......................................... 9 -- 1,159 (1,159)
-------- -------- --------
Comprehensive Income (Loss)............................ $ 7,982 $(21,863) $(17,626)
======== ======== ========
Earnings (Loss) per Common Share
(Basic and Diluted).................................. $ 0.90 $ (2.60) $ (1.86)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 43
THE CRONOS GROUP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
NOTES 1997 1998
----- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 14,455 $ 9,281
Amounts due from lessees (net).............................. 1j,5 40,383 33,215
Amounts receivable from container owners, including amounts
due from related parties of $7,311 and $7,738 at December
31, 1997 and 1998, respectively........................... 6 8,402 10,265
New container equipment for resale.......................... 7 8,202 315
Net investment in direct financing leases, including amounts
due within twelve months of $1,726 and $1,365 at December
31, 1997 and 1998, respectively........................... 8 4,991 3,504
Investments, including investments in related parties of
$220 and $55 at December 31, 1997 and 1998,
respectively.............................................. 3,9 4,282 1,458
Container equipment, net of accumulated depreciation of
$44,980 and $59,640 at December 31, 1997 and 1998,
respectively.............................................. 3,10 192,766 168,243
Property and other equipment, net of accumulated
depreciation of $9,040 and $10,139 at December 31, 1997
and 1998, respectively.................................... 16,141 13,273
Intangible assets........................................... 3,11 14,771 14,088
Other amounts receivable from related parties (net)......... 21 5,500 5,500
Other assets including prepayments.......................... 12 17,252 20,837
-------- --------
Total assets...................................... $327,145 $279,979
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts payable to container owners, including amounts
payable to related parties of $15,484 and $13,287 at
December 31, 1997 and 1998, respectively.................. 13 $ 31,020 $ 31,314
Amounts payable to container manufacturers.................. 7,594 101
Other amounts payable and accrued expenses.................. 20,066 23,159
Debt and capital lease obligations, including amounts due
within twelve months of $82,717 and $87,271 at December
31, 1997 and 1998, respectively........................... 14 171,399 148,466
Income taxes................................................ 3,487 3,110
Deferred income taxes....................................... 4 4,832 4,975
Deferred income and unamortized acquisition fees............ 16 15,034 12,767
-------- --------
Total Liabilities................................. 253,432 223,892
-------- --------
Commitments and contingencies............................... 17 -- --
Shareholders' Equity
Common shares, par value $2 per share (25,000,000 shares
authorized; shares issued and outstanding, 8,858,378)..... 18 17,717 17,717
Additional paid-in capital.................................. 18,20 49,154 49,108
Share subscriptions receivable.............................. 19 (169) (123)
Accumulated other comprehensive income...................... 9 1,159 --
Retained earnings
Restricted................................................ 20 1,772 1,772
Unrestricted.............................................. 4,080 (12,387)
-------- --------
Total Shareholders' Equity........................ 73,713 56,087
-------- --------
Total Liabilities and Shareholders' Equity........ $327,145 $279,979
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 44
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES 1996 1997 1998
----- --------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)........................................... $ 7,982 $(23,022) $(16,467)
Adjustments to reconcile net income to net cash provided by
operating activities:
Impairment losses......................................... 3 -- 11,668 6,500
Provision against available for sale securities........... 3 -- -- 1,500
Depreciation and amortization of intangible assets........ 14,258 19,033 18,714
Increase (decrease) in unamortized acquisition fees....... 305 (1,322) (1,907)
Provision for losses on accounts receivable............... 1,080 2,245 4,062
(Gain) loss on disposal of fixed assets................... (582) 129 (1)
Gain on conversion of investment in affiliate............. (5,260) (321) --
Share of undistributed income of affiliates............... (774) -- --
Increase (decrease) in current and deferred income
taxes................................................... 482 837 (234)
(Increase) decrease in new container equipment for
resale.................................................. 6,425 (6,717) 7,887
(Increase) decrease in amounts receivable:
US Limited Partnerships................................. 2,096 458 (427)
Other related parties................................... 21 -- 3,909 --
Unrelated parties....................................... (7,240) (5,327) 75
Increase (decrease) in amounts payable and accrued
expenses:
US Limited Partnerships................................. (3,578) 1,902 (2,197)
Other related parties................................... 21 (1,512) (747) --
Unrelated parties....................................... 5,456 (23,369) (2,266)
--------- -------- --------
Net cash provided (used) by operating activities............ 19,138 (20,644) 15,239
--------- -------- --------
Cash flows from investing activities
Purchase of container equipment............................. (142,609) (38,724) (1,822)]
Purchase of property and other equipment.................... (692) (598) (1,052)
Purchase of investment in related parties................... 9 (310) (39) --
Purchase of intangible asset................................ 11 (2,086) (11) --
Purchase of subsidiary undertaking (net of cash acquired)... 11 (3,386) -- --
Investment in finance lease equipment....................... 8 (26,419) (2,443) --
Issue of notes to related parties........................... 21 (2,000) (3,700) --
Proceeds from sales of container equipment.................. 36,419 61,495 1,155
Proceeds from sales of property and other equipment......... 50 -- 325
Proceeds from sale of investment............................ 9 19,288 1,953 --
Proceeds from sale of investment in finance lease
equipment................................................. -- 25,121 --
Repayment of note by related parties........................ 21 511 1,500 --
--------- -------- --------
Net cash (used) provided for investing activities........... (121,234) 44,554 (1,394)
--------- -------- --------
Cash flows from financing activities
Issue of common shares...................................... 18 2,111 -- --
Share subscriptions received................................ 134 -- --
Proceeds from issuance of term debt......................... 227,475 62,141 3,109
Repayments of term debt and capital lease obligations....... (139,589) (93,874) (22,128)
Cash deposits (restricted).................................. 5,000 5,000 --
--------- -------- --------
Net cash provided (used) by financing activities............ 95,131 (26,733) (19,019)
--------- -------- --------
Net decrease in cash and cash equivalents................... (6,965) (2,823) (5,174)
Cash and cash equivalents at beginning of year.............. 24,243 17,278 14,455
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 17,278 $ 14,455 $ 9,281
========= ======== ========
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 11,099 $ 17,605 $ 16,402
Income taxes.............................................. 1,829 492 786
Cash received during the year for:
Interest.................................................. 1,129 1,272 1,092
Income taxes.............................................. 806 1,329 229
Non-cash investing and financing activities:
Container equipment acquired under capital lease.......... 4,999 4,143 --
Container equipment acquired but unpaid at December 31.... 27,426 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 45
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL SHARE OTHER RETAINED
COMMON PAID-IN SUBSCRIPTIONS COMPREHENSIVE EARNINGS RETAINED TOTAL
SHARES CAPITAL RECEIVABLE INCOME RESTRICTED EARNINGS SHAREHOLDERS'
(NOTE 18) (NOTE 20) (NOTE 19) (NOTE 9) (NOTE 20) UNRESTRICTED EQUITY
--------- ---------- ------------- ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................ $17,231 $47,679 $(404) $ -- $1,723 $ 19,120 $ 85,349
Net income............ 7,982 7,982
MEIP receipts......... 134 134
MEIP lapses........... (27) 27 --
Issue of common
shares.............. 486 1,625 2,111
Transfer to legal
reserve............. (49) 49 --
------- ------- ----- ------- ------ -------- --------
Balance, December 31,
1996................ 17,717 49,228 (243) -- 1,772 27,102 95,576
Net loss.............. (23,022) (23,022)
MEIP lapses........... (74) 74 --
Unrealized holding
gain on available
for sale security... 1,159 1,159
------- ------- ----- ------- ------ -------- --------
Balance, December 31,
1997................ 17,717 49,154 (169) 1,159 1,772 4,080 73,713
Net loss.............. (16,467) (16,467)
MEIP lapses........... (46) 46 --
Change in unrealized
holding gain on
available for sale
security............ (1,159) (1,159)
------- ------- ----- ------- ------ -------- --------
Balance, December 31,
1998................ $17,717 $49,108 $(123) $ -- $1,772 $(12,387) $ 56,087
------- ------- ----- ------- ------ -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 46
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Nature of operations
The principal activity of The Cronos Group (the "Company") and its
subsidiaries (together, the "Group") is the leasing to ocean carriers of marine
containers which are owned either by third party container owners or by the
Group.
The Group provides a worldwide service and, accordingly, has significant
foreign operations and assets in key shipping locations, particularly in the
United States, Europe and Asia.
The Group enters into agreements with third party container owners to
manage the leasing of their containers to ocean carriers. These agreements have
taken two principal forms. Under the first form, the Group organizes public
limited partnerships in the United States and purchases and manages containers
on their behalf. Under the second form, the Group enters into agreements with
third parties that provide for the Group to purchase and manage containers for
such third parties. Although the provisions of the agreements vary, they all
permit the Group to use the containers together with containers owned by the
Group as part of a single fleet, which the Group endeavours to operate without
regard to ownership. The Group has discretion over which ocean carriers,
container manufacturers and suppliers of goods and services it may deal with.
Since the agreements with container owners meet the definition of leases in
Statement of Financial Accounting Standards ("SFAS") No. 13, they are accounted
for as leases under which the container owners are lessors and the Group is
lessee.
The terms of the agreements vary from 1 to 15 years. Containers generally
have an expected useful economic life of 12 to 15 years. The agreements
generally contain provisions which permit earlier termination under certain
conditions upon 60 - 90 days' notice. For the US Limited Partnerships, a
majority of the limited partners in a partnership can remove the general
partner, thereby terminating the agreement with the Group. Under the agreements
with third parties, the container owner can generally terminate the agreement if
average payments by the Group are less than a certain percentage (specified in
each agreement) of total capital invested. The Group believes that early
termination is unlikely in normal circumstances.
The agreements generally provide that the Group will make payments to the
container owners based upon the rentals collected from ocean carriers after
deducting direct operating expenses and the Group's management fee.
Substantially all payments to container owners are therefore contingent upon the
leasing of the containers by the Group to ocean carriers and the collection of
lease rentals. Minimum lease payments on the minority of agreements which have
fixed payment terms are disclosed in note 14(c). Substantially all payments to
container owners represent a percentage of the rentals collected from the ocean
carriers to whom containers are leased by the Group.
The Group also leases containers from lessors under capital leases. The
cost and book value of assets acquired under capital leases together with the
minimum lease payments representing interest and principal are shown in note 14.
The Group leases containers to ocean carriers generally under master leases
for dry cargo containers and term leases (mostly 2 to 5 years) for refrigerated
and other specialized containers. Master leases do not specify the exact number
of containers to be leased or the term that each container will remain on hire
but allow the ocean carrier to pick up and drop off containers at various
locations specified in the lease agreement. Lease rentals, which are generally
based upon the number of containers used by the ocean carrier and the applicable
per diem rate, are therefore all contingent rentals. Receivables in respect of
containers on lease up to the end of an accounting period are included in the
balance sheet.
F-7
<PAGE> 47
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a) Nature of operations (continued)
Since all future rentals are contingent on the number of containers used,
there are no minimum lease rentals applicable to master leases, and accordingly
no analysis of minimum lease rentals is provided in these financial statements.
Term leases provide the ocean carriers with specified container equipment
throughout the term of the lease. The rentals are based upon the number of
containers leased, the applicable per diem rate and the length of the lease,
irrespective of the number of days during which the ocean carrier actually uses
the containers. The minimum lease rentals for term leases are shown in note 5.
b) Basis of accounting
The Group'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.
The financial statements for the year ended December 31, 1998 reflect
compliance with Statement of Financial Accounting Standards No. 130 ("SFAS 130")
"Reporting Comprehensive Income" and SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information".
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Generally accepted accounting principles also contemplate the continuation
of the Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. The company is
presently involved in negotiations with regard to refinancing certain financial
obligations. Details of the anticipated arrangements are given in note 14.
In addition to the satisfactory renegotiation of certain financial
obligations, management is undertaking a restructuring program in order to
reduce selling, general and administrative expenses and increase operational
efficiency. In this regard a $2,000 financing and recomposition charge has been
incurred in December 1998 (note 3(b) ii).
There can be no assurances that management's plans to secure adequate
refinancing will be successful. Should the group be unable to refinance its
loans, then the Directors will have to consider discontinuing the operation of
or selling the business. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary in the event
that the Company cannot continue in existence.
c) Principles of consolidation
The Company is incorporated in Luxembourg.
The consolidated financial statements include the accounts of the Company
and its subsidiaries all of which are wholly owned. All significant intercompany
accounts and transactions have been eliminated on consolidation.
F-8
<PAGE> 48
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d) Gross lease revenue
Gross lease revenue represents invoices to customers for operating leases
of marine containers excluding advance billings.
e) Commissions, fees and other operating income
This comprises acquisition fees, syndication commissions, income on direct
financing leases, income from the Group's limited partner interest in US Limited
Partnerships and other income.
Acquisition fees represent amounts received and receivable from third party
container owners when the Group enters into an agreement and begins to manage
new container equipment on their behalf. They are generally non-refundable and
are amortized in the income statement on a straight-line basis over the period
of the agreements to which they relate.
Syndication commissions represent amounts earned on the sale of US Limited
Partnership interests and are recognized at the time of sale.
f) Advertising costs
Advertising costs, included in selling, general and administrative
expenses, are expensed as incurred, and amounted to $290, $225 and $34 for the
years ended December 31, 1996, 1997 and 1998, respectively.
g) Income taxes
Income taxes are accounted for using the asset and liability method. Under
this method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying the statutory tax rate to the difference
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The effect on deferred income taxes of a change in tax
rates is recognized in income in the period of enactment.
h) Earnings per common share
Earnings per share data have been calculated in accordance with SFAS No.
128.
Basic earnings per share represent the amount of earnings for the period
available to each share of common stock outstanding during the reporting period
and have been calculated by dividing net income available to common shareholders
by the weighted average number of common shares outstanding during each of the
periods.
Earnings per share have been computed based on a weighted average of
8,853,067, 8,858,378 and 8,858,378 common shares outstanding during the years
ended December 31, 1996, 1997 and 1998, respectively.
The fair value of the Group's common shares has been determined to be below
the average exercize price of options outstanding under the Management Equity
Investment Plan ("MEIP"). Accordingly there is no dilution caused by the MEIP.
However, the MEIP could potentially dilute basic earnings per share in the
future.
F-9
<PAGE> 49
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
i) Cash equivalents
Cash equivalents are highly liquid debt instruments purchased with original
maturities of three months or less. The carrying value approximates fair value.
Cash and cash equivalents are maintained in accounts which, at times, may exceed
federally insured limits. No losses have been experienced in such accounts and
management believes it is not exposed to any significant credit risk. The group
places its cash equivalents in investment grade, short term debt instruments and
limits the amount of credit exposure to any one commercial issuer.
j) Amounts due from lessees
Amounts due from lessees represent gross lease revenue due from customers,
less allowance for doubtful accounts of $3,106 and $4,446 at December 31, 1997
and 1998, respectively. Allowance for doubtful accounts comprises specific
amounts provided against known potentially doubtful accounts plus a general
allowance. The general allowance was $639 and $600 at December 31, 1997 and
1998, respectively. Invoices representing advance billings are included in both
Amounts due from lessees and Deferred income.
k) New container equipment for resale
New container equipment for resale represents new containers purchased by
the Group with an intent to resell to third party container owners. Such sales
are usually made at original cost to the Group, and accordingly no gain or loss
arises. Where gains or losses on such sales occur, they are recognized at the
date of sale, because under the agreements with container owners the Group
retains less than substantially all of the remaining use of the containers. Such
gains are included within Commissions, fees and other operating income.
