<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
Form 10-K
------------------------------------
<TABLE>
<S> <C> <C>
(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, 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
</TABLE>
THE CRONOS GROUP
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
LUXEMBOURG NOT APPLICABLE
(State or other Jurisdiction of incorporation (I.R.S Employer Identification No.)
or organization)
</TABLE>
16, ALLEE MARCONI, BOITE POSTALE 260, L-2120 LUXEMBOURG
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODES:
(352) 453145
------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT.
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
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. [X]
The aggregate market value of voting stock of the registrant held by
non-affiliates as of March 23, 2000 (Common Shares) was approximately
$49,744,305.
The number of Common Shares outstanding as of March 23, 2000:
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
<S> <C>
Common 9,158,378
</TABLE>
Portions of the following documents have been incorporated by reference
into this report.
<TABLE>
<CAPTION>
DOCUMENT PARTS IN WHICH INCORPORATED
-------- ---------------------------
<S> <C>
Registrant's Registration Statement On Form S-8, dated
February 25, 2000 Part I
Registrant's Current Report On Form 8-K, dated January 21,
2000 Part I
Registrant's Quarterly Report On Form 10-Q, for the Quarter
Ended June 30, 1999 Part II
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE CRONOS GROUP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introductory Note........................................... ii
PART I
Item 1 -- Description of Business........................... 1
Item 2 -- Properties........................................ 10
Item 3 -- Legal Proceedings................................. 11
Item 4 -- Submission of Matters to a Vote of Security
Holders................................................... 12
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....................... 15
Item 7A -- Quantitative and Qualitative Disclosures about
Market Risk............................................... 22
Item 8 -- Financial Statements and Supplementary Data....... 23
Item 9 -- Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure....................... 23
PART III
Item 10 -- Directors and Executive Officers of Registrant... 24
Item 11 -- Executive Compensation........................... 27
Item 12 -- Security Ownership of Certain Beneficial Owners
and Management............................................ 33
Item 13 -- Certain Relationships and Related Transactions... 35
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 37
</TABLE>
i
<PAGE> 3
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.
All statements in this report regarding the market for the Company's
container leasing services and the Company's revenues, expenses, and financial
condition, and any statement containing the words "anticipate," "believe,"
"plan," "estimate," "expect," "intend," or other similar expressions, constitute
forward-looking statements. Our actual results of operations may differ
materially from those contained in any forward-looking statement. This
cautionary statement applies to all forward-looking statements wherever they
appear in this report.
An investment in the Common Shares of the Company involves a high degree of
risk. The risks that attend the Company and its business include the following:
The Company is heavily dependent upon third parties to supply it with
the capital needed to acquire containers; such capital may not be available
to the Company to enable it to expand its fleet of containers.
The Company is in a dispute with a group of container owners who claim
that the Company owes it $2.6 million.
The Company settled an SEC investigation in November 1999. The Company
agreed to cease and desist from committing or causing any future violation
of certain antifraud, reporting, record keeping, and internal control
provisions of the Federal securities laws.
The market for the Company's outstanding shares of Common Stock is not
liquid. The Company's four largest groups of shareholders control
approximately 60% of its outstanding Common Shares. For 1999, the average
daily trading volume in the Company's shares was 9,288 shares, or
approximately 0.1% of the Company's outstanding shares.
For a fuller statement of the risk factors attendant to an investment in
the Company's Common Shares, see the section entitled "Risk Factors" in the
Registration Statement on Form S-8 that the Company filed with the SEC on
February 25, 2000. For a discussion of the container leasing industry and the
Company's business, see "Description of Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" herein. For a
discussion of the Company's legal proceedings, see "Legal Proceedings" herein;
and for a discussion of the market for the Company's Common Shares, see "Market
for the Company's Common Equity and Related Shareholder Matters" herein.
ii
<PAGE> 4
PART I
ITEM 1 -- DESCRIPTION OF BUSINESS
INTRODUCTION
The Company is a limited liability company (societe anonyme) organized 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 UK 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. It owns and manages 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.
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 87% (in TEU) of the worldwide container fleet. Refrigerated
containers and tank containers currently constitute approximately 8% (in TEU) of
the worldwide container fleet, with open-tops and other specialized containers
constituting the remaining 5%.
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.
The logistical advantages and reduced freight rates brought about by
containerization have been major catalysts for world trade growth since the late
1960's, resulting in increased demand for containers. The world's container
fleet has grown from an estimated 270,000 TEU in 1969 to approximately 13
million TEU by mid-1999.
The container leasing business is cyclical, and depends largely upon the
rate of increase in world trade. The container leasing industry has experienced
cyclical downturns during the last fifteen years.
1
<PAGE> 5
BENEFITS OF LEASING
Leasing companies own approximately 46% 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 the following 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 low 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, 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. 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.
2
<PAGE> 6
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 frequently redeliver and lease out.
<TABLE>
<CAPTION>
PERCENTAGE OF FLEET ON-HIRE
---------------------------------------------
DRY FREIGHT
TYPE OF LEASE DRY CARGO REFRIGERATED TANK SPECIALS
- ------------- --------- ------------ ---- -----------
<S> <C> <C> <C> <C>
Master............................................. 73% 47% 16% 11%
Term............................................... 20% 49% 84% 47%
Finance............................................ 7% 4% -- 42%
---- ---- ---- ----
Total......................................... 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
CUSTOMERS
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 48% 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.
The Company is subject to unexpected loss in rental revenue from lessees of
its containers that default under their container lease agreements.
FLEET PROFILE
Cronos focuses on supplying to its customers high-quality containers,
manufactured to specifications that exceed International Standards Organization
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.
During 1999, the size of the total fleet increased by 8,400 TEU
representing new container production of 19,000 TEU net of disposals of 10,600
TEU. Total new container production in 1999 represented an investment of $25.9
million. Approximately $22.6 million, or 87%, of the new container investment
related to dry cargo containers. Of the balance of new container purchases, $1.4
million was invested in CPCs, $1.3 million was invested in flatracks and the
remaining $0.6 million was invested primarily in roll-trailers.
3
<PAGE> 7
<TABLE>
<CAPTION>
CRONOS CONTAINER FLEET (IN TEU THOUSANDS)
AT DECEMBER 31,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Dry Cargo............................................. 346.6 337.8 345.9 322.0 250.2
Refrigerated.......................................... 13.6 14.7 16.0 16.2 14.3
Tank.................................................. 2.0 2.0 2.0 1.7 1.0
Roll-Trailer.......................................... 1.9 2.2 2.0 1.7 --
CPCs.................................................. 3.1 2.4 2.4 -- --
Other Dry Freight Specials............................ 2.7 2.3 1.5 1.2 0.1
----- ----- ----- ----- -----
Total Fleet...................................... 369.9 361.4 369.8 342.8 265.6
===== ===== ===== ===== =====
</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 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 did not buy new
refrigerated containers in the three years ended December 31, 1999 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 1,930 TEU at the
end of 1999. 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 3,115 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. 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 supplied more than 28%
of Cronos' dry cargo container purchases during 1999.
4
<PAGE> 8
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 customers who
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 ("CCL"), a wholly-owned subsidiary based in the United
Kingdom. CCL is supported in this role by area offices and dedicated agents
located in San Francisco, California; Iselin, New Jersey; Hamburg; Antwerp;
Genoa; Gothenburg, Sweden; Singapore; Hong Kong; Sydney; Tokyo; Taipei; Seoul;
Rio de Janeiro; Shanghai and Madras, India.
Cronos also maintains agency relationships with over 25 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 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.
5
<PAGE> 9
Cronos' global network is integrated with its computer system and provides
24-hour communication between offices, agents and depots. 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, GE Seaco, Triton
Container International Ltd., Textainer Corp. and others. Mergers and
acquisitions have been a feature of the container leasing industry for over a
decade and the leasing market is essentially comprised of three distinct groups:
the very large (in TEU terms) market leaders Transamerica Leasing and GE Seaco,
who between them, with fleets of around 1 million TEU each in mid-1999, control
in excess of one third of the total leased fleet; a substantial middle tier of
companies possessing fleets in the 200,000 to 850,000 TEU range, and the smaller
more specialist fleet operators. In recent years, 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, up to a point. There appears to be an upper
limit to the size of the optimum fleet, beyond which dis-economies of scale
and/or barriers against further market share development become apparent.
Furthermore, ocean carriers have a tendency to support a number of lessors
simultaneously, in order to maximize competition and increase the number of
available locations for redelivery of containers. Economies of scale, worldwide
operations, diversity, size of fleet and financial strength are increasingly
important to the successful operation of a container leasing business.
Additionally, as containerization continues to grow, as regions such as South
America and the Indian sub-continent become ever bigger generators of
containerized cargo, customers may demand more flexibility from leasing
companies, particularly regarding per diem rates, pick-up and drop-off
locations, and the availability of containers.
Some of Cronos' competitors 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. Furthermore, by having as many suppliers as possible, the carrier is
able to maximize the number of off-hires and off-hire locations available, as
typically each supplier may limit the number of containers which can be
off-hired by location. The advantage to the carrier is that this prevents the
carrier from being burdened with an excess number of off-hired containers, which
incur both storage and per diem charges, in a low demand market.
OPERATING SEGMENTS
Cronos has three operating segments which are determined based on source of
container funding:
1. US Public Limited Partnerships ("US Limited Partnerships"),
6
<PAGE> 10
2. Other Container Owners, and
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 financial instrument.
This diversification reduces its reliance on individual financial markets and
provides for a more balanced financing structure.
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>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
US Limited Partnerships.............................. 33% 34% 35% 38% 45%
Other Container Owners............................... 45% 41% 40% 29% 34%
Owned Containers..................................... 22% 25% 25% 33% 21%
---- ---- ---- ---- ----
Total........................................... 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
As of December 31, 1999, no single owner, other than the Company, 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 more than 10%
of a segment's revenues or of the total revenues of the Company. The Company
evaluates the performance of its operating segments based on operating profit or
loss. Substantially all of the Company'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 Company
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 1999
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.
US 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. However, upon any such removal, the
general partner is entitled to payment, generally over five years, of the
present fair market value of its interest in the partnership.
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 US since early 1997.
The US Limited Partnerships provide compensation to Cronos consisting of
the following fees and commissions:
- Acquisition fees: equal to 5% 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> 11
- 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);
- 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 $8.6 million, $11.3 million, and $12 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
OTHER CONTAINER OWNERS
In addition to US 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 of 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% 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' statements
of operations over periods ranging from 7 to 15 years, representing the life of
the agreements to which they relate.
Total fees earned by the Company from Other Container Owners were $5.9
million, $7.4 million and $7.3 million for the years ended December 31, 1999,
1998 and 1997, respectively.
The containers managed for these owners may be combined into pools with
containers of similar age and type and managed pursuant to generally similar
management agreements. 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
financing.
From time to time, Cronos also owns containers on a temporary basis until
such time that the containers are sold to its US 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
8
<PAGE> 12
and later sell these containers to third party owners after the initial lease
profile is established for a particular group of containers.
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, certain 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 certain of its
Owned Containers, which constitute approximately 9% of its total owned
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, 1999, Cronos had 100 employees worldwide, 27 were
located in the United States, 56 in Europe and 17 in Asia. None of Cronos'
employees is covered by a collective bargaining agreement.
RECENT DEVELOPMENTS
On September 21, 1999, the Company received an unsolicited merger proposal
from the President of Interpool, Inc. ("Interpool"). Interpool is a competitor
of the Company. Cronos' container fleet consists of 369,900 TEUs, both owned and
managed for third parties. Interpool's fleet consists of approximately 500,000
TEUs. Whereas the Company concentrates primarily on the short-term and master
lease market, meaning that most of the Company's leases have terms of less than
one year, Interpool concentrates on the longer-term lease market, with the bulk
of its fleet of containers leased under leases of terms of three years or more.
By its proposal, Interpool proposed a merger of Cronos with Interpool's
50%-owned Nevada subsidiary, Container Applications International, Inc. ("CAI").
Interpool proposed, subject to conditions, that the shareholders of Cronos would
receive $5.00 per share in the transaction. Interpool's proposal was subject to
numerous conditions, including the conduct of "confirmatory" due diligence, the
absence of a material adverse effect prior to closing, the negotiation of a
definitive acquisition agreement, and the obtaining of regulatory and other
approvals.
While Interpool indicated in its letter a willingness to discuss its
proposal and its structure, Interpool gave the Company 24 hours to provide a
"satisfactory response," or Interpool threatened to take its proposal "directly
to [the Company's] shareholders". On September 23, 1999, Interpool filed its
preliminary proxy statement with the SEC proposing an alternative slate of
nominees for the Board of Directors of Cronos, whose sole purpose would be to
merge Cronos with and into CAI pursuant to the Interpool proposal.
Promptly after the Company received Interpool's September 21st proposal,
the Board of Directors of the Company instructed the Company's financial
advisors, First Union Securities, Inc. ("First Union"), to evaluate it. On
October 4 and 8, 1999, the Board met and unanimously determined that the
Interpool proposal, in its then current form, be rejected as inadequate and not
in the best interest of the Company and its shareholders. At the same time, the
Board instructed First Union to pursue strategic alternatives to enhance
shareholder value, including a possible sale of the Company.
The Company has entered into confidentiality and standstill agreements with
several parties, and has supplied these parties with financial and other
information about the Company. On January 4, 2000, the Company
9
<PAGE> 13
also entered into a confidentiality agreement with Interpool, whereby the
Company agreed to provide Interpool with access to the same information as the
Company made available to other interested parties. Interpool also agreed not to
pursue a transaction with Cronos on an unsolicited basis until April 30, 2000.
Interpool may pursue a transaction with the Company on an unsolicited basis
earlier than April 30, 2000, in the event that Cronos enters into a letter of
intent or an agreement in principle to merge, or engages in a business
combination or like transaction with another entity, or if another entity or
Cronos makes a tender or an exchange offer for 25% or more of the outstanding
shares of Common Stock of Cronos.
The Company, with its advisor, First Union, has continued to hold
discussions with Interpool and other interested parties. However, at this time,
the Company is unable to predict whether a transaction will result from these
discussions.
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 22,820 square foot office building on four
acres of land and is the head office of Cronos' container leasing operations.
The Company is negotiating an agreement to sell its Orchard Lea office building
to an unaffiliated third party for approximately $10.8 million, payable in cash
at the closing. After payment of expenses and retirement of applicable mortgage
debt, the Company would realize proceeds of approximately $4.5 million. Under
the terms of a further loan agreement, the Company would utilize such proceeds
to repay debt. The sale is scheduled to close in April 2000. The Company will
lease back 10,342 square feet in the office building from the buyer in the form
of two leases for 7,000 square feet and 3,342 square feet respectively, for a
full term of 3 years, and at a market rental rate. Both agreements contain terms
that enable the Company or the purchaser to terminate the leases at the end of
two years and the second lease grants the Company and the purchaser an
additional option to end after 6 months. As the sale is subject to the
fulfillment of closing conditions, there can be no assurance that it will be
consummated.
Cronos also leases approximately 12,160 square feet of office space in San
Francisco, California, where its US Limited Partnership activities are based.
Cronos also conducts container leasing operations from offices in Iselin, New
Jersey; Hamburg; Genoa; Gothenburg; Hong Kong; Singapore and Sydney 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 -- US Limited Partnerships, Other
Container Owners and Owned Containers", above. As of December 31, 1999, Cronos
owned 41,658 TEU of dry cargo containers, 6,300 TEU of refrigerated containers,
730 TEU of tank containers and 5,268 TEU of other specialized equipment. As of
December 31, 1999, Cronos managed a total of 346,557 TEU of dry cargo
containers, 13,576 TEU of refrigerated containers, 2,010 TEU of tank containers
and 7,724 TEU of other specialized equipment.