Containers not sold to container owners within six months of purchase are
transferred to the Group's long term ownership of container equipment.
Depreciation is then calculated from the original date of acquisition. The
amount of depreciation which would have been provided on container equipment for
resale, had it been transferred to long term ownership at the balance sheet
date, is immaterial to the Net income/(loss) in all periods presented.
Rentals received on new container equipment for resale are included within
Gross lease revenue. Container orders are placed with manufacturers based on the
identified level of internal and external financing and the projected capacity
in the leasing market.
New container equipment for resale is stated at the lower of original unit
cost or net realizable value.
l) Leases
i. Group as lessor
Operating leases with customers. The Group enters into leases with
customers, principally as lessor in operating leases. Operating lease rentals
are recognized as gross lease revenue on the basis of invoices issued to
customers in accordance with the lease agreement.
Direct financing leases with customers. The Group has entered into direct
financing leases as lessor for container equipment owned by the Group. The net
investment in direct financing leases represents the receivables due from
lessees net of unearned income. Unearned income is amortized to give a constant
return on capital over the lease term.
F-10
<PAGE> 50
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
l) Leases (continued)
ii. Group as lessee
Capital leases. Assets held under capital leases are initially reported at
the fair value of the asset categorized within container equipment, with an
equivalent liability categorized as capital lease obligations. The asset is
depreciated over its expected useful life. Finance charges are allocated to
accounting periods over the lease term in accordance with the actuarial method.
Operating leases. Payments by the Group to container owners are charged to
the income statement in each period based upon the amounts paid and payable
under the agreements with container owners, which generally are contingent upon
the lease rentals collected from ocean carriers, direct operating expenses and
management fees due to the Group in respect of the containers specified in each
agreement.
Other operating lease rentals are charged to the income statement on a
straight-line basis over the lease term.
m) Investments, including investments in related parties
i. Investment securities
Investment securities are classified as either available for sale or
trading securities. Available for sale securities are reported at fair market
value with unrealized gains and losses included in Stockholders' Equity as
Accumulated other comprehensive income. Trading securities are reported at fair
market value with unrealized gains and losses reported in earnings.
ii. Investment in US Limited Partnerships
Investment in US Limited Partnerships represents the Group's general and
limited partner interests in partnerships in which a subsidiary company, Cronos
Capital Corp., acts as a general partner. These are accounted for on the equity
basis.
iii. Investments in affiliated companies
The investments in affiliated companies are stated at cost plus the Group's
equity in the undistributed earnings of the affiliates since the date of
acquisition or investment, less the amortization, where applicable, of the
excess of the purchase price over the fair value of net assets acquired
("goodwill"). Goodwill is amortized over an original period of 40 years.
n) Container equipment
Container equipment is carried at cost less accumulated depreciation.
Depreciation is provided to write off the cost, less estimated residual value,
of containers, both owned by the Group and acquired under capital leases, on a
straight-line basis over their expected useful life.
Refrigerated container equipment is depreciated over a useful life of 12
years to a residual value of 15%, with effect from January 1, 1998, following an
impairment review undertaken at December 31, 1997. Previously, refrigerated
container equipment was depreciated over a useful life of 15 years to a residual
value of 10%. The impact of the change in depreciation policy has been to
increase the depreciation charge for the year ended December 31, 1998 by $1,300
($0.15) per share.
Dry cargo and other specialized container equipment is depreciated over a
useful life of 15 years to a residual value of 10%.
F-11
<PAGE> 51
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o) Property and other equipment
Property and other equipment are carried at cost less accumulated
depreciation. Depreciation is provided to write off the cost, less estimated
residual value, of each asset on a straight-line basis over its expected useful
life. Depreciation periods are as follows:
<TABLE>
<S> <C>
Properties.................................................. 50 years
Property improvements....................................... 25 years
Other equipment............................................. 3 - 7 years
Land is not depreciated.....................................
</TABLE>
p) Intangible assets
i. Intermodal Equipment Associates
The intangible asset comprises the excess of the purchase price over the
fair value of the net assets ("goodwill") of Intermodal Equipment Associates, a
wholly owned subsidiary, acquired in 1990. Goodwill is amortized on a straight
line basis over an original period of 40 years. At December 31, 1997, an
impairment charge was recorded to write off part of the value of the intangible
asset (note 3) in accordance with SFAS 121.
ii. Intermodal Management AB & Intermodal Leasing AB (together
"Interlease")
The intangible asset includes the goodwill acquired with the purchase of
the wholly owned subsidiary Intermodal Management AB and its subsidiary
Intermodal Leasing AB in August 1996. The acquired goodwill is amortized on a
straight line basis over a period of 40 years.
iii. Cellular Palletwide Container (CPC) & Slimwall CPC patents
The Group acquired the patent rights relating to the Cellular Palletwide
Container ("CPC"), the Slimwall CPC and the intellectual property of Cargo Unit
Containers Limited ("CUC") in August 1996. The Group also acquired the business
of CUC which markets CPCs and controls the manufacturing licences for CPCs. The
goodwill acquired is amortized on a straight line basis over a period of 40
years. The cost of the patents is amortized on a straight line basis over a
period of between 4 - 40 years depending on the patent type as follows:
<TABLE>
<S> <C>
CPC patents.............................................. 4 - 12 years
Cargo Unit Containers Limited -- patents................. 11 - 17 years
Cargo Unit Containers Limited -- trademark............... 40 years
</TABLE>
q) Translation of foreign currencies
Substantially all the Group's revenue is denominated in US dollars as are a
significant proportion of total costs, including container purchases.
Accordingly, the functional currency of the Group is the US dollar, the currency
in which the financial statements are prepared.
Transactions denominated in other currencies are translated into US dollars
and recorded at the rate of exchange at the date of the transaction. Balances
denominated in other currencies are translated into US dollars at the rate of
exchange on the balance sheet date. Exchange differences arising are charged or
credited to the income statement.
F-12
<PAGE> 52
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
r) Financing and recomposition expenses
In 1996, costs, which were incurred and accrued by the Group in connection
with its initial public offering ("IPO") of common shares, were charged to
Additional paid-in capital and set off against the proceeds of the IPO, as shown
in note 20.
In 1997, the Group made an adjustment of $3,400 in respect of a contingent
liability (note 17). This amount was included in Other amounts payable and
accrued expenses at December 31, 1997 and 1998, respectively.
In 1996, 1997 and 1998 the Group incurred and accrued costs in connection
with certain financing and other transactions, the restructuring of the Board of
Directors, senior management and other employee positions. Costs incurred and
accrued were charged to the income statement, where the Group determined that no
future benefit would be derived from such costs.
s) Management Equity Investment Plan ("MEIP")
Amounts received and receivable for the purchase of options under the
contractual arrangements of the MEIP are included within Additional paid-in
capital when the commitment is made by the key employee. Amounts receivable for
the purchase of options are offset against Share subscriptions receivable within
Shareholders' equity.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", effective for fiscal years beginning after December 15, 1995. The
Group continues to account for the MEIP under APB (Accounting Practices Board)
Opinion No. 25, "Accounting for Stock Issued to Employees" under which no
compensation cost has been recognized. As required by SFAS 123, the Group has
made the required disclosures in relation to proforma Net income/(loss) and
Earnings/(loss) per share, as shown in note 19.
t) Financial instruments-derivatives
The Group enters into interest rate swap transactions from time to time to
hedge a portion of its exposure to floating interest rates. These transactions
involve the conversion of floating rates over the life of the transactions
without an exchange of underlying principal. The differential is accrued as
interest rates change and recognized as an adjustment to interest expense. The
related amount receivable from or payable to counterparties is included in
accrued interest expense. The fair values of the interest rate swaps are
recognized in the financial statements.
The Group enters into forward exchange contracts from time to time,
typically covering an average period of approximately 5 months, to hedge a
portion of its expenses, which are paid in U.K. Sterling. Realized and
unrealized gains and losses on foreign currency hedging transactions that are
designated and effective as hedges of firm identifiable foreign currency
commitments are deferred and recognized in income over the period of the hedged
transaction. No such transactions were undertaken during 1998.
The group has not entered into any speculative derivative contracts.
u) Asset impairment
Certain long-term assets of the Group are reviewed when changes in
circumstances require as to whether their carrying value has become impaired,
pursuant to guidance established in Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
F-13
<PAGE> 53
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
u) Asset impairment (continued)
Assets to be Disposed Of". Management considers assets to be impaired if the
carrying value of the asset exceeds the future projected cash flows from related
operations (undiscounted and without interest charges). When impairment is
deemed to exist, the assets are written down to fair value or projected
discounted cash flows from related operations. Management also re-evaluates the
period of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. In accordance with SFAS 121, the
Group recorded impairment losses of $0, $11,668 and $6,500 for the years ended
December 31, 1996, 1997 and 1998, respectively (note 3).
v) New pronouncements
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and how it is designated. A variable cash flow hedge of a forecasted
transaction is initially recorded as comprehensive income and subsequently
reclassified into earnings when the forecasted transaction affects earnings.
Gains and losses from foreign currency exposure hedges are reported in other
comprehensive income as part of the cumulative translation adjustment. Gains and
losses from fair value hedges are recognized in earnings in the period of any
changes in the fair value of the related recognized asset or liability or firm
commitment. Gains and losses on derivative instruments that are not designated
as a hedging instrument are recognized in earnings in the period of change. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, and should not be applied retroactively to financial statements
for prior periods.
While the Company does enter into interest rate swaps to hedge a portion of
its exposure to floating interest rates and enters into forward exchange
contracts to hedge a portion of its expenses which are paid in U.K. Sterling, it
does not currently record its derivative instruments as assets or liabilities
and does not measure such instruments at fair value. The Company is assessing
the impact that SFAS No. 133 will have in accounting for its derivative
transactions and hedging activities.
F-14
<PAGE> 54
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2 OPERATING SEGMENT DATA
Segment information is provided in the tables below:
<TABLE>
<CAPTION>
OTHER
US LIMITED CONTAINER OWNED
PARTNERSHIPS OWNERS CONTAINERS TOTAL
------------ --------- ---------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Items directly attributable to operating
segments:
- gross lease revenue........................ $ 69,088 $ 48,218 $ 36,705 $154,011
- direct operating expenses.................. (15,703) (10,602) (8,230) (34,535)
-------- -------- -------- --------
Net lease revenue......................... 53,385 37,616 28,475 119,476
- payments to container owners............... (40,338) (32,556) -- (72,894)
- commissions, fees and other operating
income.................................... 1,941 2,326 3,193 7,460
- depreciation............................... -- -- (12,277) (12,277)
- interest expense........................... -- -- (8,978) (8,978)
-------- -------- -------- --------
Operating profit before indirect items......... 14,988 7,386 10,413 32,787
Indirect allocations:
- interest income............................ -- 225 1,108 1,333
- depreciation............................... (669) (467) (356) (1,492)
- interest expense........................... (278) (193) (147) (618)
- selling, general and administrative
expenses.................................. (11,786) (6,379) (4,700) (22,865)
-------- -------- -------- --------
Operating profit............................... $ 2,255 $ 572 $ 6,318 $ 9,145
======== ======== ======== ========
Segment assets................................. $ 33,141 $ 17,754 $285,551 $336,446
Expenditure for segment assets................. $ 439 $ 307 $173,820 $174,566
YEAR ENDED DECEMBER 31, 1997
Items directly attributable to operating
segments:
- gross lease revenue........................ $ 61,235 $ 54,179 $ 45,434 $160,848
- direct operating expenses.................. (14,153) (11,377) (8,687) (34,217)
-------- -------- -------- --------
Net lease revenue......................... 47,082 42,802 36,747 126,631
- payments to container owners............... (36,478) (37,467) -- (73,945)
- commissions, fees and other operating
income.................................... 1,384 1,919 2,242 5,545
- depreciation............................... -- -- (16,686) (16,686)
- interest expense........................... -- -- (16,628) (16,628)
- impairment losses.......................... -- -- (7,368) (7,368)
-------- -------- -------- --------
Operating profit before indirect items......... 11,988 7,254 (1,693) 17,549
Indirect allocations:
- interest income............................ -- 480 1,205 1,685
- depreciation............................... (611) (541) (453) (1,605)
- interest expense........................... (315) (279) (234) (828)
- selling, general and administrative
expenses.................................. (8,878) (6,028) (5,109) (20,015)
-------- -------- -------- --------
Operating profit............................... $ 2,184 $ 886 $ (6,284) $ (3,214)
======== ======== ======== ========
Segment assets................................. $ 29,429 $ 19,531 $221,925 $270,885
Expenditure for segment assets................. $ 228 $ 201 $ 43,036 $ 43,465
</TABLE>
F-15
<PAGE> 55
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2 OPERATING SEGMENT DATA (CONTINUED)
<TABLE>
<CAPTION>
OTHER
US LIMITED CONTAINER OWNED
PARTNERSHIPS OWNERS CONTAINERS TOTAL
------------ --------- ---------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Items directly attributable to operating
segments:
- gross lease revenue........................ $ 54,677 $ 63,013 $ 39,856 $157,546
- direct operating expenses.................. (12,820) (14,325) (8,173) (35,318)
-------- -------- -------- --------
Net lease revenue......................... 41,857 48,688 31,683 122,228
- payments to container owners............... (31,922) (43,605) -- (75,527)
- commissions, fees and other operating
income.................................... 1,347 2,349 1,259 4,955
- depreciation............................... -- -- (16,403) (16,403)
- interest expense........................... -- -- (15,124) (15,124)
- impairment losses.......................... -- -- (4,500) (4,500)
-------- -------- -------- --------
Operating profit before indirect items......... 11,282 7,432 (3,085) 15,629
Indirect allocations:
- interest income............................ -- 584 570 1,154
- depreciation............................... (565) (651) (412) (1,628)
- interest expense........................... (206) (238) (150) (594)
- selling, general and administrative
income.................................... (7,884) (7,023) (4,516) (19,423)
- impairment losses.......................... (694) (800) (506) (2,000)
-------- -------- -------- --------
Operating profit............................... $ 1,933 $ (696) $ (8,099) $ (6,862)
======== ======== ======== ========
Segment assets................................. $ 23,872 $ 21,121 $183,822 $228,815
Expenditure for segment assets................. $ 365 $ 421 $ 2,088 $ 2,874
</TABLE>
Reconciliation of operating profit for reportable segments to earnings
before taxes:
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Operating profit............................................ $ 9,145 $ (3,214) $ (6,862)
Equity in earnings of affiliate............................. 1,397 -- --
Gain on conversion of investment in affiliate............... 5,260 321 --
Unallocated amounts:
- interest expense........................................ (1,772) (302) --
- selling, general and administrative expenses............ (969) (2,668) (1,741)
Amortization of intangibles................................. (489) (742) (683)
Financing and recomposition expenses........................ (2,149) (7,384) (5,375)
Provisions against amounts receivable from related
parties................................................... -- (4,733) --
Provision against available for sale securities............. -- -- (1,500)
Impairment losses........................................... -- (4,300) --
------- -------- --------
Earnings (loss) before income taxes......................... $10,423 $(23,022) $(16,161)
======= ======== ========
</TABLE>
Reconciliation of assets for reportable segments to total assets:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Total assets for reportable segments............... $336,446 $270,885 $228,815
General corporate assets........................... 62,855 56,260 51,164
-------- -------- --------
Total assets....................................... $399,301 $327,145 $279,979
======== ======== ========
</TABLE>
F-16
<PAGE> 56
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2 OPERATING SEGMENT DATA (CONTINUED)
The segments shown above depict the different forms of agreements entered
into by the Group with third party container owners and represent different
levels of profitability and risk to the Group. Although there are a number of
different forms of agreements, they fall into two principal categories -- those
with US Limited Partnerships and those with Other Container Owners. Owned
containers are those in which the Group has the risk of ownership and which are
financed by the Group's own capital resources, debt facilities and capital
leases, and include new container equipment for resale.
All revenues and expenses that are specifically identifiable to the
containers within each segment are allocated to that segment. The Group manages
a number of different container products, revenue details on which are given
below. Individual product revenues have been aggregated within the operating
segments reported. A significant portion of the selling, general and
administrative expenses relating to the operation of the entire container fleet
is not identified to segments. Since the Group operates the container fleet as a
homogenous unit, these expenses have been allocated on the basis of the gross
lease revenue in each segment.
Revenues from external customers by product comprised:
Gross lease revenue
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Dry cargo containers............................... $112,015 $117,094 $114,373
Refrigerated containers............................ 34,808 32,675 29,901
Tanks.............................................. 5,245 7,054 8,269
Other container products........................... 1,943 4,025 5,003
-------- -------- --------
Total.............................................. $154,011 $160,848 $157,546
======== ======== ========
</TABLE>
No single lessee accounted for 10% or more of total revenues in the years
ended December 31, 1996, 1997 and 1998, respectively.
Almost all of the Group's lease revenue is earned on containers used by its
customers in global trade routes. Accordingly, the Group believes that it does
not possess discernible geographic reporting segments as defined in Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
3 ITEMS AFFECTING FOURTH QUARTER RESULTS OF OPERATIONS
In the fourth quarters of 1997 and 1998 the Group recorded asset impairment
and other charges, the aggregate of which was to reduce 1997 and 1998 net income
by $19,801 ($2.24 per share) and $11,500 ($1.30 per share), respectively. There
were no such charges in the fourth quarter of 1996.
a) Impairment losses
In December 1997 and 1998, the Group recorded charges relating to the
impairment of certain long-lived assets as required by SFAS 121.
F-17
<PAGE> 57
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3 ITEMS AFFECTING FOURTH QUARTER RESULTS OF OPERATIONS (CONTINUED)
Impairment losses comprised:
<TABLE>
<CAPTION>
1996 1997 1998
---- ------- ------
<S> <C> <C> <C>
Container equipment....................................... $ -- $ 7,368 $4,500
Goodwill.................................................. -- 4,300 --
Property.................................................. -- -- 2,000
---- ------- ------
Total........................................... $ -- $11,668 $6,500
==== ======= ======
</TABLE>
i. Container equipment
In December 1997, in response to market information, management conducted a
review of the carrying value of refrigerated containers. The review concluded
that the carrying value of the equipment was greater than the undiscounted
future cash flows. In accordance with SFAS 121, an impairment loss of $7,368 was
recognized to record the assets at fair value. A study of refrigerated container
disposals was undertaken in order to determine fair value.
In December 1998, in response to proposed asset sales to third party
container owners, management concluded that the carrying value of certain
refrigerated and dry cargo containers was not recoverable. An impairment charge
of $4,500 was recognized to record the assets at fair value.
ii. Goodwill
At December 31, 1997 management concluded that the ability of the Group to
organize future public limited partnerships was impaired by the continuing SEC
investigation (note 17). Accordingly, a $4,300 impairment charge was recorded to
write off the element of the carrying value of the unamortized portion of
goodwill, relating to the acquisition of Intermodal Equipment Associates in
1990, attributed by the directors to the public limited partnership fund raising
capacity of the business.
iii. Property
In December 1998, management concluded that the carrying value of a
property exceeded fair value. An impairment charge of $2,000 was recorded to
state the asset at fair value in accordance with SFAS 121. Independent
valuations were used to determine fair value.
b) Other adjustments
i. Related party loans and contingent liabilities
In December 1997, charges of $4,733 and $3,400 were made in respect of
related party loans (note 21) and contingent liabilities (note 17) respectively.
ii. Restructuring program
During 1998, the Group announced a restructuring program, which will
reorganize the Group's key activities into three divisions:
- Leasing
- Capital Markets and Investor Services
- Finance and Administration
This program, which commenced in December 1998 will be substantially
completed by June 1999 and anticipates the termination of 15 employees. In
December 1998, the Group recorded a $2,000 Financing and
F-18
<PAGE> 58
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3 ITEMS AFFECTING FOURTH QUARTER RESULTS OF OPERATIONS (CONTINUED)
recomposition charge in respect of termination and related costs. The first
phase of this program was implemented in December 1998, with the internal
replacement of the Chief Executive Officer and with the redundancy of the Chief
Operating Officer. In January and February 1999, the Group made termination
payments totalling $220.
iii. Financing transactions
In December 1998, the Group made provision for $1,500 of fees in connection
with the extension of certain loan facilities. The fees, which are payable
between February and September 1999, were included in Other amounts payable and
accrued expenses at December 31, 1998.
iv. Available for sale securities
In February 1999, management was advised that there were claims outstanding
against certain of the Transamerica shares held in escrow (note 9ii and 9iii). A
provision of $1,500 has been made in this regard.
4 INCOME TAXES
The provision for income taxes comprises:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ----
<S> <C> <C> <C>
Current taxes:
Federal.................................................. $(1,707) $ 585 $ --
State.................................................. (149) 3 --
Withholding............................................ 23 -- --
Foreign................................................ (1,386) 928 309
------- ------- ----
(3,219) 1,516 309
------- ------- ----
Share of affiliate tax................................. 623 -- --
------- ------- ----
Deferred taxes:
Federal................................................ 1,942 (1,316) (3)
State.................................................. 157 (20) --
Withholding............................................ (562) 37 --
Foreign................................................ 3,500 (217) --
------- ------- ----
5,037 (1,516) (3)
------- ------- ----
Total provision for income taxes......................... $ 2,441 $ -- $306
======= ======= ====
</TABLE>
F-19
<PAGE> 59
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4 INCOME TAXES (CONTINUED)
Differences between the provision for taxes that would be computed at the
US statutory rate and the actual tax provision were:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Expected US federal provision.......................... $3,418 $(7,827) $(5,495)
Foreign income not subject to US corporate taxes....... (2,630) 7,135 5,341
Tax impact of net loss carried forward................. -- -- 516
State taxes (net of Federal tax benefit)............... 19 (56) --
Share of state and foreign taxes of affiliate.......... 69 -- --
Foreign corporate taxes................................ 2,099 711 309
Other foreign taxes.................................... 39 -- --
Tax on unremitted retained earnings of subsidiaries.... (562) 37 --
Other.................................................. (11) -- (365)
------ ------- -------
Actual tax provision................................... $2,441 $ -- $ 306
====== ======= =======
</TABLE>
Temporary differences giving rise to the net deferred income tax liability
as of the balance sheet date were:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Assets
Acquisition fees............................................ $3,098 $3,098
Other..................................................... 165 197
------ ------
Total deferred income tax assets.................. 3,263 3,295
------ ------
Liabilities
Depreciation.............................................. 7,932 8,327
Partnership income taxable in different periods for book
and tax purposes....................................... 2,219 2,171
Unremitted retained earnings of subsidiaries.............. 133 265
Losses carried forward.................................... (2,189) (3,723)
Adjustment for deferred tax allowances not recognized..... -- 1,230
------ ------
Total deferred income tax liabilities............. 8,095 8,270
------ ------
Net deferred income tax liabilities............... $4,832 $4,975
====== ======
</TABLE>
Tax losses have arisen in US entities. As of December 31, 1998 the deferred
tax asset associated with these losses carried forward will expire as follows:
<TABLE>
<S> <C>
1999........................................................ $ --
2000........................................................ --
2001........................................................ 50
2002........................................................ 75
2003........................................................ 49
2004 and thereafter......................................... 3,549
------
Total............................................. $3,723
======
</TABLE>
The Group has a potential deferred income tax liability for tax arising on
unremitted retained earnings of certain subsidiaries. Upon remittance of such
earnings to the parent company, tax may be withheld by certain jurisdictions in
which the Group operates. The directors have considered the Group's remittance
intentions in
F-20
<PAGE> 60
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4 INCOME TAXES (CONTINUED)
arriving at the related provision for deferred income taxes. The total potential
amount of such deferred income taxes not provided at December 31, 1997 and 1998
was $422 and $303, respectively, based on unremitted earnings for which
provision has been made of $8,435 and $6,061 respectively.
5 AMOUNTS DUE FROM LESSEES
Amounts due from lessees represent gross lease revenue due but not paid by
ocean carriers.
As of December 31, 1998 the minimum lease rentals collectable in future
years under term operating leases were:
<TABLE>
<S> <C>
1999....................................................... $24,838
2000....................................................... 15,975
2001....................................................... 8,661
2002....................................................... 3,959
2003....................................................... 2,716
2004 and thereafter........................................ 1,988
-------
Total............................................ $58,137
=======
</TABLE>
6 AMOUNTS RECEIVABLE FROM CONTAINER OWNERS
Amounts receivable from container owners comprise:
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Amounts due from unrelated parties.......................... $1,091 $ 2,527
Amounts due from related parties
-- US Limited Partnerships................................ 7,311 7,738
------ -------
$8,402 $10,265
====== =======
</TABLE>
7 NEW CONTAINER EQUIPMENT FOR RESALE
Activity during the year in new container equipment for resale was:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ------
<S> <C> <C> <C>
Beginning of year.................................... $ 7,910 $ 1,485 $8,202
Container purchases.................................. 137,755 34,959 671
Container disposals
-- sold to container owners........................ (58,328) (28,242) (8,558)
-- transferred to long term ownership of container
equipment....................................... (85,852) -- --
-------- -------- ------
End of year.......................................... $ 1,485 $ 8,202 $ 315
======== ======== ======
</TABLE>
8 NET INVESTMENT IN DIRECT FINANCING LEASES
The Group, as lessor, has entered into various leases of equipment that
qualify as direct financing leases.
F-21
<PAGE> 61
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8 NET INVESTMENT IN DIRECT FINANCING LEASES (CONTINUED)
The minimum lease receivables under these direct financing leases, net of
unearned income, are collectable as follows:
<TABLE>
<CAPTION>
NET LEASE UNEARNED TOTAL LEASE
RECEIVABLES LEASE INCOME RENTALS
----------- ------------ -----------
<S> <C> <C> <C>
December 31, 1997................................. $4,991 $1,074 $6,065
====== ====== ======
December 31, 1998:
-- 1999......................................... $1,365 $ 430 $1,795
-- 2000......................................... 1,216 208 1,424
-- 2001......................................... 322 78 400
-- 2002......................................... 261 49 310
-- 2003......................................... 290 20 310
-- 2004 and thereafter.......................... 50 -- 50
------ ------ ------
Total................................... $3,504 $ 785 $4,289
====== ====== ======
</TABLE>
9 INVESTMENTS, INCLUDING INVESTMENTS IN RELATED PARTIES
Investments comprise:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Investment in US Limited Partnerships....................... $ 220 $ 55
Investment securities available for sale:
-- cost................................................... 2,903 1,403
-- unrealized holding gain................................ 1,159 --
------ ------
$4,282 $1,458
====== ======
</TABLE>
i. Investment in US Limited Partnerships
The Group has a general partnership investment and a further limited
partnership investment in ten sponsored funds. These general and limited partner
investments are accounted for on the equity basis. The subsidiary of the Company
which acts as a general partner maintains insurance against liability 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.
ii. Investments in affiliated companies
The activity in the investments in affiliated companies was:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---- ----
<S> <C> <C> <C>
Beginning of year........................................... $ 17,691 $ 2 $--
Share of undistributed income for the year.................. 1,002 -- --
Amortization of goodwill.................................... (228) -- --
Disposal of investment...................................... (18,562) -- --
Other....................................................... 99 (2) $--
-------- --- ---
End of year................................................. $ 2 $-- $--
======== === ===
</TABLE>
As of December 31, 1995, the investments in affiliated companies comprised
an interest of approximately 24% in Trans Ocean Limited ("TOL"), a container
leasing company incorporated in Delaware, United States
F-22
<PAGE> 62
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9 INVESTMENTS, INCLUDING INVESTMENTS IN RELATED PARTIES (CONTINUED)
and an interest, purchased in 1994 for $2, of approximately 49% in Hinderton
Limited ("Hinderton"), a container investment company incorporated in the Isle
of Man.
In 1996, following an Agreement and Plan of Merger between Transamerica
Corporation ("Transamerica") and TOL, the Group was entitled to receive 19.23
Transamerica shares for each TOL common share it held. Of these Transamerica
shares, the Group sold 251,882 in October 1996 for a consideration of $19,288.
The total gain on conversion of the TOL shares recognized in 1996 was $5,260, of
which $1,621 was realized.
Following the final determination of the initial escrow fund, 21,989 shares
were released to the Group and sold for a consideration of $1,953 in May 1997
resulting in a realized gain of $321. As of December 31, 1998, a further 47,196
shares remain held in escrow pending final determination of post-closing reports
and adjustments in 1999 (note 9iii).
In December 1996 the equity interest in Hinderton was exchanged for
subordinated debt, that was to earn interest equivalent to 50% of the net profit
of Hinderton. No interest has been earned in any of the periods presented. In
1998 the subordinated debt was assigned to Hinderton for a nominal
consideration.
The Group has a management agreement covering the operation of containers
owned by Hinderton, under which management and acquisition fees are receivable.
The revenue earned with respect to this agreement was not material in any of the
periods presented.
iii. Investment securities
Investment securities: the available for sale balance of $1,403 represents
12,326 shares in Transamerica, which are on deposit in escrow accounts pending
resolution of withholding tax issues, following the conversion of the TOL shares
disclosed above, together with the estimated fair value of the additional 47,196
Transamerica shares held in escrow at December 31, 1998 (note 9ii). The Group
has agreed to provide a bank group with a security interest in respect of the
Transamerica shares when they are released to the Group (note 14(a)). The
estimated fair value of the shares is based on the number of shares anticipated
to be released from the escrow funds, valued at the closing rate at the balance
sheet date. In February 1999, the Group was advised that claims, which are being
challenged, have been made against the escrow funds, which hold the 47,196
shares, for amounts in excess of the value of the shares held. In this regard,
the Group recorded a charge to reduce the carrying value of the investment
securities by $1,500, in addition to which a charge of $1,159 has been incurred
in respect of an unrealized holding gain. There is a reasonable possibility that
the estimated realizable value of these shares could change within one year of
the date of these financial statements.