10
<PAGE> 14
ITEM 3 -- LEGAL PROCEEDINGS
DISPUTE WITH THE CONTRIN GROUP
The Company manages containers for investment entities sponsored by or
affiliated with Contrin Holding S.A., a Luxembourg holding company (collectively
"Contrin"). Approximately 2% (measured by TEUs) of the fleet of managed
containers is owned by members of the Contrin Group. The Company is in a dispute
with Contrin over funds that Contrin claims to have remitted to Cronos for the
purchase of containers. Contrin claims that in 1994 it transmitted $2.6 million
to Cronos for the purchase of containers. The Company believes that these funds
were not received by the Company but were diverted to an account in the name of
and/or controlled by a former chairman of the Company, Stefan M Palatin, and
that this was known or should have been known by Contrin. The Company also
believes that the bank that received the funds is at fault. Contrin's counsel
has advised the Company that Contrin will institute proceedings for the recovery
of the $2.6 million against Cronos, together with accrued interest. The Company
is unable to predict the outcome of the dispute.
THE SEC'S NOVEMBER 15, 1999 CEASE-AND-DESIST ORDER
On November 15, 1999, the Company consented to the entry by the SEC of an
administrative cease-and-desist order (the "Order"). Without admitting or
denying the findings made by the SEC in the Order, the Company agreed to cease
and desist from committing or causing any future violation of certain antifraud,
reporting, record keeping, and internal control provisions of the Federal
securities laws. The SEC's investigation of the Company began in February 1997
and was triggered by the actions of Mr. Palatin. Cronos' Board removed Mr.
Palatin as CEO in May 1998 and, in July 1998, Mr. Palatin resigned from the
Board. While Mr. Palatin is no longer an officer or director of the Company, he
continues to control approximately 20% of the outstanding common shares of the
Company.
The SEC made certain findings by its Order. The Company neither admitted
nor denied the findings made by the SEC. The SEC found that Cronos, under the
domination and control of Mr. Palatin, misrepresented, through affirmative
misstatements and omissions in its public statements and filings with the SEC,
transactions it had with Mr. Palatin for the period from December 1995 through
1997, including --
That Mr. Palatin had intercepted payments between Cronos and one of
its major customers (which Mr. Palatin also controlled);
That Cronos paid Mr. Palatin millions of dollars in 1994 before Cronos
first sold its shares of Common Stock to the public;
That Mr. Palatin had sold shares in Cronos' initial public offering
through another entity that he controlled;
That Cronos paid additional monies to Mr. Palatin shortly after the
1995 offering;
That Mr. Palatin did not own certain collateral that he pledged to
secure loans he owed to Cronos; and
That Cronos systematically fired or demoted employees and directors
who challenged or questioned Mr. Palatin's transactions or the disclosures
of the Company related thereto.
While the Order did not impose any fine or penalty against Cronos, the
Company is unable to predict what impact, if any, it will have on its future
business or whether it will lead to future litigation involving Cronos. Under
the Order, the Company has designated an agent for service of process with
respect to any proceeding instituted by the SEC to enforce the Order or with
respect to any future investigation of the Company by the SEC. In addition, the
entry of the Order precludes the Company and persons acting on its behalf from
relying upon certain protections accorded to forward-looking statements by the
Securities Act of 1933 and the Securities Exchange Act of 1934 until November
14, 2002.
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<PAGE> 15
COLLECTION OF PALATIN NOTES
In October 1999, the Company brought an action against Mr. Palatin, in the
Supreme Court of the State of New York (Case No. 604963/99), for payment of the
remaining balances due under two promissory notes, both dated July 14, 1997, by
and between a subsidiary of the Company, as payee ("Payee"), and Mr. Palatin, as
payor.
On February 8, 2000, the Supreme Court of the State of New York entered its
default judgment against Mr. Palatin. Pursuant to the judgment, the Payee is to
recover from Mr. Palatin $6.2 million, plus interest at 9% per annum from June
21, 1999 to February 8, 2000 in the amount of $0.4 million, for a total recovery
of $6.6 million.
The Payee currently is pursuing execution of the judgment against Mr.
Palatin's beneficial ownership of the Common Shares of the Company. According to
filings made with the SEC by the shareholder of Klamath Enterprises S.A.
("Klamath"), Mr. Palatin is the beneficial owner of the 1,793,798 outstanding
shares of Common Stock of the Company owned of record by Klamath. On February
28, 2000, the Payee obtained a preliminary injunction order from the Superior
Court of the Commonwealth of Massachusetts against Mr. Palatin and against the
Company's transfer agent, EquiServe Limited Partnership, preliminarily enjoining
them from selling, transferring, assigning, or otherwise encumbering, disposing
of, or diminishing the value of the Common Shares of the Company held of record
by Klamath.
The Company is also pursuing an attachment order in the Swiss courts
against the individual the Company believes is the record owner of the
outstanding shares of Klamath, precluding him from transferring the shares of
Klamath or the Common Shares of the Company owned by Klamath.
The objective of the Company is to satisfy the judgment obtained by the
Payee against Mr. Palatin by a transfer of Common Shares beneficially owned in
the Company by Mr. Palatin to the Payee or by a liquidation of the shares in an
amount sufficient to fully discharge the judgment. The Company is unable to
predict at the present time whether it will succeed in achieving its objectives.
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 Mr. Palatin and Contrin Holding S.A., Barton Holding Ltd. ("Barton"),
and affiliated persons. The Committee is also investigating transactions between
the Company and its present and former officers and directors since January 1,
1995, to determine whether improper self-dealing occurred between the Company
and such persons. The Committee intends to complete its investigation by March
31, 2000. 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 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 annual meeting of shareholders on January 13,
2000, in Luxembourg. At the meeting, five directors were elected, and the
Company's 1999 Stock Option Plan and the appointment of Deloitte Touche Tohmatsu
(Deloitte & Touche SA) as the Company's independent auditors for the 1999 fiscal
year were approved. For a complete report on the matters submitted to a vote of
the shareholders, see the Company's Current Report on Form 8-K, dated January
21, 2000.
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<PAGE> 16
PART II
ITEM 5 -- MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 23, 2000, there were outstanding 9,158,378 Common Shares. They
were held of record by approximately 446 holders.
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 US 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 closing 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. Closing 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)
----------------
HIGH LOW
------ ------
<S> <C> <C>
March 31, 1998.............................................. $7.250 $5.125
June 30, 1998............................................... $7.125 $5.000
September 30, 1998.......................................... $5.969 $4.875
December 31, 1998........................................... $6.625 $3.375
March 31, 1999.............................................. $5.938 $4.125
June 30, 1999............................................... $4.875 $3.500
September 30, 1999.......................................... $4.625 $3.500
December 31, 1999........................................... $5.625 $4.563
</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. No dividend declarations
have been made by the Company since its initial public offering in December
1995.
Under the terms of certain loan agreements, the Company is restricted from
declaring or making dividend payments unless it achieves specified financial
criteria.
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.
UNREGISTERED SALES OF SECURITIES
On August 2, 1999, MeesPierson N.V., a Dutch financial institution
("MeesPierson"), and First Union National Bank, a national banking association
("FUNB"), lent $50 million to a special purpose subsidiary organized by the
Company, the proceeds of which were used to repay existing indebtedness of the
Company and its subsidiaries. The Company described this financing in its
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
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<PAGE> 17
In connection with the August 1999 refinancing, each of MeesPierson and
FUNB were issued 150,000 of the Company's authorized but unissued Common Shares
(300,000 shares in total), and the Company entered into a Warrant Agreement with
MeesPierson and FUNB. The issuance of the Common Shares was made in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act").
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 statement of
operations data for each of the five years for the period ended December 31,
1999, 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 1999 Consolidated Financial Statements and related notes thereto included
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross lease revenue......................................... $132,140 $157,546 $160,848 $154,011 $150,429
Commissions, fees and other operating income................ 5,949 4,955 5,545 7,460 6,942
Interest income............................................. 1,011 1,154 861 1,333 1,329
Equity in earnings of affiliates............................ -- -- -- 1,397 1,895
Gain on sale of investment.................................. 1,278 -- 321 5,260 --
-------- -------- -------- -------- --------
TOTAL REVENUES.............................................. 140,378 163,655 167,575 169,461 160,595
======== ======== ======== ======== ========
Direct operating expenses................................... 31,179 35,318 34,217 34,535 26,938
Payments to container owners................................ 63,943 75,527 73,945 72,894 77,073
Depreciation and amortization............................... 16,200 18,714 19,033 14,258 10,676
Selling, general and administrative expenses................ 16,569 21,164 22,683 23,834 24,133
Financing and recomposition expenses(1)..................... -- 5,375 7,384 2,149 --
Interest expense............................................ 10,809 15,718 17,758 11,368 11,238
Provision against amounts receivable from related
parties(2)................................................ -- -- 3,909 -- --
Reversal of unrealized holding gain on available for sale
securities(3)............................................. -- 1,929 -- -- --
Impairment losses(4)........................................ -- 6,500 11,668 -- --
-------- -------- -------- -------- --------
TOTAL EXPENSES.............................................. 138,700 180,245 190,597 159,038 150,058
======== ======== ======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES........................... 1,678 (16,590) (23,022) 10,423 10,537
Income taxes (benefit)...................................... (236) 306 -- 2,441 3,175
-------- -------- -------- -------- --------
NET INCOME (LOSS)........................................... 1,914 (16,896) (23,022) 7,982 7,362
Preferred dividends......................................... -- -- -- -- 856
-------- -------- -------- -------- --------
Net income (loss) available for common shares............... $ 1,914 $(16,896) $(23,022) $ 7,982 $ 6,506
-------- -------- -------- -------- --------
Net income (loss) per common share (basic and diluted)...... $ 0.21 $ (1.91) $ (2.60) $ 0.90 $ 1.21
-------- -------- -------- -------- --------
Shares used in:
- -- basic net income (loss) per share calculations........... 8,983 8,858 8,858 8,853 5,383
- -- diluted net income (loss) per share calculations......... 8,998 8,858 8,858 8,853 5,383
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................... $ 8,701 $ 9,281 $ 14,455 $ 17,278 $ 24,243
Total assets................................................ 231,867 279,979 327,145 399,301 266,485
Long-term debt and capital lease obligations................ 93,401 61,195 88,682 141,435 89,600
Total debt and capital lease obligations.................... 109,978 148,466 171,399 198,989 106,620
Shareholders' equity........................................ 60,370 56,087 73,713 95,576 85,349
</TABLE>
- ---------------
(1) In 1998, 1997 and 1996, the Company incurred costs in connection with
certain financing and other transactions, the restructuring of the Board of
Directors, senior management and other employee positions and a contingent
liability. Costs incurred and accrued were charged to the statement of
operations when the Company determined that no future benefit would be
derived from such costs.
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<PAGE> 18
(2) At December 31, 1997, the Company provided $3.9 million against loans to
the then Chairman due to concern over its collectability and the Company's
ability to exercise the pledge over shares put up as collateral for the
loans.
(3) At December 31, 1998, in response to claims made against certain escrow
funds holding Transamerica shares pending final determination of
post-closing reports and adjustments, the Company provided $1.9 million
against the unrealized holding gain of $1.7 million recognized in 1996
together with a $0.2 million charge related to a reduction in the number of
shares held.
(4) At December 31, 1998 and 1997, the Company recorded accounting charges
relating to the impairment of certain long-lived assets as required by the
Statement of Financial Accounting Standards 121.
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 1999 Consolidated Financial
Statements and the notes thereto and the other financial and statistical
information appearing elsewhere in this Annual Report. The 1999 Consolidated
Financial Statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("US GAAP").
GENERAL
The Company generates revenues by leasing to ocean carriers marine
containers that are owned either by managed 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 to the Company's 1999
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 ("Managed Container Owners") which are comprised of US
Limited Partnerships and Other Container Owners ("Other 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, 1999,
approximately 33%, 45% and 22% of the Company's fleet (by original equipment
cost) was owned by US 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. 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 agreements which have fixed payment terms are
presented in Note 13(c) to the Company's 1999 Consolidated Financial Statements.
Over 85% of 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 US 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 per diem rates.
15
<PAGE> 19
The Company has expanded its fleet since December 31, 1995 from 265,600 TEU
to 369,900 TEU at December 31, 1999. During 1998 and 1997, the ability of the
Company to purchase new equipment for both the owned and managed fleets was
constrained by the levels of financing available to the Company.
The following chart summarizes the combined utilization of the Cronos fleet
(based on approximate original equipment cost) at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Utilization................................................. 80% 75% 84%
</TABLE>
The short-term objective of the Company is to improve utilization by
offering greater leasing incentives and actively repositioning equipment to
higher-demand locations. The Company continues to take advantage of its
marketing resources in order to seek out leasing opportunities. While this
short-term strategy will increase repositioning expenses, it may also reduce
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.
During the course of 1999, 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 Asian 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 1998, utilization declined reflecting the deteriorating economic
position in Asian, South American and other markets. Utilization experienced
steady growth during 1997 due to marketing efforts and improved inventory
management.
The Company's average per diem rates have fallen consistently throughout
1999, 1998 and 1997. This reflects the rationalization in the global shipping
industry and competitive market conditions. During the course of 1999, the
Company's combined per diem rate fell by approximately 11% from the combined
rate at December 1998.
Commissions, fees and other operating income includes acquisition fees
relating to the Company's managed container programs, income from direct
financing leases (principally containers leased under lease-purchase
arrangements), fees earned in connection with the manufacture and sale of dry
freight special and other products, fees from the disposal of used containers,
syndication fees relating to the Company's limited partnership offerings and
miscellaneous other fees and income. This item is affected by the size of new
managed programs, the purchase price of containers acquired for new managed
programs, the quantity of dry freight special and other products manufactured
and sold, 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 statement of operations 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.
16
<PAGE> 20
Operating profit or loss, for reported segments, 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 revenue, direct operating expenses, payments to
container owners, container interest and depreciation expense. Indirect items
allocated across segments include selling, general and administrative expenses
and 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,
--------------------
1999 1998 1997
---- ---- ----
% % %
<S> <C> <C> <C>
Payments to container owners................................ 48 48 46
Direct operating expenses................................... 24 22 21
Selling, general and administrative expenses................ 13 13 14
Depreciation and amortization............................... 12 12 12
Interest expense............................................ 8 10 11
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
In 1999, the Company implemented a strategy that was designed to reduce
overhead expenses and to refinance short-term debt.
First, the Company made significant reductions to selling, general and
administrative expenses under a program that involved the reorganization of key
activities together with the termination of certain employee positions.
Second, in the first half of the year the Company reduced its short-term
debt by $20.6 million under a program that involved the sale of container
equipment to third party investor programs. The refinancing plan was completed
in August with the closure of a $50 million transaction, the proceeds of which
were used to refinance $47.8 million of debt and capital lease obligations. See
also "Liquidity and Capital Resources -- Capital Resources".
Approximately 91% of new container investment in 1999 was financed within
the Managed Container Owners segments, compared to 85% in 1998. The remaining 9%
in 1999 and 15% in 1998 was financed within the Owned Container segment by
operating cash flow and borrowings.
Operating profit, see Note 2 to the 1999 Consolidated Financial Statements,
from US Limited Partnerships increased by approximately $0.4 million, or 21%,
from $1.9 million in 1998 to $2.3 million in 1999. Reduced operating profit
before indirect items, reflecting a smaller fleet size and lower average
utilization and per diem rates, were more than offset by lower allocations of
selling, general and administrative expenses and the absence of an impairment
charge in 1999.
Other Container Owners generated an operating profit of $0.2 million in
1999, compared to an operating loss of $0.7 million in 1998. Operating profit
before allocations of indirect items decreased by $1.5 million as the effect of
a larger fleet size was more than offset by the combined effects of lower
average utilization and per diem rates. Indirect allocations of $5.8 million
were $2.4 million lower than in 1998 as a result of the reduction in selling,
general and administrative expenses and without the effect of the $0.8 million
impairment loss recorded in 1998 relating to the Company's real property in
England.