F-23
<PAGE> 63
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10 CONTAINER EQUIPMENT
The activity in container equipment for the years ended December 31, 1997
and 1998 was:
<TABLE>
<S> <C>
COST
Balance, December 31, 1996.................................. $276,174
Additions................................................. 42,867
Disposals................................................. (73,927)
Impairment loss (note 3).................................. (7,368)
--------
Balance, December 31, 1997................................ 237,746
Additions................................................. 1,822
Disposals................................................. (7,185)
Impairment loss (note 3).................................. (4,500)
--------
Balance, December 31, 1998................................ $227,883
========
ACCUMULATED DEPRECIATION
Balance, December 31, 1996................................ 33,831
Expense................................................... 16,686
Disposals................................................. (5,537)
--------
Balance, December 31, 1997................................ 44,980
Expense................................................... 16,403
Disposals................................................. (1,743)
--------
Balance, December 31, 1998................................ $ 59,640
========
BOOK VALUE
December 31, 1997......................................... $192,766
========
December 31, 1998......................................... $168,243
========
</TABLE>
The depreciation expense in 1996 was $12,601
F-24
<PAGE> 64
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11 INTANGIBLE ASSETS
The activity in the intangible assets was:
<TABLE>
<CAPTION>
PATENTS GOODWILL TOTAL
------- -------- -------
<S> <C> <C> <C>
COST
Balance, December 31, 1996............................. $2,085 $20,119 $22,204
Additions............................................ 11 412 423
Impairment loss (see note 3)......................... -- (4,300) (4,300)
------ ------- -------
Balance, December 31, 1997........................... 2,096 16,231 18,327
Additions............................................ -- -- --
------ ------- -------
Balance, December 31, 1998........................... $2,096 $16,231 $18,327
====== ======= =======
ACCUMULATED AMORTIZATION
Balance, December 31, 1996........................... $ 62 $ 2,752 $ 2,814
Expense.............................................. 188 554 742
------ ------- -------
Balance, December 31, 1997........................... 250 3,306 3,556
Expense.............................................. 188 495 683
------ ------- -------
Balance, December 31, 1998........................... $ 438 $ 3,801 $ 4,239
====== ======= =======
BOOK VALUE
December 31, 1997.................................... $1,846 $12,925 $14,771
====== ======= =======
December 31, 1998.................................... $1,658 $12,430 $14,088
====== ======= =======
</TABLE>
The amortization expense in 1996 was $489.
i. Goodwill
Goodwill arose on the acquisition in 1990 of Intermodal Equipment
Associates and the acquisition in 1996 of Intermodal Management AB. At December
31, 1997, the Group recorded an impairment loss of $4,300 against the
unamortized portion of goodwill relating to the acquisition of Intermodal
Equipment Associates.
The Group acquired Intermodal Management AB and its subsidiary Intermodal
Leasing AB in August 1996. Goodwill arose on the acquisition of $4,644
(1997 -- $412, 1996 -- $4,232).
ii. Patents
The Group acquired the patent rights relating to the Cellular Palletwide
Container ("CPC") and the Slimwall CPC and the business of Cargo Unit Containers
Limited in August 1996. The total consideration paid for the patents and
business assets was $2,096.
12 OTHER ASSETS
At December 31, 1998 other assets includes the following items:
i. In 1997 and 1998 non interest bearing loan notes of $6,766 and $539,
respectively, were received in part consideration for respective asset sales to
a third party container owner of $25,800 and $3,914. The loan notes fall due for
repayment after certain other loan notes due to third parties have been repaid
from funds generated from containers managed by the Group. It is anticipated
that the loan notes will not be repaid until 2006 at the earliest. The Group
owns one share of $1 in the third party container owner, which has a share
capital of $12,000 and has the option to acquire 75% of the container owning
company for $1 in August 2006.
F-25
<PAGE> 65
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12 OTHER ASSETS (CONTINUED)
ii. At December 31, 1997 and 1998 an amount of $1,598 was held in escrow in
connection with a container sale to a third party container owner during 1997
(note 17).
iii. Amounts of $3,613 and $3,704 were held as retention deposits by
financial institutions in connection with long term funding transactions at
December 31, 1997 and 1998 respectively. These amounts will be released on dates
between 2000 and 2005 in accordance with the terms of the funding transactions
(note 14(a)).
iv. At December 31, 1997 and 1998 deposits of $743 and $4,450,
respectively, were held in escrow accounts in respect of amounts due to third
party container owners (note 17).
v. At December 31, 1997 and 1998 an amount of $793 was held in escrow in
respect of the sale in December 1996 of Cronos Investments B.V. (note 17).
13 AMOUNTS PAYABLE TO CONTAINER OWNERS
Amounts payable to container owners comprise:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Amounts due to unrelated parties............................ $15,536 $18,027
Amounts due to related parties:
-- US Limited Partnerships................................ 15,484 13,287
------- -------
$31,020 $31,314
======= =======
</TABLE>
14 DEBT AND LEASE OBLIGATIONS
Debt and capital lease obligations comprise:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Debt
- -- long term................................................ $ 66,038 $ 49,687
-- current................................................ 77,648 74,820
Obligations under capital leases
-- long term.............................................. 22,644 11,508
-- current................................................ 5,069 12,451
-------- --------
$171,399 $148,466
======== ========
</TABLE>
F-26
<PAGE> 66
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14 DEBT AND LEASE OBLIGATIONS (CONTINUED)
a) Debt
Debt comprises:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Long term debt:
Revolving credit............................................ $16,189 $15,134
Term loans
-- fixed rate.......................................... 45,356 39,980
-- variable rate....................................... 82,141 69,393
------- -------
143,686 124,507
Less: current maturities of long term debt.................. 77,648 74,820
------- -------
$66,038 $49,687
======= =======
</TABLE>
Bank loans are secured by the Group's container equipment and property,
with instalments payable through 2004 and with interest rates fixed or floating
dependent upon the facilities. The weighted average interest rates for the years
ended December 31, 1996, 1997 and 1998 were 8.1%, 8.5% and 9.0%, respectively.
The Group has entered into interest rate swap agreements to effectively fix
the rates on $20,625 of floating rate long term debt until 1999 (note 15).
As of December 31, 1998 the estimated fair value of fixed rate long term
debt was $37,625 (1997 -- $46,946) for which the carrying value was $39,980
(1997 -- $45,356). The fair value of fixed rate long term debt has been
calculated using the market rates prevailing at December 31, 1998.
As of December 31, 1998 the Group had $133,332 of term facilities
(including capital lease financing) under which $133,332 was outstanding. In
addition, as of such date, the Group had available lines of credit of $27,500
under short term revolving credit facilities, under which $15,134 was
outstanding. Interest rates under these facilities ranged from 6.6% to 10.2%.
The terms of these facilities extend to various dates up to 2005. In March 1999,
the Group agreed an amendment to a $20,000 short term revolving credit facility
which had a maturity date of March 31, 1999, under which $10,334 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. In the first three months of 1999, the Group
made repayments of $1,100.
The Group is subject to quarterly loan covenants which include financial
covenants relating to minimum tangible net worth, leverage, interest and fixed
charge coverage, earnings and debt service, and other covenants relating to the
filing of quarterly unaudited financial statements and annual audited financial
statements together with a limitation on dividend distributions to 35% of
retained earnings after tax.
At December 31, 1998 the Group was in breach of loan covenants relating to
interest coverage, fixed charge coverage, minimum tangible net worth, earnings
and debt service with five institutions representing 31% of debt and lease
obligations. Waivers have been received in respect of the breaches at December
31, 1998.
Following negotiations in 1997 with the banks providing the Group's primary
revolving credit facility, under which $73,500 was outstanding as of December
31, 1996, an Amended and Restated Credit Agreement was executed in June 1997,
subject to various actions being taken by the Group, primarily relating to the
provision of additional collateral. This Agreement was further amended in July
1997 and the provisions of the Agreement and its Amendment converted the
facility (the "Bank Facility") to a term loan, payable in
F-27
<PAGE> 67
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14 DEBT AND LEASE OBLIGATIONS (CONTINUED)
instalments with a final maturity date of May 31, 1998. The terms of the
Agreement and its Amendment also provided for additional security over shares in
the subsidiary of the Group that owns the head office of the Group's container
leasing operations. They also provided for the loans to Mr S M Palatin (a former
Chairman and director) of $5,900 and $3,700 to be restructured as obligations of
Mr S M Palatin to another subsidiary of the Group, together with the pledge to
this subsidiary company of 2,030,303 Common Shares beneficially owned by him in
The Cronos Group, as security for these loans (note 21). They further provided
for the assignment of these loans to the lending banks, together with the pledge
of 1,000,000 shares and the assignment of the rights of the Group in respect of
the other 1,030,303 shares. The Group did not repay the Bank Facility at the
amended maturity date of May 31, 1998.
On June 30, 1998 the Group entered into a third amendment (the "Third
Amendment") to the Bank Facility. Under the Third Amendment, the remaining
principal amount of $36,800 was due to be amortized in varying monthly amounts
commencing on July 31, 1998 with $26,950 due on September 30, 1998 and a final
maturity date of January 8, 1999.
Under the Third Amendment, the Group agreed to provide the banks with a
security interest in certain shares of Transamerica Corporation when they are
released to the Group under a 1996 Escrow Agreement (note 9).
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 $33,110. In the first three months of 1999, the Group
repaid $7,279 of the Bank Facility leaving an outstanding balance of $25,831.
In March 1999, the Group agreed a fourth amendment (the "Fourth Amendment")
to the Bank Facility under which, the final maturity date will be September
1999. The Fourth Amendment became effective as of March 31, 1999 subject to the
satisfaction thereafter of various conditions, including the delivery of the
Group's audited financial statements for 1998, together with various legal
opinions and other loan documentation by April 15, 1999.
Prior to the agreement of the Fourth Amendment, the principal bank, under
the Bank Facility, secured title to 463,636 shares previously held by Lambert
Business Inc ("Lambert"). This is discussed more fully in note 21vii.
As at May 31, 1998, the Group owed $13,900 principal amount under a Note
Purchase Agreement which became due and payable on May 31, 1998. In July 1998,
the Group agreed and executed an Amendment to the Note Purchase Agreement with
the holders of the Notes under which 70% of the principal amount was due and
payable on September 30, 1998 and the balance on January 31, 1999. Neither of
these principal payments were made and the balance outstanding under the
facility at December 31, 1998 was $13,900. An amendment to the Note Purchase
Agreement has been executed in 1999 which extends the final maturity date to
September 1999 and also provides for interim principal payments to be made in
April and July. In February 1999, the Group made a $1,200 repayment, in lieu of
the April payment, leaving an outstanding balance of $12,700.
The directors are taking the necessary action to secure alternative sources
of finance and are confident that refinancing will be arranged to meet these
amended repayment obligations. Failure to meet revised lending terms would allow
the lenders to declare a default. The declaration of default would result in
further defaults with other lenders under loan agreement cross-default
provisions. Should a default of the term loans be declared, the Group may be
unable to continue as a going concern.
F-28
<PAGE> 68
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14 DEBT AND LEASE OBLIGATIONS (CONTINUED)
As of December 31, 1998, based, as management anticipates, on the
satisfactory implementation of the revised loan terms as outlined above, the
annual maturities of debt were:
<TABLE>
<S> <C>
1999...................................................... $ 74,820
2000...................................................... 7,217
2001...................................................... 7,179
2002...................................................... 12,496
2003...................................................... 7,345
2004 and thereafter....................................... 15,450
--------
Total........................................... $124,507
========
</TABLE>
b) Capital lease obligations
The cost and net book value of assets acquired through capital leases was
$43,158 and $29,878, respectively, at December 31, 1998 ($43,341 and $31,303,
respectively, at December 31, 1997). Amortization in respect of these leases is
included in depreciation expense. The aggregate capital lease obligations are
secured by container equipment.
As of December 31, 1998, based, as management anticipates, on the
satisfactory implementation of the revised loan terms as outlined in 14(a)
above, the minimum lease payments under capital leases representing interest and
principal were:
<TABLE>
<CAPTION>
CAPITAL LEASE
PRINCIPAL INTEREST OBLIGATIONS
--------- -------- -------------
<S> <C> <C> <C>
1999................................................. $12,451 $1,147 $13,598
2000................................................. 2,050 803 2,853
2001................................................. 1,495 661 2,156
2002................................................. 1,776 545 2,321
2003................................................. 1,733 414 2,147
2004 and thereafter.................................. 4,454 359 4,813
------- ------ -------
Total...................................... $23,959 $3,929 $27,888
======= ====== =======
</TABLE>
c) Operating leases
i. Group as lessee
The Group leases container equipment, computer equipment and office space
under operating leases.
Rental expense for containers, substantially all of which is contingent as
described in note 1(a), is shown in the income statement as Payments to
container owners. Rental expense for those leases which carry fixed payment
terms was $3,829, $4,023, and $4,023 for the years ended December 31, 1996, 1997
and 1998, respectively.
Rental expense for computer equipment and office space was $1,595, $1,548
and $1,593 for the years ended December 31, 1996, 1997 and 1998, respectively.
F-29
<PAGE> 69
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14 DEBT AND LEASE OBLIGATIONS (CONTINUED)
As of December 31, 1998, based, as management anticipates, on the
satisfactory implementation of the revised loan terms as outlined in 14(a)
above, future minimum lease payments under these non-cancellable operating
leases were:
<TABLE>
<S> <C>
1999....................................................... $ 5,771
2000....................................................... 5,293
2001....................................................... 4,982
2002....................................................... 4,833
2003....................................................... 4,704
2004 and thereafter........................................ 6,717
-------
Total............................................ $32,300
=======
</TABLE>
ii. Group as lessor
The Group sub-leases containers to ocean carriers under operating leases,
as described in note 1(a). The Group also sub-leases office space and earned
revenue of $278, $88 and $211 for the years ended December 31, 1996, 1997 and
1998, respectively.
Rental income from sub-leasing containers owned by third party container
owners to ocean carriers was $117,306, $115,414 and $117,690 for the years ended
December 31, 1996, 1997 and 1998, respectively. These amounts are included in
Gross lease revenue in the income statement.
Future sub-lease rentals for containers leased under operating leases to
ocean carriers under non-cancellable term leases are included in the amounts
shown in note 5.
d) Going concern
As indicated in note 1(b), these financial statements have been prepared on
a going concern basis which contemplates the realization of assets and
settlement of liabilities in the normal course of business. Negotiations for
refinancing are continuing and are detailed in this note. There can be no
assurances that management's plans to secure adequate refinancing will be
successful. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
15 FINANCIAL INSTRUMENTS-DERIVATIVES
The Group has entered into a limited number of interest rate swap
agreements to reduce the impact of changes in interest rates on its floating
rate long term debt. As of December 31, 1998 the notional principal amount
outstanding under these agreements was $20,625. The agreements were with major
commercial banks and expire in 1999.