Owned Containers generated an operating profit of $0.9 million in 1999
compared to a loss of $8.1 million in 1998. Of the loss reported in 1998, $5
million was attributable to impairment losses recorded on container assets and
real property. In 1999, the total charge for container depreciation and interest
was $7.3 million lower
17
<PAGE> 21
than in 1998 due to the sale of container assets to the Other Container Owner
segment and to the repayment and refinancing of debt. This more than offsets the
$5.7 million decrease in net lease revenue which was caused by a smaller fleet
size together with lower average utilization and per diem rates. In addition,
the reduction in selling, general and administrative expenses and the increase
in the level of commissions and fees and other operating income contributed to
the improvement in operating profit.
Gross lease revenue decreased by approximately $25.4 million, or 16%, to
$132.1 million in 1999. Of the decrease, approximately 91% was caused by the
combined effect of lower average per diem and utilization rates and the balance
was attributable to a smaller average fleet size.
Commissions, fees and other operating income increased to $5.9 million in
1999, an increase of $1 million, or 20%, over 1998. This was primarily due to a
$1.3 million increase in commissions and fees earned in connection with the
manufacture and sale of dry freight special and other products partly offset by
a $0.3 million reduction in income from direct financing leases and a $0.1
million reduction in fees from the disposal of containers.
Investment gains of $1.3 million represent the cash received that had been
held pending post-closing reports and adjustments related to the Agreement and
Plan of Merger between Transamerica Corporation and Trans Ocean Limited in 1996.
Direct operating expenses of $31.2 million were $4.1 million, or 12%, lower
than in 1998. A $2.4 million, or 18%, increase in inventory related costs,
reflecting a larger off-hire fleet, was more than offset by reductions in
activity related costs of $2.3 million, or 15%, and by reduced charges for legal
expenses and doubtful accounts of $4.2 million, or 61%.
Payments to container owners decreased to $63.9 million in 1999, a decrease
of $11.6 million, or 15%, over the prior year. Payments to Other Container
Owners were $39.7 million in 1999, a decrease of $4 million, or 9%, over 1998
due to a $5.3 million reduction in net lease revenue for this segment. An
increase in the average fleet size, due to transactions involving the sale of
equipment from the Owned to the Other Container Owner segment in the first half
of 1999 together with new container production in the second half of the year,
was more than offset by lower average utilization and per diem rates. Payments
to US Limited Partnerships decreased by $7.6 million to $24.3 million, a 24%
decrease when compared to 1998. The $10.8 million reduction in gross lease
revenue for the segment was caused by lower average utilization and per diem
rates and a smaller dry cargo container fleet.
Depreciation and amortization decreased to $16.2 million in 1999, a
reduction of $2.5 million, or 13%, compared to 1998. This was primarily due to
the sale of equipment in the first six months of the year.
Selling, general and administrative expenses were $16.6 million in 1999,
compared to $21.2 million in 1998, a decrease of $4.6 million, or 22%. Manpower
costs were $2.4 million, or 21%, lower due to the completion of the
restructuring program announced in December 1998. The Company also achieved cost
savings over 1998 of 61% for legal and other professional fees, 26% for
information technology expenses, 11% for occupancy expenses and 20% for
communication expenses.
Interest expense decreased to $10.8 million in 1999, a decrease of $4.9
million, or 31%, over 1998, reflecting a $38.5 million reduction in the total
debt balance during the course of the year and a lower average interest rate due
to the refinancing of short-term debt.
Income taxes. The Company recorded an income tax benefit of $0.2 million
in 1999 reflecting losses that have arisen in the Company's US operations.
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 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
18
<PAGE> 22
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.
Operating profit, see Note 2 to the 1999 Consolidated Financial Statements,
from US 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 a larger 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
Owned Containers generated a loss from operations in 1998 of $8.1 million
compared to a loss of $7.1 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 refrigerated and selected dry cargo containers, in anticipation of a
sale of these assets to various third party investor programs in the first half
of 1999. These sales reflected 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.
Gross lease revenue decreased by approximately 2% in 1998, primarily due to
lower average utilization rates on dry cargo 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 larger 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.
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 cargo 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 larger average fleet size which more than offset lower
average dry cargo container 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. Payments 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 cargo
container fleet which more than offset a
19
<PAGE> 23
$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 smaller 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 related to professional, financing and termination costs together with
a $2.0 million provision in connection with a restructuring plan. Charges
incurred during 1997 were comprised of a $3.4 million provision against a
contingent liability (see Note 16 to the 1999 Consolidated Financial Statements)
and $4.0 million in costs related to professional and financing fees.
Interest expense decreased to $15.7 million in 1998, a decrease of $2.0
million, or 11%, 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.
Reversal of unrealized holding gain on available for sale securities
represented a $1.9 million charge to reduce the anticipated proceeds from
investment securities held in escrow accounts.
Impairment losses of $6.5 million in 1998 comprised a $4.5 million charge
related to 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.
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 Company derives all of its
operating income and cash flow from its subsidiaries. Dividends of $3.2 million
were paid to the Company by its subsidiaries during 1998. There were no such
dividends in 1999.
The Company purchases new containers for its own account and for resale to
its managed container programs. In recent years the Company has targeted
container purchases to take advantage of strategic purchasing and leasing
opportunities, once the related financing was secured. During 1998 and 1997 the
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 $15 million and $15.2 million in 1999 and 1998, respectively. Net cash used
by operating activities was $20.6 million in 1997. The cash generated in 1999
represented cash provided by operations together with a $6.5 million reduction
in the net amounts due from lessees and a release of $4.9 million of deposits
from escrow accounts of which $2.7 million was utilized to make payments to
third party container owners. During 1999, cash was primarily utilized to pay
amounts due to container owners and to reduce the balance of Other amounts
payable and accrued expenses by $9.4 million, including payments of amounts due
under a restructuring plan and under the terms of loan extension agreements. The
net cash generated in 1998 reflected cash generated from operations and $7.9
million of
20
<PAGE> 24
proceeds from new container equipment for sale. The net cash used in 1997
reflected payments to container manufacturers of $26.4 million together with the
addition of new container equipment for resale of $6.7 million.
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 provided by
investing activities was $18.9 million and $44.6 million in 1999 and 1997,
respectively. Net cash used in investing activities was $1.4 million in 1998.
During 1999, $21.7 million was generated by the sales of container equipment and
finance lease equipment, primarily to third party container owners. Cash
payments in 1998 included acquisitions of container equipment and computer
equipment of $1.8 million and $1.1 million, respectively. 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. 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. Also included in cash received in 1997 was the return of $1.5 million
paid by the Company purportedly related to professional fees relating to a
proposed strategic alliance.
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 used in financing
activities was $34.5 million, $19 million and $26.7 million in 1999, 1998 and
1997, respectively. In 1999, the Company utilized the proceeds of a $50 million
loan to refinance $47.8 million of indebtedness. In addition to this, debt and
capital lease obligations included $20.6 million of repayments in connection
with transactions involving container equipment sales. In 1998, net cash used by
financing activities included $22.1 million of debt and capital lease repayments
from operating cash.
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 ("Cronos Finance"),
a newly-organized, wholly-owned, special purpose subsidiary of the Company.
Cronos Finance borrowed $50 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.
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 each granted a warrant to
purchase 100,000 shares of the Company's Common Stock at an exercise price of
$4.41 per share.
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.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital expenditures for containers in 1999, 1998 and 1997 were $2.7
million, $1.8 million and $38.7 million, respectively. Other capital
expenditures in 1999, 1998 and 1997 were $0.2 million, $1.1 million, and $0.6
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. In
October
21
<PAGE> 25
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. In June 1999, $5.3 million was received from the sale of the Company's
stock held as collateral on the loans and was utilized in reducing the
indebtedness to the Company under these loans. See Item 13 -- "Certain
Relationships and Related Transactions" below.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133 ("SFAS 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 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 133, as amended by SFAS 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and should not be
applied retroactively to financial statements for prior periods. The Company is
assessing the impact that SFAS 133 will have in accounting for its derivative
transactions and hedging activities.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101 was
to have been effective in the first quarter of 2000. On March 24, 2000, the
Staff of the SEC announced that registrants with fiscal years that begin between
December 16, 1999 and March 15, 2000 may take an additional three months to
implement SAB No. 101. The Company is evaluating the impact, if any, of SAB No.
101 on the Company's financial statements.
YEAR 2000
The Company did not experience nor does it currently anticipate any
material adverse effects on the Company's business, results of operations or
financial condition as a result of Year 2000 issues involving its internal use
systems, third party products or any of its software products. Costs incurred in
preparing for Year 2000 issues were expensed as incurred. The Company does not
anticipate any additional material costs in connection with Year 2000 issues.
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 14 to
the 1999 Consolidated Financial Statements.
22
<PAGE> 26
The following table sets forth principal cash flows and related weighted
average interest rates by expected maturity dates for debt and capital lease
obligations at December 31, 1999:
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE OF DEBT AND CAPITAL LEASE OBLIGATIONS
--------------------------------------------------------------
2000 2001 2002 2003 2004 2005
-------- -------- -------- -------- -------- -------
(US DOLLAR EQUIVALENT, IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt and capital lease
obligations:
Fixed rate ($US).................... $ 4,019 $ 4,143 $ 3,769 $ 3,649 $12,119 $ --
Average interest rate %............. 8.7 8.6 8.6 8.6 8.6 --
Fixed rate (GBP).................... -- -- $ 5,750 -- -- --
Average interest rate %............. 9.8 9.8 9.8 -- -- --
Variable rate ($US)................. $12,558 $12,148 $12,362 $13,131 $24,494 $1,836
Average interest rate %............. 7.6 7.6 7.6 7.6 7.5 7.5
</TABLE>
Interest rate risk: outstanding borrowings are subject to interest rate
risk. At December 31, 1999, 70% 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 $0.6 million.
Exchange rate risk: substantially all of the Company's revenues are billed
and paid in US dollars and approximately 78% of costs in 1999 were incurred and
paid in US dollars. Of the remaining costs, approximately 82% 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 UK pounds sterling.
In addition, almost all of the Company's container purchases are paid for in US
dollars.
As exchange rates are outside of the control of the Company, there can be
no assurance that such fluctuations will not adversely affect its results of
operations and financial condition. By reference to 1999, it is estimated that
for every 10% fall in value of the US dollar, the effect would be to reduce cash
flows by $1.4 million in any similar year.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1999 Independent Auditors' Report
1998 Report of Independent Public Accountants
The financial statements listed in this Item 8 are set forth herein beginning on
page F1:
Consolidated Balance Sheets -- At December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
<PAGE> 27
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Board of Directors, in general, delegates the daily management of the
Company's business to the Company's executive officers. The following table sets
forth information with respect to the executive officers and directors of the
Company.
<TABLE>
<CAPTION>
YEAR INITIALLY ELECTED
NAME AGE OR APPOINTED POSITION
- ---- --- ---------------------- --------
<S> <C> <C> <C>
OFFICERS AND DIRECTORS:
Dennis J Tietz................. 47 1998 Chairman of the Board of Directors and
Chief Executive Officer
Peter J Younger................ 43 1997 Director, Executive Vice President and
Chief Financial Officer
Maurice Taylor................. 39 1998 Outside Director
Charles Tharp.................. 49 1999 Outside Director
Stephen N Walker............... 45 1999 Outside Director
Robert M Melzer................ 59 2000 Outside Director
John M Foy..................... 54 1999 Senior Vice President
Nico Sciacovelli............... 50 1999 Senior Vice President
John C Kirby................... 46 1999 Senior Vice President
</TABLE>
DENNIS J TIETZ. Mr. Tietz, age 47, was appointed Chief Executive Officer
of the Company on December 11, 1998, and Chairman of the Board of Directors on
March 30, 1999, to fill the vacancies created by the resignation of Rudolph J
Weissenberger as Chief Executive Officer and Chairman of the Board. Mr. Tietz
will serve as a director until the annual meeting in 2001 and his successor is
elected. From 1986 until his election as Chief Executive Officer of the Company,
Mr. Tietz was responsible for the organization and marketing of investment
programs managed by Cronos Capital Corp. ("CCC"), (formerly called Intermodal
Equipment Associates), a subsidiary of the Company. From 1981 to 1986, Mr. Tietz
supervised container lease operations in both the United States and Europe.
Prior to joining CCC in 1981, Mr. Tietz was employed by Trans Ocean Leasing
Corporation, San Francisco, California, a container leasing company, as regional
manager based in Houston, with responsibility for leasing and operational
activities in the US Gulf. Mr. Tietz holds a B.S. degree in Business
Administration from San Jose State University. Mr. Tietz is a licensed principal
with the National Association of Securities Dealers ("NASD").
PETER J YOUNGER. Mr. Younger, age 43, was elected to the Board of
Directors of the Company on January 13, 2000. Mr. Younger will serve as a
director until the annual meeting in 2001 and his successor is elected. Mr.
Younger was appointed as Executive Vice President of the Company in April 1999
and its Chief Financial Officer in March 1997. From 1991 to 1997, Mr. Younger
served as Vice President of Finance for Cronos Containers Ltd., located in the
UK. From 1987 to 1991 Mr. Younger served as Vice President and Controller for
CCC 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, Salem, Oregon.
MAURICE TAYLOR. Mr. Taylor, age 39, was appointed to the Board of
Directors of the Company as an outside director on July 9, 1998. Mr. Taylor will
serve as a director until the annual meeting for the year 2000 and his successor
is elected. Mr. Taylor, based in Geneva, Switzerland, is and has been an
independent consultant in international trade finance for the last five years.
He serves on the boards of numerous privately-held trading companies in Europe.
Mr. Taylor holds a B.A. degree in Mathematical Economics from Brown University.
CHARLES THARP. Mr. Tharp, age 49, was appointed to the Board of Directors
of the Company as an outside director on March 31, 1999, to fill the vacancy
created by the resignation of Dr. Axel Friedberg. Mr. Tharp will serve as a
director until the annual meeting for the year 2000 and his successor is
elected. Mr. Tharp is based in Washington D.C. and has for the last four years
acted as a consultant to pension funds and foundations on international
investment policy, fiduciary issues, and financial management. Mr. Tharp is a
24
<PAGE> 28
director of The Info/Change Foundation, Washington D.C. He held several
positions, including Executive Director (the Chief Executive Officer) of the
Pension Benefit Guaranty Corporation, a federal agency, from 1982 to 1985. Mr.
Tharp has served on the boards of insurance companies, pension funds, and real
estate holding companies in California, Ohio, and Bermuda. Mr. Tharp holds a
B.A. degree in History from Yale University and an M.A. in Jurisprudence from
Oxford University, England.
STEPHEN NICHOLAS WALKER. Mr. Walker, age 45, was appointed to the Board of
Directors of the Company as an outside director on October 5, 1999, to fill the
vacancy created by the resignation of Ernst-Otto Nedelmann, and was elected to
the Board by the shareholders at the January 13, 2000 meeting. Mr. Walker will
serve as a director until the annual meeting in 2002 and his successor is
elected. Since 1995, Mr. Walker has served as Senior Vice President of
Investments of Paine Webber Inc. From 1982 until he joined PaineWebber, he
served as Senior Vice President of Investments of Prudential Securities Inc. Mr.
Walker holds an M.A. degree in Jurisprudence from Oxford University, England.
ROBERT M MELZER. Mr. Melzer, age 59, was elected to the Board of Directors
of the Company as an outside director on January 13, 2000, and will serve as a
director until the annual meeting in 2002 and his successor is elected. Mr.
Melzer served as President and Chief Executive Officer of Property Capital
Trust, Inc., a publicly-traded real estate investment trust ("REIT"), from 1992
until May 1999 when the company completed its plan to dispose of its investments
and distributed the proceeds to its shareholders. Since May 1999, Mr. Melzer has
devoted his business activities to consulting and to serving as a director or
trustee of various business and charitable organizations. Mr. Melzer serves as a
director of Genesee & Wyoming, Inc., a short-line railroad holding company; a
director of Beacon Capital Partners, Inc., a REIT; a trustee of MGI Properties,
a REIT; and chair of the board of trustees of Beth Israel Deaconess Medical
Center. Mr. Melzer holds a B.A. degree in Economics from Cornell University and
an M.B.A. from the Harvard Business School. The Board proposed Mr. Melzer as a
candidate for director in its preliminary proxy statement filed with the SEC on
August 24, 1999, and, on October 21, 1999, appointed Mr. Melzer as a non-voting
member of the Board's Transaction Committee, which was organized to assess the
proposal made by Interpool, Inc. to acquire the Company and to consider
alternative means of enhancing shareholder value. See "Description of
Business -- Recent Developments" above.
JOHN M FOY. Mr. Foy, 54, was appointed Senior Vice President Americas, on
April 1, 1999. Mr. Foy is responsible for lease marketing and operations in
North and South America, Asia and Australia, and is based in San Francisco. Mr.
Foy was appointed Vice President, Americas in 1993. From 1985 to 1993, Mr. Foy
was Vice President/Pacific with responsibility for dry cargo container lease
marketing and operations in the Pacific Basin. From 1977 to 1985, Mr. Foy was
Vice President of Marketing for Nautilus Leasing Services in San Francisco with
responsibility for worldwide leasing activities. From 1974 to 1977, Mr. Foy was
Regional Manager for Flexi-Van Leasing, a container lessor, in the Western
United States. Mr. Foy holds a B.A. degree in Political Science from University
of the Pacific, and a Bachelor of Foreign Trade from Thunderbird Graduate School
of International Management.
NICO SCIACOVELLI. Mr. Sciacovelli, 50, was appointed Senior Vice President
Europe, Middle East and Africa on April 1, 1999. Mr. Sciacovelli is responsible
for lease marketing and operations in those areas. He is based in Genoa, Italy.
In 1997, Mr. Sciacovelli was appointed as Vice President/Europe with
responsibility for leasing operations in the European area. From 1983 to 1997,
Mr. Sciacovelli was Director of Marketing for Southern Europe, the Middle East
and Africa. Prior to 1983, Mr. Sciacovelli was employed by Interpool, Inc., a
container lessor, as Marketing Manager with responsibility for container leasing
in Italy.
JOHN C KIRBY. Mr. Kirby, 46, was appointed Senior Vice President for
Operations on April 1, 1999. Mr. Kirby is responsible for container purchasing,
contract and billing administration, container repairs and leasing-related
systems and is based in the United Kingdom. Mr. Kirby previously served as Vice
President of Operations from 1992. From 1986 to 1992, Mr. Kirby was Director of
European Operations, a position he had held with IEA. Prior to joining IEA as
European Technical Manager in 1985, Mr. Kirby was employed by CLOU Containers, a
leasing company, as Technical Manager based in Hamburg, Germany. Mr. Kirby holds
a Professional Engineering Qualification from the Mid-Essex Technical College in
England.
25
<PAGE> 29
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors and executive officers must file reports with the
SEC indicating the number of shares of the Company's Common Stock they
beneficially own and any changes in their beneficial ownership. Copies of these
reports must be provided to the Company. Based solely on written representations
from the Company's directors and executive officers and a review of the copies
of beneficial ownership reports furnished to the Company, the Company believes
that all of the directors, executive officers and 10% shareholders of the
Company complied with such reporting requirements during the 1999 fiscal year,
except Messrs. Melzer and Walker, and Hans-Ulrich Ming, individually and as
Trustee of the Trust for the benefit of Stefan M Palatin, each of whom
inadvertently failed to timely file an initial statement on Form 3.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established Audit, Compensation, Special Litigation, and
Transaction Committees.
The Audit Committee consists of Directors Melzer, as its chair, Taylor and
Walker. The Audit Committee has general oversight responsibility with respect to
the Company's financial reporting, reviews the results and scope of the audit
and other services provided by the Company's independent auditors, and is
responsible for recommending to the Board the appointment of the Company's
independent auditors.
The Compensation Committee is comprised of Directors Tharp, as its chair,
Walker and Taylor. The Compensation Committee is responsible for establishing
and supervising the compensation and benefit plans for the officers and key
employees of the Company.
The Special Litigation Committee is comprised of Directors Taylor, as its
chair, Walker and Melzer. This Committee has been established to review
transactions between the Company and present and former management to determine
if management engaged in any misfeasance or improper self dealing. The Committee
is also responsible for supervising the Company's efforts to recover the
indebtedness owed to the Company by its former Chairman, Mr. Palatin.
The Transaction Committee consists of Directors Walker, as its chair,
Melzer, Taylor and Tharp. It was organized on October 8, 1999, to supervise the
efforts of the Board, working in conjunction with counsel and the Company's
financial advisors, First Union, to pursue strategic alternatives to enhance
shareholder value, and to oversee discussions between Cronos and interested
parties.
26
<PAGE> 30
ITEM 11 -- EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth certain information concerning the cash and
non-cash compensation (stated in U.S. dollars) received for services rendered in
the fiscal years ended December 31, 1999, 1998, and 1997 by (i) the Company's
Chief Executive Officer during 1999, and (ii) the four most highly compensated
executive officers of the Company (other than the Chief Executive Officer) in
office on December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
- ----------------------------------------------------------------------------------- -----------------------------
(a) (b) (c) (d) (e) (g) (i)
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND SALARY BONUS COMPENSATION SARS COMPENSATION(1)
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- ------------------ ---- ------- ------ ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
OFFICERS:
Dennis J Tietz............................ 1999 453,923 -- 38,819 -- 5,000
Chairman and Chief Executive Officer 1998 237,824 71,435 27,790 300,000 5,000
1997 232,250 59,774 7,220 -- 5,000
Peter J Younger........................... 1999 250,000 -- 19,769 200,000 --
Director, Executive Vice President and 1998 205,352 61,443 10,614 -- --
Chief Financial Officer 1997 177,963 43,290 9,688 -- --
John M Foy................................ 1999 187,000 -- 14,155 -- 5,000
Senior Vice President 1998 153,114 25,356 20,847 -- 5,000
1997 149,525 41,268 17,754 -- 4,750
Nico Sciacovelli.......................... 1999 179,127 -- 2,264 -- --
Senior Vice President 1998 183,477 28,098 995 -- --
1997 139,665 26,991 -- -- --
John C Kirby.............................. 1999 157,616 -- 19,275 -- 6,297
Senior Vice President 1998 122,030 35,990 13,888 -- 5,199
1997 113,015 28,950 10,757 -- 4,856
</TABLE>
- ---------------
(1) Column (i) represents retirement plan contributions made by Cronos on
behalf of the named officers.
27
<PAGE> 31
OPTION GRANT TABLE
The following Option Grant Table includes columns designated "Potential
Realizable Value". The calculation of these columns is based on hypothetical 5%
and 10% growth assumptions established by the rules of the Securities and
Exchange Commission (the "Commission"). There is no way to anticipate what the
actual growth rate of the Company's Common Stock will be.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AND ASSESSED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- --------------------------------------------------------------------------------------------------- ----------------------
(a) (b) (c) (d) (e) (f) (g)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- ------------ ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter J Younger....................... 200,000 100% $4.375 Oct. 2009 713,172 1,653,899
</TABLE>
Reported in this table are Stock Appreciation Rights ("SARs") awarded to
the named officer. SARs allow the recipient to share in any increase in the
value of a specified amount of the Company's Common Stock without acquiring
ownership of such stock nor the rights associated with ownership. Under the
terms of the agreement, the Company granted the named officer the option to
acquire 200,000 SARs. The grant date was October 13, 1999.
STOCK OPTION TABLE
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END ($)
SHARES ---------------------------- ----------------------------
ACQUIRED ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis J Tietz...................... -- -- 321,600 -- 187,500 --
Peter J Younger..................... -- -- 10,800 200,000 -- 125,000
John M Foy.......................... -- -- 10,800 -- -- --
Nico Sciacovelli.................... -- -- 5,400 -- -- --
John C Kirby........................ -- -- 10,800 -- -- --
</TABLE>
COMPENSATION OF DIRECTORS
In 1999, outside directors received quarterly retainers of $6,250, fees of
$6,000 per board meeting attended in person, fees of $1,000 for every board
meeting attended via telephone conference facilities and reasonable travel and
entertainment expenses. In addition, Messrs. Taylor, Tharp and Walker each
earned $30,000 in 1999 for their services on the Transaction Committee of the
Company. Mr. Melzer, as a non-voting member of the Transaction Committee, earned
$20,000.
SAR GRANT TO OUTSIDE DIRECTORS. On October 13, 1999, the Board approved
the grant to each existing non-employee director of the Company, and to Mr.
Melzer, stock appreciation rights ("SARs") on 15,000 "share units", with a grant
price of $4.094, the closing price of Company's Common Stock on August 4, 1999.
A "share unit" is defined as the equivalent of one share of Common Stock of the
Company. As of the date of the award of the SARs to the outside directors,
October 13, 1999, the closing price of the Company's Common Stock was $4.875 per
share. The share units vest over a period of three years, with one-third of the
share units vesting on each of the first three anniversaries of the date of
grant, October 13, 1999, or seven days before the next
28
<PAGE> 32
scheduled annual meeting of shareholders for that year, whichever date first
occurs. If a grantee of share units resigns from the Company or is terminated
(other than for cause) by the Company within twelve months following a "change
in control", then the share units become fully exercisable, at anytime within 90
days after the date of such resignation or termination (if not exercised within
said time period, then the share units lapse and terminate). The share units
similarly vest in the event that a grantee is terminated by the Company without
cause, or upon a grantee's permanent disability or death. A "change in control"
is defined to include the acquisition by any person or related group of persons
of 20% or more of the Common Stock of the Company. The share units are also
fully exercisable upon any merger of the Company with another corporation or the
sale of substantially all of the assets of the Company. The share units may be
redeemed only for cash, not for shares of Common Stock of the Company. A grantee
is entitled to an "award payment" at the time of exercise of share units, equal
to the excess if any, of the fair market value of a share of Common Stock on the
date of exercise over the grant price, multiplied by the number of exercised
share units. The number of share units is subject to adjustment in the event of
any subdivision of the outstanding shares of the Common Stock of the Company,
the declaration of a dividend payable in Common Stock of the Company, or like
events. In all events, the share units may not be exercised beyond October 12,
2009. The grant of share units to an outside director does not entitle the
director to any rights as a shareholder of the Company.
EMPLOYMENT AGREEMENTS
DENNIS J TIETZ. When Mr. Tietz was hired as Chief Executive Officer on
December 11, 1998, he and the Company entered into an Employment Agreement (the
"Agreement"). The initial term of the Agreement was to expire December 31, 2000.
Under the Agreement, Mr. Tietz was to be paid a base salary of $235,000, subject
to annual increases as determined by the Board, but in no event less than the
increase in the consumer price index. Under the Agreement, Mr. Tietz was to
receive bonus compensation at such times, and in such amounts, as the Board
determines. Mr. Tietz was also entitled to receive from Cronos Capital Corp.
("CCC"), a subsidiary of the Company and the general partner of the U.S. limited
partnerships sponsored by the Company, 3% of the fees and distributions payable
by the partnerships to CCC for the life of the partnerships.
At the time the Company entered into the Agreement with Mr. Tietz, it also
granted him a stock option to acquire 300,000 shares of the Company's Common
Stock, at an exercise price of $4.375 per share, the closing price of the Common
Shares of the Company on December 11, 1998.
The Agreement also provided for a severance payment to Mr. Tietz upon his
termination without "cause" or upon Mr. Tietz's termination of the Agreement
"for good reason."
In June of 1999 the Board increased Mr. Tietz's base salary to $300,000,
payable in monthly installments. Shortly after Interpool made its proposal to
the Company described under "Description of Business -- Recent Developments"
above, the Compensation Committee of the Board commenced negotiations with
Messrs. Tietz and Younger with a view to securing their services by extending
their Employment Agreements, conforming Mr. Younger's Employment Agreement
(which had been entered into in 1998) to the general provisions of the
Employment Agreement with Mr. Tietz, and providing incentive compensation to
both to encourage them to pursue a transaction that would enhance shareholder
value. On March 24, 2000, the Compensation Committee of the Board and the full
Board (with Messrs. Tietz and Younger abstaining from the vote) approved revised
Employment Agreements with Messrs. Tietz and Younger.
Under the Amended and Restated Employment Agreement (the "Amended
Agreement") with Mr. Tietz, the term of his employment shall continue until
December 31, 2001, with any further extensions to occur upon the written
agreement of both the Company and Mr. Tietz. The Amended Agreement provides for
Mr. Tietz to be nominated to the Company's Board of Directors and nominated to
serve as Chairman of the Board for the term of the agreement. He shall continue
to receive a base salary of $300,000 per year, with increases to commence
January 1, 2001, in the discretion of the Board, but not less than the increase
in the consumer price index. Mr. Tietz is to receive an annual bonus, in an
amount of up to 50% of his annual base salary, to be calculated on the basis of
performance goals established by the Compensation Committee, in its discretion.
29
<PAGE> 33
In addition, Mr. Tietz is entitled to receive a lump sum cash bonus (the
"Transaction Bonus") upon the attainment of certain targets in the event of any
"change in control" of the Company. A change in control is generally defined as
the acquisition by any beneficial owner of 50% or more of the then-outstanding
Common Shares of the Company, a merger or consolidation of the Company with and
into another entity, or the sale of all or substantially all of the assets of
the Company. The Transaction Bonus is calculated by first multiplying the
consideration received by the Company's shareholders as a result of any such
transaction by a fraction determined by the following formula:
<TABLE>
<C> <S>
X - Y
X 0.25
------------
10
</TABLE>
where "X" equals the price per share received by the holders of the
Company's Common Shares and "Y" equals $5.40.
Under his Amended Agreement, Mr. Tietz's Transaction Bonus shall be equal
to 60% of the amount determined in accordance with the foregoing formula, and
under his Amended Employment Agreement, Mr. Younger's Transaction Bonus shall be
equal to 40% of the amount determined in accordance with the foregoing formula.
Under the Amended Agreements with Messrs. Tietz and Younger, the amounts
payable by the Company to them as Transaction Bonuses shall be reduced, dollar
for dollar, so as to avoid the imposition of any excise tax upon the Company
imposed by Section 4999 of the Internal Revenue code.
Under the Amended Agreement, the Company may, at any time, discharge Mr.
Tietz from active service, upon no more than 30 days' advance notice, by
providing a notice of termination. Mr. Tietz may terminate the Amended Agreement
at any time upon the occurrence of certain events, such as a change in his
duties or position. Under the Amended Agreement, Mr. Tietz is also entitled to
three percent of the fees and distributions payable by the U.S. limited
partnerships to CCC, the general partner, for the life of the partnerships. Mr.
Tietz receives additional benefits, including an automobile.
If, at any time, Mr. Tietz's employment is terminated for an event or
events as defined in the Amended Agreement, then Mr. Tietz will be entitled to a
severance payment (the "Severance Payment") from the Company. (The event or
events as defined in the Amended Agreement are as follows: (a) the Company
terminates Mr. Tietz's employment without "cause," (b) Mr. Tietz terminates his
employment with the Company "for good reason," or (c) Mr. Tietz resigns, with or
without good reason, within the thirty-day period commencing one year following
an "equity change in control" of the Company. An equity change in control is
generally defined as the acquisition by any person or related group of persons
of 20% or more of the Common Stock of the Company.) The severance payment will
be made in a lump sum within 30 days of Mr. Tietz's last day of active service.