The Group is exposed to credit risk in the event of non-performance by the
other parties to the interest rate swap agreements. The Group does not
anticipate non-performance by these counterparties.
As of December 31, 1998 the fair value of the agreements was a net payable
of $91 (1997 -- $206), which is included in Other amounts payable and accrued
expenses, for which the carrying value was $20,625 (1997 -- $24,269). The fair
value has been calculated using the market rate prevailing at December 31, 1998.
Interest expense includes charges in respect of interest rate swap
agreements of $223, $149 and $243 for the years ended December 31, 1996, 1997
and 1998 respectively.
F-30
<PAGE> 70
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16 DEFERRED INCOME AND UNAMORTIZED ACQUISITION FEES
Deferred income and unamortized acquisition fees comprise:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Advance billings............................................ $ 3,041 $ 2,681
Unamortized acquisition fees................................ 11,993 10,086
------- -------
$15,034 $12,767
======= =======
</TABLE>
The recognition of unamortized acquisition fees is not contingent upon the
performance or continuation of any of the agreements to which they relate. On
the termination of an agreement, any unamortized fees are recognized
immediately. As of December 31, 1998 unamortized acquisition fees are scheduled
to be recognized as follows:
<TABLE>
<S> <C>
1999....................................................... $ 2,065
2000....................................................... 1,933
2001....................................................... 1,672
2002....................................................... 1,273
2003....................................................... 1,085
2004 and thereafter........................................ 2,058
-------
Total............................................ $10,086
=======
</TABLE>
17 COMMITMENTS AND CONTINGENCIES (TO BE READ IN CONJUNCTION WITH NOTE 21)
i. Commitments
At December 31, 1998 the Group had commitments under operating leases for
office space and equipment which were not material.
The group had no outstanding orders in respect of container equipment at
December 31, 1998.
ii. Contingencies -- general
At December 1998, the Group 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 Group in return for a corporate guarantee
under the terms of which the Group 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 Group has deposited $360 in a bank account under the control of
Austrian Courts. This deposit is intended to fulfil liabilities regarding the
operation of certain containers once the proper recipients have been determined
and is discussed further in iv below.
The Group has deposited a further $4,090 in escrow bank accounts in order
to fulfil liabilities in respect of specified containers once certain issues
have been resolved. In February, 1999 the Group released $2,703 of the escrow
deposits. This matter is discussed further in iv below.
At December 31, 1998, Other assets included an amount of $793 which was
held in escrow, in respect of the sale in December 1996 of Cronos Investments
B.V., the release of which was dependant 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 Group received an initial payment of $619 and
expects to receive a further payment of $42 in final settlement of the escrow
fund.
F-31
<PAGE> 71
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17 COMMITMENTS AND CONTINGENCIES (TO BE READ IN CONJUNCTION WITH NOTE 21)
(CONTINUED)
The Group does not believe it has any other contingent liabilities, other
than as disclosed in note 14 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 enquiries 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 Group in January 1997. See also
note 21 in this regard. To date current management has been unable to obtain an
adequate explanation of the facts and circumstances with respect to this payment
and its return.
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 organisations 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
periodical 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 wrong doing 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.
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 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").
Further details regarding Barton Holding Ltd ("Barton") and transactions
involving that company are given in note 21.
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 S M Palatin and regarding
Mr S M 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.
F-32
<PAGE> 72
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17 COMMITMENTS AND CONTINGENCIES (TO BE READ IN CONJUNCTION WITH NOTE 21)
(CONTINUED)
In this connection, a bank account to which $360 was transferred by the
Group, 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 consider that no liability arises as a consequence of making this
transfer as the funds are under the control of the Austrian courts which will
determine the correct recipients of the funds. In March 1999, the Group together
with the Austrian investment entities have applied to the Austrian courts for
the release of the funds to the Austrian investment entities.
Moreover, Austrian courts have initiated investigations against Mr S M
Palatin and additional persons, including Mr R J Weissenberger, a former
Chairman and director, and Mr A Friedberg, a former director. Mr S M Palatin and
Mr A Friedberg have since been formally charged. Such investigations have not
resulted in any actions being taken against Mr R J 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 have been unable to obtain definitive information regarding the
relationships suggested in the allegations by the third parties.
Secondly, it is alleged that funds may have been remitted to the Group
which were not deposited in a Group bank account and are not reflected in the
Group's accounting records. Specifically, it is alleged that Mr S M 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-Group 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 S M Palatin's acknowledgement. The Group has
determined that a $400 distribution, to third party investors, was paid by the
Group 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-Group 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 S M 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 Group was not involved in
these transactions, that the Group has no access to the records of the alleged
transactions and, so far as the Group has managed the containers, the Group 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 Group 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 Group records appertaining to the management of containers owned
by those investment entities. Some enquiries 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 Group terminated certain
of its management agreements with Contrin entities in 1998. Discussions are
taking place between Contrin and the Group and it is anticipated that these
agreements will be reinstated.
Management consider that prudent provision has been made in these financial
statements for the matters in this connection. Details of the provision are
given in notes 1r and 3.
F-33
<PAGE> 73
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17 COMMITMENTS AND CONTINGENCIES (TO BE READ IN CONJUNCTION WITH NOTE 21)
(CONTINUED)
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 Group,
through its Austrian attorney. In December 1998, the arbitration panel found
that the management agreements with the Austrian investment entities were valid.
The Group 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.
18 COMMON SHARES AND INITIAL PUBLIC OFFERING
The common shares of the Company are publicly traded on the National
Association of Securities Dealers Automated Quotation System (NASDAQ), following
the Company's initial public offering in December 1995.
As part of the initial public offering the underwriters were granted
options at $10 per share, exercizable by January 7, 1996, to purchase up to an
additional 510,000 shares for the purposes of covering over-allotments. On
January 7, 1996, the underwriters exercized 243,000 of these options. The
remaining 267,000 options lapsed.
During 1997 and 1998 there were no changes to the number of issued common
shares.
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Common shares outstanding:
At beginning of year........................... 8,615,378 8,858,378 8,858,378
New common shares issued..................... 243,000 -- --
---------- ---------- ----------
At end of year....................... 8,858,378 8,858,378 8,858,378
========== ========== ==========
Proceeds of the offering:
Sale price of shares issued.................. $ 2,430 $ -- $ --
Underwriting discounts and commissions....... (170) -- --
Expenses of issuance and distribution........ (149) -- --
---------- ---------- ----------
Net proceeds......................... $ 2,111 $ -- $ --
========== ========== ==========
</TABLE>
All common shares rank equally in respect of shareholder rights.
19 MANAGEMENT EQUITY INVESTMENT PLAN ("MEIP")
In November 1994, the Group introduced the MEIP for key employees of the
Group. A total of 440,000 common shares have been reserved for issuance under
the MEIP. As of December 31, 1998 outstanding options to acquire 156,600 common
shares were held by 20 employees. The main terms of the plan are as follows:
i. The MEIP consists of option units comprising four separate options, each
option granting the right to the key employee to acquire an equal number of
common shares at four different exercize prices. The key employee must pay an
option price to acquire each option. The exercize price for each option was
determined at the date of grant.
F-34
<PAGE> 74
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
19 MANAGEMENT EQUITY INVESTMENT PLAN ("MEIP") (CONTINUED)
ii. Each option vested 25% in the years ended December 31, 1995 and 1996,
respectively. Options may only be exercized in units of each of the four
options. At December 31, 1998 options were exercizable over 81,000 shares.
iii. Members of the MEIP may only exercize vested options within seven
years of November 25, 1994, the date of grant. No options were granted in 1996
and 1997. Unexercized options will expire thereafter. As of December 31, 1998
unexercized options have a remaining contractual life of 2 years, 11 months.
The granting of the options did not result in additional compensation for
the key employees who joined the plan for the year ended 31 December, 1998. As
of December 31, 1998, the options are estimated to have a nil value based on the
share price at that date and the exercize prices. Total compensation cost
recognized in the income statement for stock-based employee compensation was
nil.
As of December 31, 1998, outstanding unpaid options amounts to $123,
included as Share Subscriptions Receivable within Shareholders' Equity. The cost
of each option and the associated exercize price at the beginning and end of the
current period are as follows:
<TABLE>
<CAPTION>
NUMBER NUMBER
OF SHARES OF SHARES OPTION PRICE EXERCIZE PRICE
AT JANUARY 1 AT DECEMBER 31 PER SHARE PER SHARE
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Option 1.............................. 53,250 39,150 $1.43 $14.30
Option 2.............................. 53,250 39,150 $1.56 $15.60
Option 3.............................. 53,250 39,150 $1.69 $16.90
Option 4.............................. 53,250 39,150 $1.82 $18.20
------- -------
Total....................... 213,000 156,600
======= =======
</TABLE>
The options purchased by key employees represent a potential ownership
interest, on a fully diluted basis, of 2.4% of common shares. Options over
56,400 shares lapsed during the year as a result of eligible employees leaving
the group.
20 RETAINED EARNINGS -- RESTRICTED
On an annual basis, Luxembourg law requires appropriation of an amount
equal to at least 5% of Net income to a legal reserve until such reserve equals
10% of the stated capital in respect of the outstanding common and preferred
shares. This reserve is not available for dividends. In 1995, following the sale
of the common shares in the initial public offering, an amount of $1,062 was
transferred from Additional paid-in capital to increase the legal reserve to the
required 10% of stated capital. A further amount of $49 was transferred from
Additional paid-in capital following the exercize of the underwriters options
and the issuance of 243,000 additional shares in January 1996 (note 18). At
December 31, 1997 and 1998, the legal reserve represented 10% of the stated
capital in respect of outstanding common shares. Accordingly, no appropriation
to the legal reserve was required for either year.
21 RELATED PARTY TRANSACTIONS (TO BE READ IN CONJUNCTION WITH NOTE 17)
The Group had the following transactions with related parties during the
three years ending December 31, 1998:
i. In 1996 the Group had management agreements with a limited number of
companies in which Mr S M Palatin, or the former preferred shareholder, Barton
Holding Ltd ("Barton") held an interest. These
F-35
<PAGE> 75
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
21 RELATED PARTY TRANSACTIONS (TO BE READ IN CONJUNCTION WITH NOTE 17)
(CONTINUED)
agreements were entered into on terms similar to other management agreements.
The net revenue retained by the Group with respect to these agreements
approximated 1% of Total revenues.
ii. In December 1994, payments amounting to $500 were reported as a
distribution to third parties in Austria (see note 17). Subsequent
investigations by management indicate that, of this, a remittance of $400 was
made to the bank account that received the $2,600 referred to in note 17;
management has requested necessary information which may be subject to
confidentiality considerations of the jurisdiction. Current management have seen
both instructions and a receipt for this amount from an authorised
representative of the third parties and is continuing to seek definitive
information regarding title and conduct of this non-Group bank account.
iii. At December 31, 1995, other assets included a loan to a director of
$511. The loan carried interest at a rate of 10% and was repaid in the amount of
$279 in January 1996 and the balance of $232 in September 1996.
iv. As part of organising the US public limited partnerships the Group
purchases containers for resale to these partnerships. For the years ended
December 31, 1996, 1997 and 1998 containers amounting to $48,107, $2,623 and $0
respectively, were purchased and resold. These transactions were entered into on
normal commercial terms.
v. During 1998, an ocean carrier in which a director of the Company was a
non executive director ceased trading. At December 31, 1998, a specific
provision of $553, representing the total amount due from the lessee of $1,153
less expected insurance proceeds, was included in the allowance for doubtful
accounts.
vi. During the years ended December 31, 1997 and 1998, payments of $97 and
$150, respectively, were made to a non executive director of the Company in
respect of legal fees.
vii. As of January 1, 1996, $4,723 was outstanding under a unsecured loan
agreement with Barton, the former preferred shareholder. This amount bore
interest at 9% and was repayable in instalments on March 31, 1996 and June 30,
1996.
In February 1996 the Group entered into an agreement with Mr S M Palatin,
under which Mr S M Palatin purportedly guaranteed the performance by Barton of
its obligations under the loan agreement, including repayment of interest and
principal according to the terms prescribed in the agreement. Mr S M Palatin's
guarantee purports to pledge 1,030,303 Common Shares owned by him in The Cronos
Group; the owner of record of these shares was Lambert Business Inc incorporated
under the laws of Panama.
The prospectus dated December 7, 1995 specifies that Barton is an
unaffiliated company; the Group has received no notification of a change in this
regard.
In April 1996, the Group advanced $500 to Mr S M Palatin. This advance bore
interest at 9% per annum and was repayable by June 30, 1996. On June 30, 1996,
principal and interest on the Group's loan to Barton in the amount of $4,950
came due, but no repayment thereon was received.
In August 1996, the Company and Mr S M Palatin entered into a new Loan
Agreement and related Pledge Agreement, each dated as of July 1, 1996, pursuant
to which Mr S M Palatin borrowed $5,461 from the Company which was used to repay
the principal and interest due on June 30, 1996, on the loan to Barton and the
$500 advance.
This loan bore interest at 9% per annum and matured on December 30, 1996.
The 1,030,303 Common Shares remained pledged as security for this loan and all
other obligations of Mr S M Palatin to the Group existing at that date. No
repayments have been made since the inception of this loan. In July 1997, in
F-36
<PAGE> 76
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
21 RELATED PARTY TRANSACTIONS (TO BE READ IN CONJUNCTION WITH NOTE 17)
(CONTINUED)
connection with the execution of the Amended and Restated Credit Agreement and
the Amendment thereto, relating to the Group's primary revolving credit
facility, this loan was revised in the amount of $5,900, representing principal
and interest due on the original loan, and was assigned to a subsidiary of the
Group, together with all the Company's rights in respect of this loan, including
the collateral rights concerning the purported pledge of 1,030,303 Common Shares
(note 14(a)). As of December 31, 1996, the fair value of this loan was $5,461.
December 31, 1997 was agreed as the revised repayment date for the loan, but no
principal or interest payments have been received. Management did not seek to
enforce the pledge following conflicting advice as to the feasibility of this
action and in particular, the powers of the Board of Lambert to prevent the
enforcement of the pledge, the sale of the shares without defect in title, or
the realisation of proceeds of sale for the benefit of the Group. As previously
disclosed, Mr R J Weissenberger had an interest in the shares of Lambert. In
March 1999, in connection with the negotiation of the Fourth Amendment (note
14(a)), title to 463,636 shares in the Company held by Lambert has been granted
as security to the Bank Facility. Title to the remaining 566,667 shares has been
taken by Mr R J Weissenberger to discharge his interest.
As indicated below, a provision of $4,733 was made in December 1997 against
Mr S M Palatin's outstanding loans and unpaid interest in view of these
circumstances.
The Company has engaged legal counsel to provide advice and commence legal
action, if appropriate, against former officers or directors if it is determined
that they engaged in any misfeasance or improper self-dealing. A special
committee has been appointed to work with counsel in this regard and also in the
recovery of balances due by Mr S M Palatin including interest.
In October 1996, $1,500 was paid by the Group purportedly in respect of an
obligation regarding professional fees relating to a proposed strategic
alliance. This alliance did not take place and the funds were repaid to the
Group in January 1997, as described in note 17iii above. To date no adequate
explanation of the facts and circumstances with respect to this payment and its
return has been forthcoming. At December 31, 1996 this amount was included
within amounts advanced to Mr S M Palatin.