It will comprise all accrued obligations plus a pro-rated portion of his annual
salary and bonus for the year of termination. In addition, if Mr. Tietz agrees,
for a period of 24 months following his last day of active service, not to
solicit or interfere with any relationship between the Company and any customer,
supplier, investor, or limited partner of the Company or its affiliates, and
agrees not to solicit any existing employee of the Company to accept any
position with any other company that currently engages in business with the
Company, then Mr. Tietz shall be entitled to receive an additional lump sum
payment in a dollar amount equal to his annual salary and bonus.
PETER J YOUNGER. The Company and Mr. Younger entered into an Employment
Agreement as of July 1, 1998 (the "Agreement"). The Agreement was for an
indefinite term, and could generally not be cancelled except upon two-years'
prior written notice. Under the Agreement Mr. Younger was entitled to a base
salary, effective January 1, 1999, of US $250,000 per year, and was entitled to
an annual bonus under the terms and conditions of any bonus plan established by
the Company for all employees.
On March 24, 2000, upon the approval of the Compensation Committee of the
Board and the full Board (with Messrs. Tietz and Younger abstaining), the
Company entered into an Amended and Restated Employment Agreement with Mr.
Younger (the "Amended Agreement"). The Amended Agreement generally contains the
same terms and provisions as set forth in Mr. Tietz's Revised Agreement, subject
to the following material differences. The Amended Agreement provides for Mr.
Younger to be nominated to the Company's Board of Directors to serve as a member
of the Board for the term of the agreement. Mr. Younger's base salary is
30
<PAGE> 34
$250,000. He also is entitled to a bonus, determined in the discretion of the
Compensation Committee, in an amount of up to 50% of his base salary, on the
basis of the achievement of performance goals established by the Committee. With
respect to any transaction bonus payable to Messrs. Tietz and Younger upon a
"change in control" of the Company, Mr. Younger is entitled to 40% of the amount
determined by the formula, described above with respect to Mr. Tietz's Amended
Agreement. In light of the fact that Mr. Younger currently resides in England,
under his Amended Agreement (as was true under his original Employment
Agreement), Mr. Younger is entitled to reimbursement from the Company for any
additional income taxes payable by him on his income as a result of currently
being resident in the United Kingdom over and above what he would pay on his
employment income were he a resident of the State of California. Mr. Younger was
granted stock appreciation rights as of October 13, 1999, described below. In
addition, Mr. Younger is entitled to participate in all present and future
option plans with other officers of the Company, in the discretion of the
Compensation Committee.
SAR GRANT TO MR. YOUNGER. To grant Mr. Younger incentive compensation, and
to retain his services to the Company, the Board resolved on October 13, 1999,
to grant to Mr. Younger stock appreciation rights ("SARs") on 200,000 "share
units". A "share unit" is defined as the equivalent of one share of Common Stock
of the Company. The grant of the SARs to Mr. Younger entitles him to receive
cash payments from the Company as provided for in his Stock Appreciation Rights
Agreement. The share units are redeemable only for cash, not for shares of
Common Stock of the Company. The share units were granted to Mr. Younger at a
grant price of $4.375 per share unit, the equivalent exercise price of the
common shares subject to Mr. Tietz' option. As of the date of the award of the
SARs to Mr. Younger, October 13, 1999, the closing price of the Company's Common
Stock was $4.875 per share. The share units are exercisable by Mr. Younger over
a period of three years, with one-third of the share units exercisable on each
of the first three anniversaries of the date of grant. If Mr. Younger resigns
from the Company within twelve months following a "change in control", then the
share units become fully exercisable, at any time within 90 days after the date
of such resignation (if not exercised within said time period, then the share
units lapse and terminate). The share units similarly vest in the event that Mr.
Younger is terminated by the Company without cause, or upon Mr. Younger's
permanent disability or death. A "change in control" is defined to include the
acquisition by any person or related group of persons of 20% or more of the
Common Stock of the Company. The share units are also fully exercisable upon any
merger of the Company with another corporation or the sale of substantially all
of the assets of the Company.
Upon any exercise of the share units, Mr. Younger is entitled to a cash
payment by the Company in the amount of the excess, if any, of the then fair
market value of a share of Common Stock of the Company over the grant price of
the share units, multiplied by the number of share units then being exercised.
The number of share units is to be adjusted in the event of any subdivision of
the Company's outstanding shares, the declaration of a dividend payable in
Common Stock of the Company, or like events. In all events, the share units
granted to Mr. Younger expire if not exercised on October 12, 2009. The grant of
the share units to Mr. Younger does not entitle him to exercise any rights as a
shareholder of the Company.
JOHN M FOY. The Company and Mr. Foy entered into an Employment Agreement,
effective April 1, 1999, (the "Agreement") which was amended on December 1,
1999. The term of the Agreement, as amended, is until November 30, 2001. The
Company may not cancel the Agreement prior to its expiration except for illness
or other incapacity that continues for a period of more than six months or the
non-performance of or willful misconduct by Mr. Foy in the performance of his
duties. In the event of the termination of the Agreement by the Company without
"cause", Mr. Foy will be paid an amount equal to the greater of his annual
salary under the Agreement for the balance of the term under the Agreement or
that amount called for by the severance policy of the Company. The severance
policy of the Company calls for the employee to be paid an amount equal to the
product obtaining by multiplying the employees monthly salary at the time of the
termination by the number of years that the employee has worked for the Company,
with a maximum severance payment of one year's salary. The Company will pay Mr.
Foy a base salary ("Base Salary") of US $156,176 a year, increased, effective as
of January 1, 1999, to US $187,000 a year. The Base Salary may be increased in
the discretion of the Company. Mr. Foy will receive bonus compensation at such
times, and in such amounts, as the Company may determine. On February 4, 2000,
the Company granted Mr. Foy a stock option to acquire 80,000 shares of the
Company's Common Stock, at an exercise price of $5.25 per share. The options
will vest and be exercisable as follows: 25% on February 2001; 50% on February
2002; 75% on February 2003 and 100% on February 2004.
31
<PAGE> 35
NICO SCIACOVELLI. Under the terms of his employment, Mr. Sciacovelli is
entitled to a base salary ("Base Salary") of ITL 345,701,314 a year
(approximately US $180,000). The Base Salary may be increased in the discretion
of the Company. Mr. Sciacovelli will receive bonus compensation at such times,
and in such amounts, as the Company may determine. Mr. Sciacovelli receives
additional benefits, including an automobile. Mr. Sciacovelli's employment may
be terminated by either party serving not less than three months written notice.
The Company and Mr. Sciacovelli are currently negotiating the terms of an
Employment Agreement which they expect to finalize in April 2000.
JOHN C KIRBY. The Company and Mr. Kirby entered into an Employment
Agreement, effective April 1, 1999, (the "Agreement") which was amended on
January 20, 2000. The term of the Agreement as amended is until November 30,
2001 and thereafter shall continue until terminated by either party serving not
less than three months written notice. The Company may not cancel the Agreement
prior to its expiration except for illness or other incapacity that continues
for a period of more than six months or the non-performance of or willful
misconduct by Mr. Kirby in the performance of his duties. The Company will pay
Mr. Kirby a base salary ("Base Salary") of GBP L97,890 a year (approximately US
$157,000). The Base Salary may be increased in the discretion of the Company.
Mr. Kirby will receive bonus compensation at such times, and in such amounts, as
the Company may determine. Mr. Kirby receives additional benefits, including an
automobile. On February 4, 2000, the Company granted Mr. Kirby a stock option to
acquire 80,000 shares of the Company's Common Stock, at an exercise price of
$5.25 per share. The options, which will vest and be exercisable as follows: 25%
on February 2001, 50% on February 2002, 75% on February 2003 and 100% on
February 2004.
32
<PAGE> 36
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 23, 2000, there were 9,158,378 Common Shares, $2 par value (the
"Common Shares"), issued and outstanding. The following table sets forth certain
information with respect to the beneficial ownership of the Company's Common
Shares as of March 23, 2000, by (i) each person who, to the knowledge of the
Company, is the beneficial owner of more than 5% of the outstanding common
stock, (ii) Directors, (iii) executive officers, and (iv) Directors and
executive officers as a group. Unless otherwise indicated, each of the persons
listed in the table has sole voting and investment power with respect to the
shares shown.
<TABLE>
<CAPTION>
TITLE OF CLASS IDENTITY OF PERSON OR GROUP AMOUNT OWNED(1) PERCENT OF CLASS
- -------------- --------------------------- --------------- ----------------
<S> <C> <C> <C>
Common Shares, par value $2 Stefan M Palatin(2)................ 1,793,798(2) 19.6%
Blavin Parties..................... 1,529,136(3) 16.7%
Central Wechsel -- und Creditbank
AG................................. 1,075,000(4) 11.7%
Waveland Parties................... 1,039,500(5) 11.4%
Rudolf J Weissenberger............. 578,667(6) 6.3%
Quadrangle Offshore (Cayman) LLC... 507,400(7) 5.5%
Dennis J Tietz..................... 321,600(8) 3.5%
Peter J Younger.................... 10,800(9) *
Robert M Melzer.................... 10,000 *
S. Nicholas Walker................. -- --
Charles Tharp...................... -- --
Maurice Taylor..................... -- --
John M Foy......................... 10,800(9) *
John C Kirby....................... 10,800(9) *
Nico Sciacovelli................... 5,400(10) *
All executive officers and
directors as a group............... 369,400 4.0%
</TABLE>
- ---------------
(1) Except as otherwise specifically noted, the number of shares stated as
being owned beneficially includes (a) all options and warrants under which
persons could acquire Common Shares currently and within 60 days following
the date hereof and (b) shares held beneficially by spouses, minor children
or grandchildren.
(2) According to the Form 3, dated April 16, 1999, of Hans-Ulrich Ming,
individually and as trustee for the benefit of Stefan M Palatin, these
shares are held of record by Klamath, a Panamanian company of which Mr.
Palatin is known to be a beneficial owner.
(3) According to the Schedule 13D, dated September 24, 1999, of Blavin &
Company, Inc. and Paul W Blavin, as principal for Blavin & Company, Inc.,
these shares are held of record by PWB Value Partners, L.P., and advisory
clients of Blavin & Company, Inc.
(4) According to the Schedule 13D Amendment No. 1, dated March 10, 1998, of
Central Wechsel -- und Creditbank AG, these shares were held of record by
Enavest Holding S.A. ("Enavest"), a Panamanian company of which Stefan M
Palatin is believed to be the beneficial owner. However, pursuant to the
terms of a pledge agreement between Central Wechsel -- und Creditbank AG
and Enavest following the default of the repayment of a loan by Enavest,
these shares are held of record by Central Wechsel -- und Creditbank AG.
(5) According to their Schedule 13D Amendment No. 2, dated July 8, 1999, these
shares are held of record by Waveland Partners, L.P., Waveland Capital
Management, L.P., Clincher Capital Corporation, Waveland Capital
Management, LLC, Waveland Partners, Ltd., and Waveland International, Ltd.
(6) According to his Form 3, dated December 21, 1998, Mr. Weissenberger is the
record holder of 12,000 shares and indirectly holds 566,667 shares owned by
Lude Management Corp.
(7) According to the Schedule 13G, dated March 13, 2000, of Lawrence A Heller,
Quadrangle Offshore (Cayman) LLC is the beneficial owner of these shares.
33
<PAGE> 37
(8) Mr. Tietz may purchase 21,600 shares by exercising outstanding options
before November 24, 2001, and may purchase an additional 300,000 shares by
exercising outstanding options on or before December 10, 2008.
(9) Messrs. Younger, Foy and Kirby may each purchase 10,800 shares by
exercising outstanding options on or before November 24, 2001.
(10) Mr. Sciacovelli may purchase 5,400 shares by exercising outstanding options
on or before November 24, 2001.
* Less than one percent.
34
<PAGE> 38
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Group had the following transactions with related parties that should
be read in conjunction with Notes 16 and 20 to the 1999 Consolidated Financial
Statements.
I. During 1998, an ocean carrier in which Eivind A Eriksen, a former
director and Chief Operating Officer of the Company, was a non executive
director, ceased doing business. The ocean carrier leased containers from the
Company. At December 31, 1998, a specific provision of $0.6 million,
representing the total amount due from the carrier of $1.2 million, less
expected insurance proceeds, was included in the allowance for doubtful
accounts. In 1999, the total amount due from the ocean carrier increased by $0.1
million. During the year ended December 31, 1999, insurance proceeds of $0.6
million were received and the remaining balance of $0.7 million was charged to
operations.
II. During the year ended December 31, 1998, payments totalling $0.2
million were made to Dr. Freidberg, a former outside director of the Company,
for legal fees. In addition Dr. Friedberg has submitted a statement to the
Company for the balance due for legal services rendered to the Company from
November 30, 1997 to December 31, 1998 in the amount $0.1 million which is
currently being reviewed by the Special Litigation Committee.
III. As of January 1, 1996, $4.7 million was owed to the Group under an
unsecured loan agreement with Barton Holding Ltd. ("Barton"), the former
preferred shareholder. This amount bore interest at 9% and was repayable in
installments on March 31, 1996 and June 30, 1996.
During 1996, Mr. 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. Palatin's
guarantee purported to pledge 1,030,303 Common Shares owned by him in The Cronos
Group. However, the owner of record of these shares was Lambert Business Inc.
incorporated under the laws of Panama.
On June 30, 1996, principal and interest on the Group's loan to Barton in
the amount of $5 million came due, but no repayment thereon was received.
In August 1996, the Company and Mr. Palatin entered into a new Loan
Agreement and related Pledge Agreement, each dated as of July 1, 1996, pursuant
to which Mr. Palatin borrowed $5.5 million from the Company which was used to
repay the principal and interest due on June 30, 1996, on the loan to Barton and
an additional $0.5 million advance. This loan bore interest at 9% per annum and
was due on December 30, 1996. No principal or interest payments were received in
1996. At December 31, 1996, the outstanding loan due from Mr. Palatin was $5.5
million. In July 1997, in connection with the execution of an amendment to a
bank facility (the "Bank Facility"), the Palatin loan was increased to $5.9
million, 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. The date of December 31, 1997, was agreed as
the revised repayment date for the loan, but no principal or interest payments
were received.
In January 1997, the Group advanced an amount of $3.7 million to Mr.
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 a like amount from a subsidiary of the
Group to Mr. Palatin, pursuant to the Bank Facility. This new loan bore interest
at 9% per annum and was secured, together with all other obligations of Mr.
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 $33.1 million
at December 31, 1998.
Interest of $0.7 million, $0.9 million and $0.8 million became due under
Mr. Palatin's outstanding loans for the years ended December 31, 1999, 1998 and
1997, respectively. These amounts have not been recognized in income.
In view of these circumstances and the doubt concerning the Board's ability
to exercise the pledge over the remaining 1,030,303 shares, a provision of $3.9
million was made on December 31, 1997, against Mr. Palatin's
35
<PAGE> 39
outstanding loans. In March 1999, title to 463,636 of the 1,030,303 shares was
granted as security to the banks under the Bank Facility.
At December 31, 1998, the carrying value of Mr. Palatin's loans was $5.5
million. In June 1999, $5.3 million of proceeds from the sale of the Company's
stock held as collateral on the Palatin loans were utilized in reducing Mr.
Palatin's indebtedness to the Company. The remaining balance of $0.2 million was
charged to operations. During 1999, the Company took action to seek recovery of
the amounts owed to the Company (see Item 3 -- "Legal Proceedings").
IV. Included in Financing and recomposition expenses in 1998 and 1997 were
amounts totalling $0.2 million which were attributed to Mr. Palatin.
On the resignation of Mr. Palatin in 1998, the Group retained $0.2 million
of outstanding payroll to be held as possible settlement against any claims.
In December 1999, the $0.2 million payable to Mr. Palatin was offset
against the $0.2 million payable to the Group.
V. Amounts of $0.03 million, $0.4 million and $0.6 million were paid for
services, for the years ended December 31, 1999, 1998 and 1997, respectively,
under the terms of an information technology agreement with a company to which
Mr. Palatin indicated that he was related. In November 1999, the Group was
advised by a third party that they had purchased all of the equity of the
information technology company that was previously owned by Mr. Palatin.
VI. As indicated in Note 16 to the 1999 Consolidated Financial Statements,
it has been asserted by a representative of Contrin that Mr. 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 ("TOEMT"), 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. The Group has
responded to a request for information from the liquidator relating to the
trading transactions with that company.
VII. TOEMT, which is currently in liquidation in the United Kingdom, has
been separately registered in the same name in both the United Kingdom and the
Isle of Man. At December 31, 1999, the Company had $0.5 million of amounts
payable to container owners on deposit in an escrow bank account pending
resolution of certain matters relating to the liquidation process. The Company
has recently become aware that more than one creditor of TOEMT may claim an
interest in the distributions made by the Company with respect to the containers
owned by TOEMT. At the present time, the Company has insufficient information to
evaluate the competing claims or to determine whether the Company may have any
liability to the competing creditors for the prior distributions made with
respect to the TOEMT containers.
36
<PAGE> 40
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
1999 Independent Auditors' Reports
1998 Report of Independent Public Accountants
Consolidated Balance Sheets -- At December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules
All schedules for which provision is made in the applicable regulations of
the Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(a) (3) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
- ------ ------- ----
<C> <S> <C>
3.1 Coordinated Articles of Incorporation (incorporated by
reference to Exhibit 1.1 to the Company's Annual Report on
Form 20-F for the year ended December 31, 1997 (File No.
0-24464)).
3.2 Policies and procedures with respect to the indemnification
of directors and officers of the Company, as adopted by the
Board of Directors on August 4, 1999 (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-3, dated November 24, 1999).
4.1 Rights Agreement, dated as of October 28, 1999, between the
Company and BankBoston, N.A., as Rights Agent (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A dated October 29, 1999).
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") (incorporated by reference to Exhibit 1.2 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
10.2 First Amendment to the Credit Agreement, dated as of July
14, 1997 (incorporated by reference to Exhibit 1.3 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
10.3 Second Amendment to the Credit Agreement, dated as of
December 3, 1997 (incorporated by reference to Exhibit 1.4
to the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464)).
10.4 Third Amendment to the Credit Agreement, dated as of June
30, 1998 (incorporated by reference to Exhibit 1.5 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
</TABLE>
37
<PAGE> 41
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
- ------ ------- ----
<C> <S> <C>
10.5 Confirmation of Guaranties, Agreement and Power of Attorney
by The Cronos Group, dated June 30, 1998, pertaining to the
Credit Agreement (incorporated by reference to Exhibit 1.6
to the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464)).
10.6 Deed in lieu of foreclosure relating to shares given as
collateral to the Palatin loans (incorporated by reference
to Exhibit 10.6 in the Company's Annual Report on Form 10-K
for the period ended December 31, 1998).
10.7 Forbearance Agreement and Fourth Amendment to Amended and
Restated Credit Agreement dated March 31, 1999 (incorporated
by reference to Exhibit 10.7 in the Company's Annual Report
on Form 10-K for the period ended December 31, 1998).
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")
(incorporated by reference to Exhibit 1.7 to the Company's
Annual Report on Form 20-F for the year ended December 31,
1997 (File No. 0-24464)).
10.9 Amendment to the Sun Agreement, dated as of November 1, 1997
(incorporated by reference to Exhibit 1.8 to the Company's
Annual Report on Form 20-F for the year ended December 31,
1997 (File No 0-24464)).
10.10 Second Amendment to the Sun Agreement dated as of January
26, 1999 (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1998).
10.11 Lambert Confirmation, Acknowledgement and Consent of
Collateral Assignment (incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1998).
10.12 Amendment to the Revolving Credit Facility between Cronos
Containers Limited and China International Marine Containers
(Group) Company Limited, dated March 24, 1999 (incorporated
by reference to Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1998).
10.13 Guarantee, dated as of July 30, 1999, by and between the
Company and MeesPierson, as agent on behalf of itself and
First Union (incorporated by reference to Exhibit 10.20 to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999).
10.14 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 (incorporated by reference to Exhibit
10.21 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1999).
10.15 CFBL Secured Note, dated as of July 30, 1999, in the
principal amount of U.S. $25,000,000, in favor of
MeesPierson (incorporated by reference to Exhibit 10.22 to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999).
10.16 CFBL Secured Note, dated as of July 30, 1999, in the
principal amount of U.S. $25,000,000, in favor of First
Union (incorporated by reference to Exhibit 10.23 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999).
10.17 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 (incorporated by
reference to Exhibit 10.24 to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1999).
10.18 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 (incorporated by reference to Exhibit 10.25 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999).
</TABLE>
38
<PAGE> 42
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
- ------ ------- ----
<C> <S> <C>
10.19 Warrant Agreement dated as of July 30, 1999 ("Warrant
Agreement") by and between the Company and MeesPierson N.V
("MeesPierson") and First Union National Bank ("FUNB")
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1999).
10.20 Amendment No.1 to Warrant Agreement, dated as of August 11,
1999, by and among the Company, MeesPierson, and FUNB
(incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30,1999).
Executive Compensation Plans and Arrangements
10.21 Stock Appreciation Rights Agreement by and between the
Company and Peter J Younger, dated as of October 13, 1999
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-3, dated November 24,
1999).
10.22 The Cronos Group Management Equity Investment Plan, dated as
of July 25, 1994 (incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the period
ended December 31, 1998).
10.23 Stock Appreciation Rights Agreement by and between the
Company and S Nicholas Walker and each other party listed on
the schedule thereto, dated October 13, 1999. E1
10.24 1999 Stock Option Plan (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-8,
dated February 25, 2000).
10.25 Employment Agreement by and between Cronos Containers Inc.
and John Foy dated April 1, 1999, as amended on December 1,
1999. E13
10.26 Employment Agreement by and between Cronos Containers Ltd.
and John Kirby dated April 1, 1999, as amended on January
20, 2000. E23
10.27 Amended and Restated Employment Agreement between Cronos and
Peter J Younger dated March 24, 2000. E37
10.28 Amended and Restated Employment Agreement between Cronos and
Dennis J Tietz dated March 24, 2000. E60
21.1 List of principal wholly-owned subsidiaries at December 31,
1999. E82
22.1 The Company's Form 8-K dated January 21, 2000, reporting on
matters submitted to a vote of shareholders.
27.1 Financial Data Schedule. E84
99.1 Pages 6 through 11 (under the caption "Risk Factors") of the
Company's Registration Statement on Form S-8 dated February
25, 2000. E85
</TABLE>
(b) Reports on Form 8-K
On November 3, 1999, a Current Report on Form 8-K was filed by the Company
reporting the Company's decision to approve and adopt a Shareholder Rights
Plan.
On November 16, 1999, a Current Report on Form 8-K was filed by the Company
announcing that it had agreed to a settlement of the SEC's private
investigation of the Company.
39
<PAGE> 43
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
/s/ DENNIS J TIETZ
By:
--------------------------------------
Dennis J Tietz
Chairman of the Board and
Chief Executive Officer
Date: March 29, 2000
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/ DENNIS J TIETZ Chairman of the Board and March 29, 2000
- ------------------------------------------ Chief Executive Officer
Dennis J Tietz (Principal Executive Officer)
By /s/ PETER J YOUNGER Director, Executive Vice President, March 29, 2000
- ------------------------------------------ Chief Financial Officer, and
Peter J Younger Chief Accounting Officer
(Principal Financial and Accounting
Officer)
By /s/ ROBERT M MELZER Director March 29, 2000
- ------------------------------------------
Robert M Melzer
By /s/ MAURICE TAYLOR Director March 29, 2000
- ------------------------------------------
Maurice Taylor
By /s/ CHARLES THARP Director March 29, 2000
- ------------------------------------------
Charles Tharp
By /s/ STEPHEN NICHOLAS WALKER Director March 29, 2000
- ------------------------------------------
Stephen Nicholas Walker
</TABLE>
40
<PAGE> 44
THE CRONOS GROUP
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
AND INDEPENDENT AUDITORS' REPORTS
F-1
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The Cronos Group:
We have audited the accompanying consolidated balance sheet of The Cronos
Group (a Luxembourg holding company) and its subsidiaries (collectively the
"Group") as of December 31, 1999, and the related consolidated statements of
operations, cash flows and shareholders' equity for the year then ended. These
consolidated financial statements are the responsibility of the Group's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of The Cronos Group
and its subsidiaries as of December 31, 1999 and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, CA
February 25, 2000
F-2
<PAGE> 46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of The Cronos Group:
We have audited the accompanying consolidated balance sheet of The Cronos
Group (a Luxembourg holding company) as of December 31, 1998, and the related
consolidated statements of income, cash flows and shareholders' equity for the
two years ended December 31, 1998 and 1997. 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, 1998 and the consolidated results of their
operations and their cash flows for the years ended December 31, 1998 and 1997
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 of the Form 10-K for the year ended
December 31, 1998, 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 to the Consolidated Financial Statements of
the Form 10-K for the year ended December 31, 1998. 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 to the Consolidated
Financial Statements of the Form 10-K for the year ended December 31, 1998.
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-3
<PAGE> 47
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
NOTES 1999 1998 1997
---------- ----------- ----------- -----------
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross lease revenue............................... $132,140 $157,546 $160,848
Commissions, fees and other operating income:
US Limited Partnerships......................... 1,356 1,347 1,384
other related parties........................... -- -- 20
unrelated parties............................... 4,593 3,608 4,141
Interest income................................... 1,011 1,154 861
Gain on sale of investment:
gain on conversion of investment................ 9ii 613 -- 106
realized holding gain........................... 9ii 665 -- 215
-------- -------- --------
TOTAL REVENUES.................................... 140,378 163,655 167,575
-------- -------- --------
Direct operating expenses......................... 31,179 35,318 34,217
Payments to container owners:
US Limited Partnerships......................... 24,288 31,922 36,478
Other container owners.......................... 39,655 43,605 37,467
Amortization of intangible assets................. 11 683 683 742
Depreciation...................................... 15,517 18,031 18,291
Selling, general and administrative expenses...... 16,569 21,164 22,683
Financing and recomposition expenses.............. 4 -- 5,375 7,384
Interest expense.................................. 10,809 15,718 17,758
Provision against amounts receivable from related
parties......................................... 20 -- -- 3,909
Reversal of unrealized holding gain on available
for sale securities............................. 3(b)iv,9ii -- 1,929 --
Impairment losses................................. 1(r),3(a) -- 6,500 11,668
-------- -------- --------
TOTAL EXPENSES.................................... 138,700 180,245 190,597
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES................. 1,678 (16,590) (23,022)
Income taxes (benefit)............................ 5 (236) 306 --
-------- -------- --------
NET INCOME (LOSS)................................. 1,914 (16,896) (23,022)
Other comprehensive income, net of tax -
Unrealized holding gain (loss) on available for
sale securities................................. 848 (730) 1,159
-------- -------- --------
COMPREHENSIVE INCOME (LOSS)....................... $ 2,762 $(17,626) $(21,863)
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE (BASIC AND
DILUTED)........................................ 1(f) $ 0.21 $ (1.91) $ (2.60)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 48
THE CRONOS GROUP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
NOTES 1999 1998
---------- --------- ---------
(US DOLLAR AMOUNTS IN
THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 8,701 $ 9,281
Amounts due from lessees (net)........................... 1(h) 26,739 33,215
Amounts receivable from container owners, including
amounts due from related parties of $5,857 and $7,738
at December 31, 1999 and 1998, respectively............ 9,147 10,265
New container equipment for resale....................... 1(i),7 2,535 315
Net investment in direct financing leases, including
amounts due within twelve months of $1,004 and $1,365
at December 31, 1999 and 1998, respectively............ 8 1,090 3,504
Investments, including investments in related parties of
$34 and $55 at December 31, 1999 and 1998,
respectively........................................... 3(b)iv, 9 1,707 1,458
Container equipment, net of accumulated depreciation of
$67,573 and $59,640 at December 31, 1999 and 1998,
respectively........................................... 3(a)i, 10 137,547 168,243
Building and other equipment, net of accumulated
depreciation of $11,615 and $10,139 at December 31,
1999 and 1998, respectively............................ 11,807 13,273
Intangible assets........................................ 3(a)ii, 11 13,405 14,088
Other amounts receivable from related parties (net)...... 20 -- 5,500
Other assets including prepayments....................... 12 19,189 20,837
-------- --------
TOTAL ASSETS............................................. $231,867 $279,979
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 49
THE CRONOS GROUP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
NOTES 1999 1998
---------- --------- ---------
(US DOLLAR AMOUNTS IN
THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts payable to container owners, including amounts
payable to related parties of $12,291 and $13,287 at
December 31, 1999 and 1998, respectively............... $ 26,620 $ 31,314
Amounts payable to container manufacturers............... 3,609 101
Other amounts payable and accrued expenses............... 13,799 23,159
Debt and capital lease obligations, including amounts due
within twelve months of $16,577 and $87,271 at December
31, 1999 and 1998, respectively........................ 13 109,978 148,466
Income taxes............................................. 3,031 3,110
Deferred income taxes.................................... 5 4,027 4,975
Deferred income and unamortized acquisition fees......... 15 10,433 12,767
-------- --------
TOTAL LIABILITIES........................................ 171,497 223,892
======== ========
Commitments and contingencies............................ 16
SHAREHOLDERS' EQUITY
Common shares, par value $2 per share (25,000,000 shares
authorized; shares issued and outstanding, 9,158,378
and 8,858,378 at December 31, 1999 and 1998,
respectively).......................................... 17,18,19 18,317 17,717
Additional paid-in capital............................... 17,18,19 49,928 49,108
Share subscriptions receivable........................... 18(a) (82) (123)
Accumulated other comprehensive income, net of tax....... 1,277 429
Restricted retained earnings............................. 19 1,832 1,772
Accumulated deficit...................................... (10,902) (12,816)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................... 60,370 56,087
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $231,867 $279,979
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 50
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
NOTES 1999 1998 1997
-------- --------- ---------- ----------
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................... $ 1,914 $(16,896) $(23,022)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
impairment losses................................... 3(a) -- 6,500 11,668
reversal of unrealized holding gain on available for
sale securities.................................. 3(b)iv -- 1,929 --
depreciation and amortization....................... 16,200 18,714 19,033
decrease in unamortized acquisition fees............ (1,607) (1,907) (1,322)
provision for losses on accounts receivable......... 1,331 4,602 2,245
(gain) loss on disposal of fixed assets............. (79) (1) 129
gain on investment securities....................... -- -- (321)
increase (decrease) in current and deferred income
taxes............................................ (1,027) (234) 837
(increase) decrease in new container equipment for
resale........................................... (2,220) 7,887 (6,717)
(increase) decrease in amounts receivable:
US Limited Partnerships............................. 1,881 (427) 458
other related parties............................... -- -- 3,909
unrelated parties................................... 9,636 (465) (5,327)
increase (decrease) in amounts payable and accrued
expenses:
US Limited Partnerships............................. (996) (2,197) 1,902
other related parties............................... -- -- (747)
unrelated parties................................... (10,045) (2,266) (23,369)
------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES... 14,988 15,239 (20,644)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of container equipment....................... (2,650) (1,822) (38,724)
Purchase of property and other equipment.............. (176) (1,052) (598)
Purchase of investment in related parties............. -- -- (39)
Purchase of intangible asset.......................... -- -- (11)
Investment in finance lease equipment................. -- -- (2,443)
Issue of notes to related parties..................... 20 -- -- (3,700)
Proceeds from sales of container equipment............ 20,724 1,155 61,495
Proceeds from sales of property and other equipment... -- 325 --
Proceeds from sale of investment...................... 9ii -- -- 1,953
Proceeds from sale of investment in finance lease
equipment........................................... 1,000 -- 25,121
Repayment of note by related parties.................. 16,20 -- -- 1,500
------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... 18,898 (1,394) 44,554
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 51
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
NOTES 1999 1998 1997
----- --------- --------- ---------
(US DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of term debt.................... 13(a) 51,116 3,109 62,141
Repayments of term debt and capital lease
obligations.......................................... (85,582) (22,128) (93,874)
Cash deposits (restricted)............................. -- -- 5,000
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES.................. (34,466) (19,019) (26,733)
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (580) (5,174) (2,823)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......... 9,281 14,455 17,278
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............... $ 8,701 $ 9,281 $ 14,455
======== ======== ========
Supplementary disclosure of cash flow information:
Cash paid during the year for:
interest............................................. $ 11,328 $ 16,402 $ 17,605
income taxes......................................... 820 786 492
Cash received during the year for:
interest............................................. 494 1,092 1,272
income taxes......................................... 29 229 1,329
Non-cash investing and financing activities:
container equipment acquired under capital lease..... 1,257 -- 4,143
reduction of debt / Other amounts receivable from
related parties................................... 5,279 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 52
THE CRONOS GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
UNRESTRICTED
ACCUMULATED RETAINED
ADDITIONAL SHARE OTHER RESTRICTED EARNINGS TOTAL
COMMON PAID-IN SUBSCRIPTIONS COMPREHENSIVE RETAINED (ACCUMULATED SHAREHOLDERS'
SHARES CAPITAL RECEIVABLE INCOME EARNINGS DEFICIT) EQUITY
------- ---------- ------------- ------------- ---------- ------------ -------------
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.... $17,717 $49,228 $(243) $ -- $1,772 $ 27,102 $ 95,576
Net loss...................... (23,022) (23,022)
Management Equity Investment
Plan ("MEIP") lapses........ (74) 74 --
Unrealized holding gain on
available for sale
securities, net of tax...... 1,159 1,159
------- ------- ----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 1997.... 17,717 49,154 (169) 1,159 1,772 4,080 73,713
Net loss...................... (16,896) (16,896)
MEIP lapses................... (46) 46 --
Change in unrealized holding
gain on available for sale
securities, net of tax...... (730) (730)
------- ------- ----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 1998.... 17,717 49,108 (123) 429 1,772 (12,816) 56,087
Net income.................... 1,914 1,914
MEIP lapses................... (41) 41 --
Stock grant................... 600 615 60 1,275
Issue of stock warrants....... 246 246
Change in unrealized holding
gain on available for sale
securities, net of tax...... 848 848
------- ------- ----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 1999.... $18,317 $49,928 $ (82) $1,277 $1,832 $(10,902) $ 60,370
======= ======= ===== ====== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 53
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 by the Group or managed by the Group on behalf of
other parties.