In January 1997, the Group advanced an amount of $3,700 to Mr S M Palatin
under the same terms as the Loan Agreement dated July 1, 1996. This loan bore
interest at 9% per annum and was secured by a further pledge of 1,000,000 Common
Shares beneficially owned by him in The Cronos Group. This loan was replaced in
July 1997 by a new loan in like amount from a subsidiary of the Group to Mr S M
Palatin, pursuant to the Amended and Restated Credit Agreement and the Amendment
thereto (see note 14). This new loan bore interest at 9% per annum and was
secured, together with all other obligations of Mr S M Palatin to this
subsidiary company, by the pledge of 1,000,000 shares. The loan was due to be
repaid on October 31, 1997, but no interest or principal payments were received.
Consequently title to the 1,000,000 shares was established by the banks
providing certain of the Group's term loans which totalled $33,110 at December
31, 1998 (note 14(a)). As of December 31, 1998 no interest or principal payments
have been received.
Interest of $460 and $824 was credited on these loans during the years
ended December 31, 1996 and 1997, respectively. During 1998, additional interest
of $864 became due under Mr S M Palatin's outstanding loans. This amount has not
been recognized in income.
viii. In May 1998, the then Chairman, Mr S M Palatin, was taken into
custody in Austria in connection with continuing investigations into alleged
offences. In July 1998, he resigned as Chief Executive Officer, Chairman and
from all other positions within the Group. The Group has retained $240 in
respect of outstanding payroll for Mr S M Palatin which will be held as possible
settlement against any claims.
In view of these circumstances and the doubt concerning the Board's ability
to exercize the pledge over the remaining 1,030,303 shares, a provision of
$4,733, including unpaid interest, was made on December 31,
F-37
<PAGE> 77
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
21 RELATED PARTY TRANSACTIONS (TO BE READ IN CONJUNCTION WITH NOTE 17)
(CONTINUED)
1997 against Mr S M Palatin's outstanding loans and unpaid interest. At December
31, 1997 and 1998, respectively, the fair value of Mr S M Palatin's loans was
$5,500. In March 1999, title to 463,636 of the 1,030,303 shares was granted as
security to the Bank facility.
ix. In 1998, the Group identified amounts totalling $232 which were paid in
respect of professional services during 1997 and 1998 and have since been
attributed to Mr S M Palatin. Such costs were included in Financing and
recomposition expenses in the years in which they were incurred. The Group
intends to seek recovery of these costs.
x. Amounts of $283, $618 and $436 were paid for services provided under the
terms of an information technology agreement with a company, to which Mr S M
Palatin has indicated he is related, for the years ended December 31, 1996, 1997
and 1998, respectively.
xi. As indicated in note 17, it has been asserted by a representative of
Contrin that Mr S M Palatin has financial and other interests in companies that
were involved in the trading of containers with participants in certain Austrian
investment entities. The relationship or otherwise between these companies and
the Group cannot be substantiated by management at present. The public records
regarding these companies do not disclose their beneficial ownership. One of the
companies in question, Transocean Equipment Manufacturing and Trading Limited,
has been separately registered in the same name in both the United Kingdom and
the Isle of Man and has been regarded by management as a subsidiary of Contrin
and is so characterised in certain commercial correspondence. Contrin, through
three management companies, administered the Austrian investment entities.
Transocean Equipment Manufacturing and Trading Limited is in liquidation in the
United Kingdom and the Group has received a request for information from the
liquidator in respect of its trading transactions with that company.
F-38
<PAGE> 78
Corporate Information
- -------------------------------------------------------------
<TABLE>
<S> <C>
EXECUTIVE OFFICERS TRANSFER AGENT
Dennis J. Tietz BankBoston, NA
Chairman of the Board and c/o EquiServe Limited Partnership
Chief Executive Officer P.O. Box 8040
800-733-5001
Peter J. Younger Boston, MA 02266-8040
Chief Financial Officer www.equiserve.com
BOARD OF DIRECTORS INDEPENDENT AUDITORS
Dennis J. Tietz Moore Stephens
Chairman of the Board and St. Pauls House
Chief Executive Officer Warwick Lane
The Cronos Group London EC4P 4BN
England
Ernst-Otto Nedelmann
Managing Partner STOCK LISTING
E.O.N. Vermoegensverwaltung
GmbH The Company's common stock is
traded over the counter on the
Maurice Taylor NASDAQ National Market System
Independent Business under the symbol CRNS
Consultant
REGISTERED OFFICE
Charles Tharp 35 Rue Glesener
Independent Financial L-1631 Luxembourg
Management Consultant www.cronos.com
</TABLE>
<PAGE> 79
The Cronos Group
(A Societe Anonyme)
Financial statements December 31, 1998
together with directors' and auditors' reports
<PAGE> 80
THE CRONOS GROUP
16 ALLEE MARCONI
L-2120 LUXEMBOURG
R.C. LUXEMBOURG SECTION B. NO. 27478
DIRECTORS' REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998
We present the financial statements of the Company for the year ended
December 31, 1998.
In December 1998, Mr D. J. Tietz was appointed Chief Executive Officer. On
March 30, 1999, Mr Tietz was named Chairman of the Board replacing Mr R. J.
Weissenberger, who resigned as Chairman and non-executive director. Also on
March 30, 1999, Mr C. Tharp was appointed as a non-executive director following
the resignation of Mr A. Friedberg.
In December 1998, the directors implemented the first phase of a
restructuring plan, which is designed to reduce selling, general and
administrative expenses and increase operational efficiency.
The directors are currently negotiating the extension of certain term
loans, and are confident that this refinancing will be achieved. Therefore, the
accounts have been prepared on a going concern basis.
On behalf of the Board of Directors
/s/ D.J. TEITZ
D. J. Tietz
Chairman of the Board and Chief
Executive Officer
April 8, 1999
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998
To the Shareholders of The Cronos Group:
We have audited the accompanying balance sheet of The Cronos Group (a
Luxembourg holding company) as of December 31, 1998, and the related statements
of profit and loss for the year then ended and have read the related Directors'
report. These financial statements and the Directors' report are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit and to check the
consistency of the Directors' report with them.
We conducted our audit in accordance with International Standards on
Auditing. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above give, in
conformity with the legal requirements, a true and fair view of the financial
position of The Cronos Group as of December 31, 1998, and the results of its
operations for the year then ended.
The Directors' report is in accordance with these financial statements.
Without qualifying our opinion, we draw attention to the fact that certain
group companies are currently negotiating the refinancing of loans of
approximately $48 million which have final maturity dates ranging from January
8, 1999 to November 30, 1999. Failure to agree and comply with the terms of
refinancing could result in an event of default; any such default would result
in these loans together with all other loans becoming repayable immediately. Due
to the existence of intercompany guarantees until the refinancing has been
completed there is substantial doubt that the Company will be able to continue
as a going concern.
Without qualifying our opinion, we draw attention also to note 11 in the
financial statements. Allegations have been made which may result in the Company
becoming a defendant in lawsuits alleging various financial improprieties in the
operation of certain third party Austrian investment entities and their
sponsoring companies. The ultimate outcome of the matter cannot presently be
determined.
LOGO
Moore Stephens S.a.r.l.
Independent Auditors
Luxembourg
April 8, 1999
1
<PAGE> 82
THE CRONOS GROUP
BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
NOTES 1998 1997
------ ------- -------
$000 $000
<S> <C> <C> <C>
ASSETS
FIXED ASSETS
Financial assets
-- investments in subsidiaries............................ 16,638 8,932
-- other investment....................................... 3 1,403 --
CURRENT ASSETS
Receivables................................................. 4 45,285 63,147
Cash at bank and in hand.................................... 311 251
------- -------
TOTAL ASSETS...................................... 63,637 72,330
======= =======
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Subscribed capital.......................................... 5 17,717 17,717
Additional paid-in capital.................................. 13 39,108 39,154
Share subscriptions receivable.............................. 1e, 12 (123) (169)
Profit and loss reserve (without current year results)...... 6 13,056 30,108
Loss for the year........................................... (15,907) (17,052)
Legal reserve............................................... 7 1,772 1,772
LIABILITIES DUE WITHIN ONE YEAR
Other creditors............................................. 8,014 800
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ 63,637 72,330
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 83
THE CRONOS GROUP
STATEMENTS OF PROFIT AND LOSS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
NOTES 1998 1997
----- ------- -------
$000 $000
<S> <C> <C> <C>
EXPENSES
Charges..................................................... (10,674) (2,420)
Impairment loss of investment in subsidiaries............... 2 (12,500) (13,000)
Provision for amounts owed by subsidiaries.................. 4 -- (7,000)
Provision for loss on other investment...................... (1,500) --
Taxation.................................................... 9 -- (267)
INCOME...................................................... 10 8,767 5,314
GAIN ON CONVERSION OF INVESTMENT IN AFFILIATE............... 1c -- 321
------- -------
NET LOSS FOR THE YEAR....................................... (15,907) (17,052)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 84
THE CRONOS GROUP
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Cronos Group (the "company") is a holding company incorporated under
the laws of Luxembourg on February 22, 1988.
The company maintains its books and records in US dollars. Unless otherwise
stated all balances are in $000's.
The financial statements are prepared in accordance with generally accepted
accounting principles in Luxembourg, which include the following significant
accounting policies:
a) Format of financial statements
In accordance with Article 205 of the Luxembourg law of May 4, 1984, the
accompanying financial statements have been presented with certain modifications
to the prescribed legal format. The directors consider that the format adopted
is the most suitable for the presentation of the company's operations.
Generally accepted accounting principles contemplate the continuation of
the Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. However, certain
group companies are presently in default with regard to certain financial
obligations in respect of which the Company has given pledges. Negotiations in
respect of these obligations are continuing.
There can be no assurances that management's plans to secure adequate
refinancing will be successful. Should the group be unable to refinance its
loans, then the Directors will have to consider discontinuing the operation of
or selling the business. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary in the event
that the Company cannot continue in existence.
b) Investment in subsidiaries
Investments in subsidiaries are stated at cost less any permanent
impairment in value. Under this method earnings of subsidiaries are recognised
when, and to the extent, dividends have been received from subsidiaries.
c) Other investment
At the end of December 1995 the company acquired from another group
company, an interest of approximately 24% in Trans Ocean Ltd ("TOL"), a
container leasing company incorporated in Delaware, United States.
In 1996, following an Agreement of Plan and Merger between Transamerica
Corporation ("Transamerica") and TOL, the company was entitled to receive 19.23
Transamerica shares for each TOL common share it held. Of these Transamerica
shares, the company sold 251,882 in October 1996 for a consideration of $19,288.
The total gain on conversion of the TOL shares recognised in 1996 was $12,771.
Following the final determination of the initial escrow fund, 21,989 shares
were released to the Group and sold for consideration of $1,953 in May 1997
resulting in a gain of $321. As of December 31, 1998, a further 47,196 shares
remain held in escrow pending final determination of post-closing reports and
adjustments in 1999 (see Note 3).
d) Foreign currency translation
Assets and liabilities denominated in currencies other than US Dollars have
been translated at the exchange rate prevailing at the date of the balance
sheet. Non-US Dollar income and expenses are translated
4
<PAGE> 85
THE CRONOS GROUP
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
at the rates of exchange prevailing at the date of the transaction. Exchange
differences are recorded in the statement of profit and loss.
e) Management Equity Investment Plan ("MEIP")
Amounts received and receivable for the purchase of options under the
contractual arrangement of the MEIP is credited to Additional paid-in-capital
when the key employee makes the commitment. Amounts receivable for the purchase
of options is debited to Share subscriptions receivable within Shareholders'
equity.
f) Financing and recomposition expenses
In 1997 and 1998 the company incurred and accrued costs in connection with
certain financing and other transactions, the restructuring of the Board of
Directors, senior management and other employee positions. Costs incurred and
accrued were charged to the income statement where the company determined that
no future benefit would be derived from such costs.
2 FIXED ASSET INVESTMENTS
The company's principal wholly-owned subsidiaries at December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
COMPANY COUNTRY OF INCORPORATION PRINCIPAL ACTIVITY
------- ------------------------ ------------------
<S> <C> <C>
Cronos Containers Limited* UK Container leasing management and
administration
Cronos Containers N.V.* Netherlands Antilles Container management, financing
and administration
Cronos Capital Corp. USA General Partner and limited
partnership administration
Cronos Securities Corp. USA Securities broking
Cronos Containers Inc. USA Administration and marketing,
USA
Cronos Containers PTE Limited* Singapore Administration and marketing --
Singapore
Cronos Containers Pty Limited* Australia Administration and marketing --
Australia
Cronos Containers S.r.l. Italy Administration and marketing --
Southern Europe and container
investment
Cronos Containers (Hong Kong) Hong Kong Administration and marketing --
Limited* Hong Kong and Australia
Cronos Containers Leasing GmbH Germany Administration and marketing --
Germany
Cronos Equipment S.A.* Liberia Container Investment
</TABLE>
5
<PAGE> 86
THE CRONOS GROUP
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997
2 FIXED ASSET INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
COMPANY COUNTRY OF INCORPORATION PRINCIPAL ACTIVITY
------- ------------------------ ------------------
<S> <C> <C>
Cronos Equipment (Jersey) Ltd.* Jersey Container Investment
Cronos Equipment (Bermuda) Ltd.* Bermuda Container Investment
Cronos Containers Insurance Guernsey Container Investment
Ltd.*
Cronos Equipment Limited UK Administration and container
investment
Advanced Property Services UK Property investment
Limited
C G Finance B.V. Netherlands Financing
Cronos Management N.V.* Netherlands Holding Company and provision of
Antilles Executive services
Cronos Containers Scandinavia Sweden Intermodal equipment management
AB+
Intermodal Leasing AB Sweden Intermodal equipment management
Cronos Containers (Cayman) Ltd.* Cayman Islands Container Investment
Cronos Containers Leasing Ltd.* Virgin Islands Container Investment
Cronos Holdings Investments USA Holding Company
Inc.*
</TABLE>
- ------------------------
* These companies are owned directly by the company. All the other companies are
owned indirectly.
In October 1998, The Cronos Group made an investment in Cronos Containers
(Cayman) Ltd. and Cronos Containers Leasing Ltd. of $200 and $6 respectively.
In December 1998, The Cronos Group increased its investment in Cronos
Containers Ltd. and Cronos Equipment (Bermuda) Ltd. by $10,000 and $17,000
respectively.
As at December 31, 1998, the company determined that an impairment charge
should be provided for in respect of the diminution in value of its investment
in subsidiary companies.
3 OTHER INVESTMENT
The available for sale balance of $1,403 represents 12,326 shares in
Transamerica, which are on deposit in escrow accounts pending resolution of
withholding tax issues, following the conversion of the TOL shares disclosed
above, together with the estimated fair value of the additional 47,196
Transamerica shares held in escrow at December 31, 1998. The balance of $2,903,
as at December 31, 1997, was included in other debtors. The Group has agreed to
provide a bank group with a security interest in respect of the Transamerica
shares when they are released to the Group. The estimated fair value of the
shares is based on the number of shares anticipated to be released from the
escrow funds, valued at the closing rate at the balance sheet date. In February
1999, the Group was advised that claims, which are being challenged, have been
made against the escrow funds, which hold the 47,196 shares, for amounts in
excess of the value of the shares held. In this regard, the Group recorded a
charge to reduce the carrying value of the investment securities by $1,500.
There
6
<PAGE> 87
THE CRONOS GROUP
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997
3 OTHER INVESTMENT (CONTINUED)
is a reasonable possibility that the estimated realizable value of these shares
could change within one year of the date of these financial statements.
4 RECEIVABLES
The receivables balance comprises the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
$ 000 $ 000
<S> <C> <C>
Amounts owed by subsidiaries.......................... 45,251 60,194
Other................................................. 34 2,953
--------- ---------
45,285 63,147
========= =========
</TABLE>
5 SHARE CAPITAL
<TABLE>
<CAPTION>
1998 1997
--------- ---------
$ 000 $ 000
<S> <C> <C>
Authorised:
25,000,000 ordinary shares of $2 each................. 50,000 50,000
========= =========
</TABLE>
The common shares of the company began to be publicly traded on the
National Association of Securities Dealers Automated Quotation System (NASDAQ)
following the company's initial public offering on December 13, 1995.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Common shares outstanding:
Brought forward and carried forward................... 8,858,378 8,858,378
========= =========
</TABLE>
6 PROFIT AND LOSS RESERVE
<TABLE>
<CAPTION>
1998 1997
--------- ---------
$ 000 $ 000
<S> <C> <C>
Profit and loss reserve comprises:
Profit and loss reserve at beginning of year.......... 30,108 9,206
Allocation of preceding year (loss) profit............ (17,052) 20,902
--------- ---------
Profit and loss reserve at end of year................ 13,056 30,108
========= =========
</TABLE>
No dividends were paid or proposed for 1998 or 1997.
7 LEGAL RESERVE
The legal reserve at December 31, 1998 was as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
$000 $000
<S> <C> <C>
Brought forward and carried forward................... 1,772 1,772
========= =========
</TABLE>
8 COMMITMENTS AND GUARANTEES
The company has provided guarantees in respect of loans to subsidiaries.
7
<PAGE> 88
THE CRONOS GROUP
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997
9 TAXES
As a Luxembourg holding company, the company is subject to an annual
subscription tax which is current 0.2%, payable quarterly, based on the
estimated value of its outstanding shares as of the beginning of the year. The
determination of share value for purposes of calculating the annual subscription
tax is subject to change and is influenced by whether or not the shares are
publicly traded, the level of dividend payments, and other factors.
10 INCOME
Income comprises:
<TABLE>
<CAPTION>
1998 1997
----- -----
$000 $000
<S> <C> <C>
Interest income from intercompany receivables............... 5,509 5,042
Dividends received from subsidiaries........................ 3,187 --
Other....................................................... 71 272
----- -----
8,767 5,314
===== =====
</TABLE>
11 CONTINGENCIES
i. 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 of 1934 ("the
Act") citing its inability to obtain what it considered to be adequate responses
to its enquiries 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 Group in January 1997. To date
current management has been unable to obtain an adequate explanation of the
facts and circumstances with respect to this payment and its return.
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 organisations 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
periodical 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.
8
<PAGE> 89
THE CRONOS GROUP
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997
11 CONTINGENCIES (CONTINUED)
ii. 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. The former Chairman of the Group, Mr.
S.M. Palatin 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").
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. S.M. Palatin and
regarding Mr. S.M. 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 a
subsidiary 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 consider that no liability arises as a consequence of
making this transfer as the funds are under the control of the Austrian courts
which will determine the correct recipients of the funds. In March 1999, the
Group together with the Austrian investment entities have applied to the
Austrian courts for the release of the funds to the Austrian investment
entities. Moreover, Austrian courts have initiated investigations against Mr.
S.M. Palatin and additional persons, including Mr. R.J. Weissenberger, a former
Chairman and director, and Mr. A. Friedberg, a former director. Mr. S.M. Palatin
and Mr. A. Friedberg have since been formally charged. Such investigations have
not resulted in any actions being taken against Mr. R.J. 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 have been unable to obtain definitive information regarding the
relationships suggested in the allegations by the third parties.
Secondly, it is alleged that funds may have been remitted to the Group
which were not deposited in a Group bank account and are not reflected in the
Group's accounting records. Specifically, it is alleged that Mr. S.M. 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-Group 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. S.M. Palatin's acknowledgement. The Group
has determined that a $400 distribution, to third party investors, was paid by
the Group 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-Group 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. S.M. 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 Group was not involved in
these transactions, that the Group has no access to the records of the alleged
transactions and, so far as the Group has managed the containers, the Group has
acted
9
<PAGE> 90
THE CRONOS GROUP
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997
11 CONTINGENCIES (CONTINUED)
in accordance with instructions from authorised representatives of the third
parties. Management has been unable to quantify the extent, if any, that the
Group 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 Group records appertaining to the management of containers owned
by those investment entities. Some enquiries 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, a subsidiary company has
terminated certain of its management agreements with Contrin entities in 1998.
Discussions are taking place between Contrin and a subsidiary company and it is
anticipated that these agreements will be reinstated.
Management consider that prudent provision has been made for the matters in
this connection.
12 MANAGEMENT EQUITY INVESTMENT PLAN ("MEIP")
In November 1994, the Group introduced the MEIP for key employees of the
Group. A total of 440,000 common shares have been reserved for issuance under
the MEIP. As of December 31, 1998 outstanding options to acquire 156,000 common
shares were held by 20 employees. The main terms of the plan are as follows:
i. The MEIP consists of option units comprising four separate options, each
option granting the right to the key employee to acquire an equal number of
common shares at four different exercise prices. The key employee must pay
an option price to acquire each option. The exercize price for each option
was determined at the date of grant.
ii. Each option vested 25% in the years ended December 31, 1995 and 1996
respectively. Options may only be exercized in units of each of the four
options. At December 31, 1997 options were exercizable over 81,000 shares.
iii. Members of the MEIP may only exercize vested options within seven
years of November 25, 1994, the date of grant. No options were granted in
1997 and 1998. Unexercized options will expire thereafter. As of December
31, 1998 unexercized options have a remaining contractual life of 2 years,
11 months.
The granting of the options did not result in additional compensation for
the key employees who joined the plan for the year ended December 31, 1998. As
of December 31, 1998, the options are estimated to have a nil value based on the
share price at that date and the exercize prices. Total compensation cost
recognized in the income statement for stock-based employee compensation was
nil.
As of December 31, 1998, outstanding unpaid options amounts to $123,
included as Share Subscriptions Receivable within Shareholders' Equity. The cost
of each option and the associated exercize price at the beginning and end of the
current period are as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES NUMBER OPTION EXERCIZE
AT OF SHARES AT PRICE PRICE
JANUARY 1 DECEMBER 31 PER SHARE PER SHARE
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Option 1................................. 53,250 39,150 $1.43 $14.30
Option 2................................. 53,250 39,150 $1.56 $15.60
Option 3................................. 53,250 39,150 $1.69 $16.90
Option 4................................. 53,250 39,150 $1.82 $18.20
------- -------
Total.................................... 213,000 156,600
======= =======
</TABLE>
10
<PAGE> 91
THE CRONOS GROUP
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997
12 MANAGEMENT EQUITY INVESTMENT PLAN ("MEIP") (CONTINUED)
The options purchased by key employees represent a potential ownership
interest, on a fully diluted basis, of 2.4% of common shares. Options over
56,400 shares lapsed during the year as a result of eligible employees leaving
the group.
13 SHAREHOLDERS' EQUITY
The reported amount of shareholders' equity comprises statutory capital
under Luxembourg law. This differs from the consolidated group financial
statements, which are prepared under US GAAP and include additional amounts in
respect of additional paid-in capital and investment securities, which do not
constitute statutory capital under Luxembourg law.
i) Additional paid-in capital: the consolidated group financial statements
include an additional paid-in surplus of $10,000 within additional paid-in
capital, relating to the acquisition of a subsidiary.
A reconciliation of the statutory company financial statements to the
consolidated group financial statements is shown below.
<TABLE>
<CAPTION>
1998 1997
------ ------
$000 $000
<S> <C> <C>
Additional paid-in capital:
As stated in the statutory company financial statements.... 39,108 39,154
Additional paid-in surplus recognized under US GAAP........ 10,000 10,000
------ ------
As stated in the consolidated group financial statements... 49,108 49,154
====== ======
</TABLE>
ii) Investment securities: the consolidated group financial statements
include an unrealised holding loss of $1,159 (1997 gain of $1,159) in
shareholders' equity relating to the recording of an available-for-sale
investment security at fair market value.
11
<PAGE> 92
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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: JUNE 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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
16, ALLEE MARCONI, BOITE POSTALE 260, L-2120 LUXEMBOURG
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
(352) 453145
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODES)
------------------------
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 August 2, 1999:
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
<S> <C>
Common 9,158,378
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 93
THE CRONOS GROUP
TABLE OF CONTENTS
THE CRONOS GROUP
PART I -- FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements................................ 3
Management Representation........................... 3
Consolidated Statements of Income................... 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....................... 11
General............................................. 11
Three Months Ended June 30, 1999 Compared to Three
Months Ended June 30, 1998................................ 12
Six Months Ended June 30, 1999 Compared to Six
Months Ended June 30, 1998................................ 13
Liquidity and Capital Resources..................... 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................... 16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................... 16
Item 5. Other Information................................... 17
Item 6. Exhibits and Reports on Form 8-K.................... 17
</TABLE>
2
<PAGE> 94
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 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> 95
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF INCOME
(US dollar amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
GROSS LEASE REVENUE....................... $ 32,082 $ 40,042 $ 66,832 $ 80,568
Commissions, fees and other income........ 1,664 1,573 3,288 3,187
---------- ---------- ---------- ----------
TOTAL REVENUES............................ 33,746 41,615 70,120 83,755
---------- ---------- ---------- ----------
Direct operating expenses................. 7,799 8,504 15,863 17,215
Payments to container owners.............. 15,101 19,615 31,773 39,081
Depreciation and amortization............. 3,987 4,821 8,385 9,452
Selling, general and administrative
expenses................................ 4,013 5,871 8,139 11,226
Financing and recomposition expenses...... -- 242 -- 484
Interest expense.......................... 2,949 4,047 6,156 8,290
---------- ---------- ---------- ----------
TOTAL EXPENSES............................ 33,849 43,100 70,316 85,748
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES.................. (103) (1,485) (196) (1,993)
Income taxes.............................. -- 68 -- 235
---------- ---------- ---------- ----------
NET LOSS.................................. (103) (1,553) (196) (2,228)
========== ========== ========== ==========
LOSS PER COMMON SHARE (BASIC AND
DILUTED)................................ $ (0.01) $ (0.17) $ (0.02) $ (0.25)
========== ========== ========== ==========
BASIC AND DILUTED SHARES OUTSTANDING...... 8,858,378 8,858,378 8,858,378 8,858,378
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 96
THE CRONOS GROUP
CONSOLIDATED BALANCE SHEETS
(US dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 5,566 $ 9,281
Amounts due from lessees, net............................... 29,062 33,215
Net investment in direct finance leases..................... 1,577 3,504
Container equipment, net.................................... 143,312 168,558
Property and investments, net............................... 29,160 32,323
Amounts receivable from related parties..................... 225 5,500
Other....................................................... 25,205 27,598
-------- --------
TOTAL ASSETS................................................ $234,107 $279,979
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts payable to container owners......................... $ 25,643 $ 31,314
Debt and capital lease obligations.......................... 114,494 148,466
Current and deferred income taxes........................... 7,696 8,085
Other liabilities........................................... 30,383 36,027
-------- --------
TOTAL LIABILITIES........................................... 178,216 223,892
-------- --------
SHAREHOLDERS' EQUITY
Common shares............................................... 17,717 17,717
Additional paid-in capital.................................. 49,077 49,108
Share subscriptions receivable.............................. (92) (123)
Retained earnings........................................... (10,811) (10,615)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 55,891 56,087
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $234,107 $279,979
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 97
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollar amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 12,047 $ 8,690
-------- -------
INVESTING ACTIVITIES:
Purchase of container and other equipment................... (267) (2,363)
Proceeds from sales of container and other equipment........ 19,416 901
-------- -------
NET CASH (USED) PROVIDED FOR INVESTING ACTIVITIES........... 19,149 (1,462)
-------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of term debt......................... -- 1,889
Repayments of term debt and capital lease obligations....... (34,911) (9,880)
-------- -------
NET CASH USED BY FINANCING ACTIVITIES....................... (34,911) (7,991)
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (3,715) (763)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 9,281 14,455
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 5,566 $13,692
======== =======
Supplementary disclosure of cash flow information:
Cash paid during the period for:
- -- interest................................................. $ 6,345 $ 9,884
- -- income taxes............................................. 257 82
Cash received during the period for:
- -- interest................................................. 267 1,678
- -- income taxes............................................. -- --
Non-cash investing and financing activities:
- -- container equipment acquired under capital lease......... -- --
- -- container equipment acquired but unpaid at June 30....... -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 98
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 1998 and 1999
(U.S. dollar amounts in thousands, except per share amounts)
(Unaudited)
<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>
SIX MONTHS ENDED JUNE 30,
1998
Balance, December 31, 1997... $17,717 $49,154 $(169) $1,159 $ 5,852 $73,713
MEIP lapses.................. -- -- -- -- -- --
Net loss..................... -- -- -- -- (2,228) (2,228)
------- ------- ----- ------ -------- -------
Balance, June 30, 1998....... $17,717 $49,154 $(169) $1,159 $ 3,624 $71,485
======= ======= ===== ====== ======== =======
SIX MONTHS ENDED JUNE 30,
1999
Balance, December 31, 1998... $17,717 $49,108 $(123) $ -- $(10,615) $56,087
MEIP lapses.................. -- (31) 31 -- -- --
Net loss..................... -- -- -- -- (196) (196)
------- ------- ----- ------ -------- -------
Balance, June 30, 1999....... $17,717 $49,077 $ (92) $ -- $(10,811) $55,891
======= ======= ===== ====== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 99
THE CRONOS GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(U.S. 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.