The Company is incorporated in Luxembourg. The common shares of the Company
are publically traded on the NASDAQ under the symbol "CRNS".
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.
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 (the "Agreements") with 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, as General
Partner, organizes public limited partnerships in the United States (the "US
Limited Partnerships") and purchases and manages containers on behalf of the US
Limited Partnerships. 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.
The Group also leases containers from lessors under capital leases
agreements.
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.
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.
F-10
<PAGE> 54
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 ("US GAAP").
The preparation of financial statements in conformity with US GAAP 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 amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
c) GROSS LEASE REVENUE
Gross lease revenue represents amounts invoiced to customers for operating
leases of marine containers excluding advance billings which are recorded as
deferred revenue.
d) COMMISSIONS, FEES AND OTHER OPERATING INCOME
This comprises acquisition fees, syndication commissions, income on direct
financing leases, fees earned in connection with the manufacture and sale of dry
freight special and other products, fees earned on the disposal of used
containers, income from the Group's limited partner interest in US Limited
Partnerships and other income.
Acquisition fees represent amounts paid by container owners when the Group
enters into an Agreement and begins to manage new container equipment on their
behalf. Such fees are generally non-refundable and are deferred and recognized
as income on a straight-line basis over the period of the Agreements to which
they relate.
Syndication commissions represent income earned on the sale of US Limited
Partnership interests and are recognized at the time of sale.
All other items are recognized at the time of sale.
e) INCOME TAXES
Income taxes are accounted for using SFAS No. 109 ("SFAS 109"), "Accounting
for Income Taxes". This statement requires that deferred income taxes be
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.
f) NET INCOME PER COMMON SHARE
Net income (loss) per share data have been calculated in accordance with
SFAS No. 128 ("SFAS 128"), "Earnings per Share".
Basic net income (loss) per share is based on the weighted effect of all
common shares issued and outstanding and is calculated by dividing net income
(loss) available to common shareholders by the weighted average number of shares
outstanding during the period. Diluted net income per share is calculated by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares used in the basic net income per common share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive common shares outstanding.
F-11
<PAGE> 55
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The components of basic and diluted net income (loss) per share were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) available for common shareholders..... $ 1,914 $ (16,896) $ (23,022)
---------- ---------- ----------
Average outstanding shares of common stock.............. 8,983,378 8,858,378 8,858,378
Dilutive effect of:
Executive officer common share options................ 9,197 -- --
Warrants.............................................. 5,780 -- --
Management equity investment plan..................... -- -- --
---------- ---------- ----------
Common stock and common stock equivalents............... 8,998,355 8,858,378 8,858,378
========== ========== ==========
Basic and diluted net income (loss) per share........... $ 0.21 $ (1.91) $ (2.60)
========== ========== ==========
</TABLE>
g) 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.
h) ALLOWANCE FOR DOUBTFUL ACCOUNTS
Amounts due from lessees represent gross lease revenue due from customers,
less an allowance for doubtful accounts. The allowance for doubtful accounts
comprises specific amounts provided against known potentially doubtful accounts
plus a general allowance estimate based on loss experience.
The activity in the allowance for doubtful accounts was:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Balance, January 1.......................................... $4,446 $3,106 $3,602
Charge...................................................... 1,331 4,602 2,245
Write-offs, net of recoveries............................... (2,208) (3,262) (2,741)
------ ------ ------
Balance, December 31........................................ $3,569 $4,446 $3,106
====== ====== ======
</TABLE>
i) NEW CONTAINER EQUIPMENT FOR RESALE
New container equipment for resale represents new containers purchased by
the Group with an intent to resell to container owners and is stated at the
lower of original unit cost or net realizable value. Such sales are usually made
at original cost and accordingly no gain or loss arises.
Containers not sold to container owners within six months from date of
purchase are transferred to the Group's 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 not
material to the Company's operations.
Rental income earned on container equipment for resale is included within
Gross lease revenue.
F-12
<PAGE> 56
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
j) 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 a straight line basis in accordance
with US GAAP.
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.
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 interest method.
Operating leases. Payments by the Group to container owners are charged to
the statement of operations in each period based upon the amounts paid and
payable under the agreements with container owners, which are collected from
ocean carriers and reduced by direct operating expenses and management fees due
to the Group.
Other operating lease rentals are expensed on a straight-line basis over
the lease term.
k) 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.
l) CONTAINER EQUIPMENT
Container equipment is carried at cost less accumulated depreciation.
Containers, both owned by the Group and acquired under capital leases are
depreciated on a straight-line basis as follows:
Effective January 1, 1998, refrigerated container equipment is depreciated
over a useful life of 12 years to a residual value of 15%. Previously,
refrigerated container equipment was depreciated over a useful life of 15 years
to a residual value of 10%.
Dry cargo and other specialized container equipment is depreciated over a
useful life of 15 years to a residual value of 10%.
F-13
<PAGE> 57
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
m) BUILDING AND OTHER EQUIPMENT
Building and other equipment is carried at cost less accumulated
depreciation. Depreciation is recorded on a straight-line basis as follows:
<TABLE>
<S> <C>
Building.................................................... 50 years
Property improvements....................................... 25 years
Other equipment............................................. 3-7 years
Land is not depreciated.
</TABLE>
n) INTANGIBLE ASSETS
Intangible assets consist of goodwill, which is amortized over 40 years and
patents that are amortized over a period of 4 to 40 years.
o) 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 statement of operations.
p) STOCK BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued SFAS No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", effective for fiscal
years beginning after December 15, 1995. The Group has adopted disclosure
requirements under SFAS 123 but continues to account for stock based
compensation under Accounting Practices Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" under which no compensation cost has
been recognized.
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.
q) 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 rate debt. These
transactions involve the swapping of a variable rate stream of interest for a
fixed rate stream of interest. Any differential is recognized as an adjustment
to interest expense upon settlement of the outstanding amounts on the due date.
The Group has not entered into any speculative derivative contracts.
r) ASSET IMPAIRMENT
Certain long lived assets of the Group are reviewed when changes in
circumstances require consideration as to whether their carrying value has
become impaired, pursuant to guidance established in SFAS No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed
F-14
<PAGE> 58
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
s) RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to current year presentation. For 1998, net loss and net loss per common share
were previously reported at $16,467 and $1.86, respectively.
t) NEW PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133 ("SFAS 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 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 133, as amended by SFAS 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and should not be
applied retroactively to financial statements for prior periods. The Company is
assessing the impact that SFAS 133 will have in accounting for its derivative
transactions and hedging activities.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101 was
to have been effective in the first quarter of 2000. On March 24, 2000, the
Staff of the SEC announced that registrants with fiscal years that begin between
December 16, 1999 and March 15, 2000 may take an additional three months to
implement SAB No. 101. The Company is evaluating the impact, if any, of SAB No.
101 on the Company's financial statements.
F-15
<PAGE> 59
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, 1999
Items directly attributable to operating
segments:
gross lease revenue............................ $43,912 $56,533 $ 31,695 $132,140
direct operating expenses...................... (12,386) (13,123) (5,670) (31,179)
------- ------- -------- --------
net lease revenue.............................. 31,526 43,410 26,025 100,961
payments to container owners................... (24,288) (39,655) -- (63,943)
commissions, fees and other operating income... 1,356 2,170 2,423 5,949
depreciation................................... -- -- (13,958) (13,958)
interest expense............................... -- -- (10,267) (10,267)
------- ------- -------- --------
Operating profit before indirect items........... 8,594 5,925 4,223 18,742
Indirect allocations:
interest income................................ -- 638 373 1,011
depreciation................................... (519) (667) (373) (1,559)
interest expense............................... (179) (234) (129) (542)
selling, general and administrative expenses... (5,564) (5,496) (3,153) (14,213)
------- ------- -------- --------
Operating profit................................. $ 2,332 $ 166 $ 941 $ 3,439
======= ======= ======== ========
Segment assets................................... $18,496 $19,726 $150,643 $188,865
======= ======= ======== ========
Expenditure for segment assets................... $ 58 $ 75 $ 3,950 $ 4,083
======= ======= ======== ========
</TABLE>
Reconciliation of operating profit for reportable segments to income before
taxes:
<TABLE>
<CAPTION>
<S> <C>
Operating profit............................................ $ 3,439
Gain on sale of investment.................................. 1,278
Unallocated selling, general and administrative expenses.... (2,356)
Amortization of intangibles................................. (683)
--------
Income before taxes......................................... $ 1,678
========
Reconciliation of assets for reportable segments to total
assets:
Total assets for reportable segments........................ $188,865
General corporate assets.................................... 43,002
--------
Total assets................................................ $231,867
========
</TABLE>
F-16
<PAGE> 60
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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
expenses................................... (7,884) (7,023) (4,516) (19,423)
impairment losses............................. (694) (800) (506) (2,000)
-------- -------- -------- --------
Operating profit (loss)......................... $ 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 loss before
taxes:
<TABLE>
<S> <C>
Operating loss.............................................. $ (6,862)
Unallocated selling, general and administrative expenses.... (1,741)
Amortization of intangibles................................. (683)
Financing and recomposition expenses........................ (5,375)
Provision against available for sale securities............. (1,929)
--------
Loss before taxes........................................... $(16,590)
========
Reconciliation of assets for reportable segments to total
assets:
Total assets for reportable segments........................ $228,815
General corporate assets.................................... 51,164
--------
Total assets................................................ $279,979
========
</TABLE>
F-17
<PAGE> 61
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OTHER
US LIMITED CONTAINER OWNED
PARTNERSHIPS OWNERS CONTAINERS TOTAL
------------ --------- ---------- ---------
<S> <C> <C> <C> <C>
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............................. -- 480 381 861
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 (loss)....................... $ 2,184 $ 886 $ (7,108) $ (4,038)
========= ========= ========= =========
Segment assets................................ $ 29,429 $ 19,531 $ 221,925 $ 270,885
========= ========= ========= =========
Expenditure for segment assets................ $ 228 $ 201 $ 43,036 $ 43,465
========= ========= ========= =========
</TABLE>
Reconciliation of operating profit for reportable segments to loss before
taxes:
<TABLE>
<S> <C>
Operating loss.............................................. $ (4,038)
Gain on sale of investment.................................. 321
Unallocated amounts:
interest expense.......................................... (302)
selling, general and administrative expenses.............. (2,668)
Amortization of intangibles................................. (742)
Financing and recomposition expenses........................ (7,384)
Provisions against amounts receivable from related
parties................................................... (3,909)
Impairment losses........................................... (4,300)
--------
Loss before taxes........................................... $(23,022)
========
Reconciliation of assets for reportable segments to total
assets:
Total assets for reportable segments........................ $270,885
General corporate assets.................................... 56,260
--------
Total assets................................................ $327,145
========
</TABLE>
The segments shown above depict the different forms of agreements entered
into by the Group with 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.
F-18
<PAGE> 62
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
Gross lease revenue from external customers by product comprised:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Dry cargo containers..................................... $ 93,813 $114,373 $117,094
Refrigerated containers.................................. 26,413 29,901 32,675
Tanks.................................................... 7,050 8,269 7,054
Other container products................................. 4,864 5,003 4,025
-------- -------- --------
Total.................................................... $132,140 $157,546 $160,848
======== ======== ========
</TABLE>
No single customer accounted for 10% or more of total revenues in the years
ended December 31, 1999, 1998 and 1997, 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 SFAS No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information".
3 ITEMS AFFECTING FOURTH QUARTER RESULTS OF OPERATIONS
In the fourth quarters of 1998 and 1997 the Group recorded asset impairment
and other charges, the aggregate of which increased 1998 and 1997 net loss by
$11,929 ($1.35 per share) and $19,801 ($2.24 per share), respectively. There
were no asset impairment and other charges in the fourth quarter of 1999.
(a) IMPAIRMENT LOSSES
In December 1998 and 1997, the Group recorded charges relating to the
impairment of certain long-lived assets as required by SFAS 121.
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Impairment losses comprised:
Container equipment....................................... $4,500 $ 7,368
Goodwill.................................................. -- 4,300
Building.................................................. 2,000 --
------ -------
Total....................................................... $6,500 $11,668
====== =======
</TABLE>
i. Container equipment
In December 1998, management considered various proposals that would enable
the Group to meet its short-term debt obligations. The Group concluded that it
would be necessary to undertake certain transactions involving the sale of
container equipment during 1999 and to utilize the proceeds generated to make
short-term debt repayments. The carrying value of the assets identified for sale
was $25,900 at December 31, 1998. The assets were reported as part of the Owned
Container business segment. During sale negotiations with third party container
owners, management concluded that the carrying value of the container equipment
to be disposed of
F-19
<PAGE> 63
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
was not recoverable and a charge of $4,500 was made to impairment losses to
record the assets at fair value. The container equipment contributed
approximately $400 to income before income taxes during each of the years ended
December 31, 1998 and 1997, respectively.