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 JUNE 30, 1998
Gross lease revenue............................ $14,062 $15,750 $10,230 $ 40,042
Operating profit before indirect items......... 2,780 1,743 455 4,978
Operating profit............................... 663 (366) (915) (618)
Segment assets................................. 24,363 23,841 199,682 247,886
THREE MONTHS ENDED JUNE 30, 1999
Gross lease revenue............................ $10,738 $13,538 $ 7,806 $ 32,082
Operating profit before indirect items......... 2,155 1,492 762 4,409
Operating profit............................... 609 39 (167) 481
Segment assets................................. 21,334 19,939 155,159 196,432
SIX MONTHS ENDED JUNE 30, 1998
Gross lease revenue............................ $28,489 $31,594 $20,485 $ 80,568
Operating profit before indirect items......... 5,740 4,082 702 10,524
Operating profit............................... 1,414 130 (1,844) (300)
Segment assets................................. 24,363 23,841 199,682 247,886
SIX MONTHS ENDED JUNE 30, 1999
Gross lease revenue............................ $22,533 $27,778 $16,521 $ 66,832
Operating profit before indirect items......... 4,521 3,102 1,304 8,927
Operating profit............................... 1,380 182 (578) 984
Segment assets................................. 21,334 19,939 155,159 196,432
</TABLE>
Reconciliation of operating profit for reportable segments to earnings before
taxes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1999 1998 1999 1998
------ -------- ----- -------
<S> <C> <C> <C> <C>
Operating profit....................................... $ 481 $ (618) $ 984 $ (300)
Selling, general and administrative expenses........... (414) (468) (839) (913)
Amortization of intangibles............................ (170) (157) (341) (296)
Financing and recomposition expenses................... -- (242) -- (484)
----- ------- ----- -------
Loss before income taxes............................... $(103) $(1,485) $(196) $(1,993)
===== ======= ===== =======
</TABLE>
3. Container equipment
Container equipment is net of accumulated depreciation of $59,863 and
$59,640 at June 30, 1999 and December 31, 1998, respectively.
8
<PAGE> 100
THE CRONOS GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. dollar amounts in thousands, except per share amounts)
4. Amounts payable to container owners
Amounts payable to container owners include amounts payable to related
parties of $11,942 and $13,287 at June 30, 1999 and December 31, 1998,
respectively.
5. Debt and capital lease obligations
Debt and capital lease obligations include amounts due within twelve months
of $59,477 and $87,271 at June 30, 1999 and December 31, 1998, respectively. On
August 2, 1999, the Company successfully closed a $50.0 million re-financing
transaction, the proceeds of which were used to refinance all of the Company's
debt scheduled to mature in the next six months. See also "Liquidity and Capital
Resources -- Capital Resources".
6. Commitments and contingencies (to be read in conjunction with Note 21 to the
1998 Consolidated Financial Statements)
i. Commitments
At June 30, 1999, the Company had commitments under operating leases for
office space and equipment that were not material.
The Company had no outstanding orders in respect of container equipment at
June 30, 1999.
ii. Contingencies -- Austrian allegations
Since 1983, as described in the Company's 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, in September 1997 the Company transferred $360 in
Contrin distributions to a bank account pursuant to instructions that may have
been falsified. The Austrian courts took control of the account and on June 8,
1999 authorized release of the monies to the originally intended Contrin
entities. The Company believes it has no further liability regarding this
matter. A further $118 deposited by the Company in an Austrian bank account also
supervised by the Austrian Courts, representing distributions due to certain
Contrin entities, was released by the courts to those entities in November 1998.
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.
9
<PAGE> 101
THE CRONOS GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. dollar amounts in thousands, except per share amounts)
Management has been unable to obtain definitive information regarding the
relationships suggested in the allegations by the third parties.
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. 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.
10
<PAGE> 102
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 June 30 for each of the periods indicated:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
U.S. Public Limited Partnerships............................ 34% 35%
Other Container Owners...................................... 43% 40%
Owned Containers............................................ 23% 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 June 30 for each of the periods
indicated:
<TABLE>
<CAPTION>
EQUIPMENT TYPE 1999 1998
-------------- ----- -----
<S> <C> <C>
Dry cargo................................................... 333.4 342.3
Refrigerated................................................ 14.2 15.1
Tank........................................................ 2.0 2.0
Roll-Trailer................................................ 2.1 2.3
Cellular palletwide containers ("CPCs")..................... 2.4 2.4
Other dry freight specials.................................. 2.5 1.8
----- -----
Total fleet....................................... 356.6 365.9
===== =====
</TABLE>
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
11
<PAGE> 103
THE CRONOS GROUP
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>
JULY 31 JUNE 30 MARCH 31 JUNE 30
1999 1999 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Utilization.................................... 75.7% 75.2% 72.6% 80.4%
</TABLE>
During the first six 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, which has
now been substantially completed, involved the reorganization of key activities
together with the termination of certain employee positions. In addition, the
Company reduced its short-term debt by $20.6 million in accordance with its
strategy to refinance certain short-term debt obligations and thereby reduce the
cost of debt financing. Through June 30, 1999, this strategy has resulted in the
sale by Cronos of $36.6 million of container equipment, at Cronos' original
equipment cost, to various third party investor programs. On August 2, 1999, the
Company successfully closed a $50.0 million re-financing transaction, the
proceeds of which were used to refinance all of the Company's debt scheduled to
mature in the next six months. See also "Liquidity and Capital
Resources -- Capital Resources".
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998
Operating profit for the three months ended June 30, 1999 was $0.5 million
compared to a loss of $0.6 million during 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 $32.1 million in the three months ended June 30,
1999 was $8.0 million, or 19.9% lower than in the corresponding period of 1998.
This decline can be attributed to the combined effect of reduced utilization,
lower per diem rates and a smaller fleet size representing approximately $3.7
million, $3.3 million and $1.0 million of the reduction respectively.
Commissions, fees and other income of $1.7 million in the three months
ended June 30, 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 $7.8 million in the three months to June 30,
1999, a decrease of $0.7 million, or 8.3%, compared to the corresponding period
in 1998. Increased storage, reflecting a larger off-hire fleet, was more than
offset by reductions in charges for doubtful accounts, repairs, repositioning
and handling.
Payments to container owners amounted to $15.1 million during the three
months ended June 30, 1999, a decrease of $4.5 million or 23.0%, when compared
to the corresponding period in 1998.
Payments to U.S. Limited Partnerships amounted to $5.7 million, a decline
of $2.9 million or 33.9%, when compared to the corresponding period in 1998.
Lower average utilization and per-diem rates, as well as a smaller container
fleet caused the decline in net lease revenue for this segment. The U.S. Limited
Partnership fleet declined from 135,517 TEU at June 30, 1998, to 126,620 TEU at
June 30, 1999 as a result of the disposal of older container equipment.
Payments to Other Container Owners were $9.4 million during the three
months ended June 30, 1999, a decrease of $1.6 million, or 14.4%, 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
12
<PAGE> 104
THE CRONOS GROUP
was due to transactions involving the sale of equipment from the Owned to the
Other Container Owners segment.
Depreciation and amortization decreased by $0.8 million, or 17.3%, in the
three months to June 30, 1999, to $4.0 million due to container sales from the
Owned to the Other Container Owners segment.
Selling, general and administrative expenses decreased to $4.0 million for
the three months ended June 30, 1999 from $5.9 million for the three months
ended June 30, 1998, a decrease of $1.9 million or 31.6%. The decrease was due
primarily to a $1.0 million reduction in manpower and manpower-related costs,
together with lower costs related to information technology, professional
services and communications.
Interest expense of $2.9 million for the three months ended June 30, 1999
declined $1.1 million or 27.1%, when compared to the corresponding period in
1998. This decrease is due primarily to a reduction in the average debt balance
from $163.8 million to $122.1 million between the second quarters of 1998 and
1999, respectively.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Operating profit of $1.0 million for the six months to June 30, 1999 was
$1.3 million higher than the $0.3 million loss for the corresponding period in
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 $66.8 million in the six months to June 30, 1999 was
$13.7 million, or 17.1%, lower than in the corresponding period in 1998. This
decline can be attributed to the combined effect of reduced utilization, lower
per diem rates and a smaller fleet size representing approximately $7.1 million,
$4.7 million and $1.9 million of the reduction respectively.
Commissions, fees and other income of $3.3 million during the six months
ended June 30, 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 $15.9 million during the six months ended
June 30, 1999, a decrease of $1.4 million, or 7.9%, compared to the
corresponding period in 1998. Increased storage, reflecting a larger off-hire
fleet, was more than offset by reductions in charges for doubtful accounts,
repairs, repositioning and handling.
Payments to container owners decreased to $31.8 million during the six
months ended June 30, 1999, a decrease of $7.3 million, or 18.7%, compared to
the corresponding period in 1998.
Payments to U.S. Limited Partnerships amounted to $12.5 million, a decline
of $4.8 million or 27.7%, when compared to the corresponding period in 1998.
Lower average utilization and per-diem rates, as well as a smaller container
fleet, caused the decline in net lease revenue for this segment.
Payments to Other Container Owners were $19.2 million during the six months
ended June 30, 1999, a decrease of $2.5 million, or 11.5%, 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 $1.1 million, or 11.3%, during
the six months ended June 30, 1999 to $8.4 million due to container sales from
the Owned to the Other Container Owners segment.
Selling, general and administrative expenses decreased to $8.1 million
during the six months ended June 30, 1999 from $11.2 million in the
corresponding period of 1998, a decrease of $3.1 million or 27.5%. The
13
<PAGE> 105
THE CRONOS GROUP
decrease was due primarily to a $1.5 million reduction in manpower and
manpower-related costs together with costs related to information technology,
professional services and communications.
Interest expense of $6.2 million for the six months to June 30, 1999 was
$2.1 million lower, or 25.7%, compared to the corresponding period of 1998 due
primarily to a reduction in the average debt balances.
LIQUIDITY AND CAPITAL RESOURCES
Cash from Operating Activities: Net cash provided by operating activities
was $12.0 million and $8.7 million during the first six 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. In addition, $5.3 million was received from the sale of the
Company's stock held as collateral on the Palatin Loans that was utilized in
reducing both short-term debt and Mr. Palatin's indebtedness to the Company. The
net cash generated in 1998 reflected earnings from operations together with a
$8.0 million decrease in new container equipment for resale.
Cash from Investing Activities: Net cash provided by investing activities
was $19.1 million in the first six months of 1999 reflecting sales of container
equipment to third party container owners. Net cash used for investing
activities was $1.5 million in the first six months of 1998 reflecting purchases
of container and other equipment of $2.4 million, which was partly offset by
proceeds from equipment sales.
Cash from Financing Activities: Net cash used by financing activities was
$34.9 million during the first six months of 1999 compared to $8.0 million in
the corresponding period of 1998. Repayments of debt and capital lease
obligations included $20.6 million in short-term debt repayments that were
generated from proceeds of container equipment sales. A further $5.3 million of
short-term debt was repaid following the sale of the Company's stock held as
collateral on the Palatin loans. In 1998, debt repayments of $9.9 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.
Monies borrowed under the Loan Facility bear interest at the annual rate of
the 3-month LIBOR plus 1.50% (currently 6.8725%). The interest rate will be
re-set quarterly. Amounts borrowed under the Loan Facility are repayable over
five years, with a balloon payment of 25% of borrowings due at the maturity. To
secure the borrowings made under the Loan Facility, the Lenders have been
granted: (i) a first priority security interest in the containers purchased by
Cronos Finance; (ii) a guarantee by the Company of 20% of the amount of the
Credit facility; (iii) a second mortgage over the Company's office building in
Windsor, England; and (iv) certain additional collateral. The Company guarantee
is secured by (i) a pledge of the capital stock held by the Company in Cronos
Finance; (ii) a security interest in the Company's shares of Common Stock of
Transamerica Corporation (which are now convertible into shares of Aegon N.V. as
a result of the merger of Transamerica with and into Aegon); and (iii) a pledge
of the capital stock held by the Company in Cronos Holdings/Investments (U.S.),
Inc., a Delaware corporation that, in turn, owns all of the
14
<PAGE> 106
THE CRONOS GROUP
outstanding capital stock of Cronos Capital Corp., the general partner of the
Group's U.S. container leasing limited partnerships.
For establishing the Loan Facility, the Lenders were paid an arrangement
fee of 1.50% of the Facility amount, issued 300,000 shares of Common Stock of
the Company (150,000 shares to each Lender) and were each granted a warrant to
purchase 100,000 shares of the Company's Common Stock at an exercise price of
$4.41 per share (the average of the daily closing price of the Company's Common
shares during the thirty day period preceding August 2, 1999). While the Lenders
have advised the Company that they have no present intent of selling or
otherwise disposing of the shares of Common Stock of the Company acquired by
them, the Company has agreed to register the 300,000 shares issued to the
Lenders under the Securities Act of 1933, as amended, within sixty days of
August 2, 1999. In addition, under the Warrant Agreement entered into by the
Company and the Lenders, the Lenders have the right to demand registration of
the shares issuable thereunder.
The Company will amortize the arrangement fee it paid to establish the Loan
Facility ($0.75 million) and the fair market value of the 300,000 shares it
issued to the Lenders to establish the Loan Facility ($1.275 million, determined
by multiplying the 300,000 shares by the closing price of the Company's Common
Stock on August 2, 1999) over the five-year term of the borrowings made under
the Loan Facility.
The establishment of the Loan Facility and the repayment of approximately
$47.8 million in short-term indebtedness will result in a reduction in the
annual interest payable by the Company on its indebtedness. Management estimates
that the Company's interest cost will be reduced by approximately $1.4 million
per annum (assuming no material increase in LIBOR) as a result of the
establishment of the Loan Facility from the amounts payable by the Company on
its indebtedness as such indebtedness stood prior to the establishment of the
Loan Facility. These interest savings will be offset, in part, by the costs of
establishing the Facility, including the arrangement fee paid and Common Stock
issued to the Lenders and the legal expenses incurred by the Company in
establishing the Loan Facility.
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 need to be modified. The Company has completed all the necessary changes
and testing in a dedicated year 2000 environment. The Company anticipates that
all compliant code will be live by the end of 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.
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.
15
<PAGE> 107
THE CRONOS GROUP
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk: outstanding borrowings are subject to interest rate
risk. Approximately 65% and 60% of total borrowings had floating interest rates
at December 31, 1998 and June 30, 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.
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.
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
16
<PAGE> 108
THE CRONOS GROUP
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
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
4.1 Warrant Agreement, dated as of July 30, 1999, by and between
the Company and MeesPierson N.V. ("MeesPierson") and First
Union National Bank ("First Union").
10.20 Guarantee, dated as of July 30, 1999, by and between the
Company and MeesPierson, as agent on behalf of itself and
First Union.
10.21 Loan Agreement, dated as of July 30, 1999, by and between
Cronos Finance (Bermuda) Limited ("CFBL") as issuer, and
MeesPierson, as agent, on behalf of itself and First Union,
as initial noteholders.
10.22 CFBL Secured Note, dated as of July 30, 1999, in the
principal amount of U.S. $25,000,000, in favor of
MeesPierson.
10.23 CFBL Secured Note, dated as of July 30, 1999, in the
principal amount of U.S. $25,000,000, in favor of First
Union.
10.24 Issuer Stock Pledge Agreement [CFBL], dated as of July 30,
1999, by and between the Company and MeesPierson, as agent
on behalf of itself and First Union.
10.25 Stock Pledge Agreement [Cronos Holdings/Investments (U.S.),
Inc.], dated as of July 30, 1999, by and between the Company
and MeesPierson, as agent on behalf of itself and First
Union.
27 Financial Data Schedule
</TABLE>
17
<PAGE> 109
THE CRONOS GROUP
(b) Reports on Form 8-K
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.
18
<PAGE> 110
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 August 11, 1999
---------------------------------------- Financial Officer and Chief
Peter J. Younger Accounting Officer (Principal
Financial and Accounting Officer)
</TABLE>
19