In the first six months of 1999, the Group sold equipment to third party
container owners and US Limited Partnerships, with a carrying value of $19,700
(net of impairment charges of $3,800).
The remaining assets with a carrying value of $1,700 (net of impairment
charges of $700) were returned to service in 1999.
In December 1997, in response to market information, management conducted a
review of the carrying value of refrigerated containers. A study of refrigerated
container disposals was undertaken in order to determine fair value. The review
concluded that the carrying value of the equipment was greater than the
undiscounted future cash flows. In accordance with SFAS 121, the Group recorded
a charge of $7,368 to impairment losses to record the assets at fair value. The
assets were reported as part of the Owned Container business segment.
ii. Goodwill
In 1990 goodwill of $15,900 arose on the acquisition of Intermodal
Equipment Associates ("IEA"). As part of the consideration for the purchase
price, the Group acquired access to future US Limited Partnership syndication.
On or about February 1997, the Securities and Exchange Commission ("SEC")
commenced an investigation of the Group (see Note 16). The Group suspended its
syndication activities immediately as management concluded that it would be
inappropriate to continue to raise funds. In December 1997, the Group decided to
terminate its syndication activities in response to the continuing SEC
investigation and concluded that the ability of the Group to organize future
public limited partnerships was impaired. Accordingly, a $4,300 impairment
charge was recorded to write off the element of the carrying value of the
unamortized portion of goodwill attributed by management to the public limited
partnership fund raising capacity of the business. The impairment charge was not
attributed to a business segment.
iii. Building
In December 1998, as part of a review process designed to increase
profitability and improve liquidity, the Group evaluated the possibility of
disposing of the head office of its container leasing operations, located in
England, within a two-year period. Independent valuations were utilized to
determine fair value. As a result of this review, management concluded that the
carrying value of the building exceeded market value and was not recoverable. An
impairment charge of $2,000 was recorded to state the building at fair value and
was allocated to each segment on the basis of gross lease revenue in that
segment. In addition, at December 1998, management concluded that the building
should continue to be held for use and any decision regarding disposal deferred
until a later date.
b) OTHER ADJUSTMENTS
i. Related party loans and contingent liabilities
In December 1997, charges of $3,909 and $3,400 were recorded against
related party loans (see Note 20) and contingent liabilities (see Note 16),
respectively. In addition, a charge of $824 was recorded to reverse interest
income previously recorded on related party loans.
ii. Restructuring program
During 1998, the Group announced a restructuring program, which was
designed to reorganize the Group's key activities into three divisions:
F-20
<PAGE> 64
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- Leasing
- Capital Markets and Investor Services
- Finance and Administration
This program, which commenced in December 1998 was substantially completed
by June 1999 and involved the termination of 15 employees from the following
employee groups:
<TABLE>
<S> <C>
Officers................................................... 3
Leasing & Operations....................................... 9
Administration............................................. 2
Finance.................................................... 1
---
Total...................................................... 15
===
</TABLE>
In December 1998, the Group recorded a $2,000 Financing and recomposition
charge in respect of termination and related costs. The charge was included in
Other amounts payable and accrued expenses at December 31, 1998. 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. During 1999, the Group made termination and restructuring payments of
$1,974. A final payment of $26 was made under this program in March 2000.
iii. Financing transactions
At December 31, 1998, Other amounts payable and accrued expenses included
an amount of $1,528 for penalty fees in connection with the failure to repay,
when due, certain loan facilities (see Note 4i).
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 (see Note 9ii). In
December 1998, a charge of $1,929 was recorded to reduce the carrying value of
these investments to $0.
4 FINANCING AND RECOMPOSITION EXPENSES
Financing and recomposition expenses comprise:
<TABLE>
<CAPTION>
NOTES 1998 1997
------ ------ ------
<S> <C> <C> <C>
Contingent liability........................................ 16iv $ -- $3,400
Restructuring plan.......................................... 3(b)ii 2,000 --
Loan penalty fees........................................... 1,803 534
Loan extension costs -- legal and professional fees......... 738 873
Other legal and professional fees........................... 640 884
Audit and compliance........................................ 194 355
Termination payments........................................ -- 533
Financing transactions...................................... -- 505
Provision for amounts on deposit in restricted accounts..... -- 300
------ ------
$5,375 $7,384
====== ======
</TABLE>
F-21
<PAGE> 65
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
i. LOAN PENALTY FEES
During 1998 and 1997 the Group incurred loan penalty fees relating to the
failure to repay certain loan facilities by the due date and to the subsequent
extension of the loan agreements.
Other amounts payable and accrued expenses included $0 and $1,528 in
respect of loan penalty fees at December 31, 1999 and 1998, respectively. The
Group made payments of $1,426, $541 and $268 in respect of loan penalty fees in
years ended December 31, 1999, 1998 and 1997, respectively. The balance of $102
was credited to operations during the twelve months ended December 31, 1999.
ii. LOAN EXTENSION COSTS -- LEGAL AND PROFESSIONAL FEES
During 1998 and 1997, the Group was charged for legal and other fees that
had been incurred by certain financial institutions in connection with the
negotiation and extension of loan facilities. Balances of $0 and $192 were
included in Other amounts payable and accrued expenses at December 31, 1999 and
1998, respectively. In this regard, the Group made payments of $192, $962 and
$457 in the years ended December 31, 1999, 1998 and 1997, respectively.
iii. OTHER LEGAL AND PROFESSIONAL FEES
In the years ended December 31, 1998 and 1997, the Group incurred legal and
other costs in connection with financing transactions, SEC matters, related
party items and the restructuring of the Board of Directors and other senior
management positions. At December 31, 1999 and 1998, Other amounts payable and
accrued expenses included balances of $0 and $105 related to such costs. The
Group made payments of $0, $745 and $779 during the years ended December 31,
1999, 1998 and 1997, respectively.
iv. AUDIT AND COMPLIANCE
During 1998 and 1997, additional audit and compliance costs were incurred
in connection with the resignation of the independent public accountants of the
Group, the SEC investigation (see Note 16iii) and with SEC filings. Payments of
$194 and $355 were made during the years ended December 31, 1998 and 1997,
respectively.
v. TERMINATION PAYMENTS
In 1997 payments totaling $533 were made in relation to the termination of
two officers of the Group.
vi. FINANCING TRANSACTIONS
In 1997 the Group made payments of $505 in connection with proposed
financing transactions that were terminated during the year. The Group
determined that no future benefit would be derived from such costs.
vii. PROVISION FOR AMOUNTS ON DEPOSIT IN RESTRICTED ACCOUNTS
In 1997, the Group recorded a provision of $300 for liabilities that were
expected to arise relating to amounts on deposit in restricted escrow accounts.
During 1999, the amounts on deposit were successfully released and the $300 was
credited to operations.
F-22
<PAGE> 66
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5 INCOME TAXES
The provision (benefit) for income taxes comprises:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current taxes:
Federal................................................... $ 75 $ -- $ 585
State..................................................... -- -- 3
Foreign................................................... 637 309 928
------- ------- -------
712 309 1,516
------- ------- -------
Deferred taxes:
Federal................................................... (1,219) (3) (1,316)
State..................................................... (247) -- (20)
Withholding............................................... -- -- 37
Foreign................................................... 518 -- (217)
------- ------- -------
(948) (3) (1,516)
------- ------- -------
Total provision (benefit) for income taxes.................. $ (236) $ 306 $ --
======= ======= =======
</TABLE>
Differences between the provision (benefit) for taxes that would be
computed at the US statutory rate and the actual tax provision (benefit) were:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Expected US federal provision (benefit)..................... $ 579 $(5,495) $(7,827)
Foreign income not subject to US corporate taxes............ (1,154) 5,341 7,135
Tax impact of net loss carried forward...................... -- 516 --
State taxes (net of Federal tax benefit).................... (158) -- (56)
Foreign corporate taxes..................................... 1,155 309 711
Tax on unremitted retained earnings of subsidiaries......... -- -- 37
Release of valuation allowance.............................. (345) -- --
Other....................................................... (313) (365) --
------- ------- -------
Actual tax provision (benefit).............................. $ (236) $ 306 $ --
======= ======= =======
</TABLE>
F-23
<PAGE> 67
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Temporary differences giving rise to the net deferred income tax liability
as of the balance sheet date were:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
ASSETS
Acquisition fees............................................ $ 2,588 $ 3,098
Losses carried forward...................................... 1,945 3,723
Disallowed interest expense................................. 1,489 --
Alternative minimum tax credit.............................. 75 --
Other....................................................... 208 197
------- -------
Total deferred income tax assets............................ 6,305 7,018
======= =======
LIABILITIES
Depreciation................................................ 7,257 8,327
Partnership income taxable in different periods for book and
tax purposes.............................................. 1,926 2,171
Unremitted retained earnings of subsidiaries................ 265 265
Valuation allowance......................................... 884 1,230
------- -------
Total deferred income tax liabilities....................... 10,332 11,993
------- -------
Net deferred income tax liabilities......................... $ 4,027 $ 4,975
======= =======
</TABLE>
Tax losses have arisen in certain US entities. As of December 31, 1999 the
deferred tax asset associated with these losses carried forward will expire as
follows:
<TABLE>
<S> <C>
2000..................................................... $ 23
2001..................................................... 25
2002..................................................... 46
2003..................................................... 134
2004..................................................... 5
2005 and thereafter...................................... 651
----
Total.................................................... $884
====
</TABLE>
At December 31, 1999 the Group had net operating loss carryforwards
available of approximately $1,748, $3,241 and $3,215 for federal, state and
foreign income taxes, respectively, to offset future income tax liabilities. The
expected tax effect of these losses is reflected as a deferred tax asset. A
valuation allowance has been established since the realization of tax benefits
of net operating loss carryforwards is not assured. The amount of the valuation
allowance is reviewed on a quarterly basis.
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. Management has considered the Group's remittance
intentions in arriving at the related provision for deferred income taxes. The
total potential amount of such deferred income taxes not provided at December
31, 1999 and 1998 was $1,040 and $1,818, respectively, based on unremitted
earnings for which provision has been made of $3,466 and $6,061, respectively.
F-24
<PAGE> 68
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6 AMOUNTS DUE FROM LESSEES
As of December 31, 1999 the minimum lease rentals receivable in future
years under term operating leases were:
<TABLE>
<S> <C>
2000.................................................. $21,224
2001.................................................. 14,546
2002.................................................. 8,349
2003.................................................. 5,561
2004.................................................. 3,611
2005 and thereafter................................... 1,255
-------
Total................................................. $54,546
=======
</TABLE>
Contingent rentals approximated 70%, 71% and 69% of gross lease revenue in
the years ended December 31, 1999, 1998 and 1997, respectively.
7 NEW CONTAINER EQUIPMENT FOR RESALE
Activity during the year in new container equipment for resale was:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Beginning of year.......................................... $ 315 $ 8,202 $ 1,485
Container purchases........................................ 20,640 671 34,959
Sold to container owners................................... (18,420) (8,558) (28,242)
-------- ------- --------
End of year................................................ $ 2,535 $ 315 $ 8,202
======== ======= ========
</TABLE>
As part of organizing the US public limited partnerships the Group
purchases containers for resale to these partnerships. For the years ended
December 31, 1999, 1998 and 1997 containers amounting to $964, $0 and $2,623,
respectively, were purchased and resold. These transactions were entered into on
normal commercial terms.
8 NET INVESTMENT IN DIRECT FINANCING LEASES
The Group, as lessor, has entered into various leases of equipment that
qualify as direct financing leases.
The minimum lease receivables under these direct financing leases, net of
unearned income, are as follows:
<TABLE>
<CAPTION>
NET LEASE UNEARNED TOTAL LEASE
RECEIVABLES LEASE INCOME RENTALS
----------- ------------ -----------
<S> <C> <C> <C>
December 31, 1999:
2000.................................................. $1,004 $110 $1,114
2001.................................................. 86 3 89
------ ---- ------
Total................................................... $1,090 $113 $1,203
====== ==== ======
December 31, 1998....................................... $3,504 $785 $4,289
====== ==== ======
</TABLE>
F-25
<PAGE> 69
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
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Investments comprise:
Investment in US Limited Partnerships....................... $ 34 $ 55
Investment securities available for sale:
cost...................................................... 396 974
unrealized holding gain................................... 1,277 429
------ ------
$1,707 $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.
ii. INVESTMENT SECURITIES
As of December 31, 1995, investments included an investment interest of
approximately 24% in an affiliated company, Trans Ocean Limited ("TOL"), a
container leasing company incorporated in Delaware, United States.
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 gain recognized on the conversion of the TOL shares in 1996 was $5,260, of
which $726 was realized.
In May 1997, an additional 21,989 shares were released to the Group and
sold for a consideration of $1,953 resulting in a gain of $321.
At December 31, 1998, the Group had an interest in 56,580 shares in
Transamerica. Of these shares, a total 44,254 were held in three escrows pending
final determination of post-closing reports and adjustments. A further 11,336
shares were held in escrow by Transamerica as security for a tax indemnification
agreement.
In February 1999, the Group was advised that claims had been made against
the 44,254 shares, for amounts in excess of the value of the shares held. In
addition, the number of shares held as security for the tax indemnification
agreement was reduced. Therefore, in December 1998, the Group recorded a total
charge of $1,929 to reverse the related unrealized holding gain recorded in
1996. This comprised a charge of $176 to reflect a reduction in the number of
shares originally held, together with a charge of $1,753 to reduce the carrying
value of the 44,254 escrowed shares to $0.
In July 1999, Aegon N.V. ("Aegon") acquired Transamerica. Under the terms
of the takeover agreement, the Group was entitled to receive a cash payment of
$23.40 together with 0.71813 Aegon shares for each Transamerica share.
In September 1999, the Group was notified that one of the three escrows had
been settled and received a cash payment of $278 together with 15,524 shares in
Aegon which were sold for a consideration of $1,000. The Group recognized a
$1,278 gain which is reported on the statement of operations as a gain on
conversion of investment and a realized holding gain. The gain on conversion is
computed as the excess number of shares released from escrow over the number of
shares recognized on the initial merger date multiplied by the approximate share
value on the initial merger date. The realized holding gain is computed as the
total number shares released from escrow multiplied by the share appreciation
between the initial merger date and the date of sale.
F-26
<PAGE> 70
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At December 31, 1999, the Group had an interest in 68,531 shares in Aegon.
Of these shares, a total of 50,828 are held in two escrows pending final
determination of post-closing reports and adjustments and a further 16,281
shares were held in escrow under the terms of the tax indemnification agreement.
10 CONTAINER EQUIPMENT
The activity in container equipment for the years ended December 31, 1999
and 1998 was:
<TABLE>
<CAPTION>
<S> <C>
COST
Balance, December 31, 1997.................................. $237,746
Additions................................................... 1,822
Disposals................................................... (7,185)
Impairment loss (note 3).................................... (4,500)
--------
Balance, December 31, 1998.................................. 227,883
Additions................................................... 3,907
Disposals................................................... (26,670)
--------
Balance, December 31, 1999.................................. $205,120
========
ACCUMULATED DEPRECIATION
Balance, December 31, 1997.................................. 44,980
Expense..................................................... 16,403
Disposals................................................... (1,743)
--------
Balance, December 31, 1998.................................. 59,640
Expense..................................................... 13,958
Disposals................................................... (6,025)
--------
Balance, December 31, 1999.................................. $ 67,573
========
BOOK VALUE
December 31, 1999........................................... $137,547
========
December 31, 1998........................................... $168,243
========
</TABLE>
The depreciation expense in 1997 was $16,686
F-27
<PAGE> 71
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, 1997.................................. $2,096 $16,231 $18,327
Additions................................................... -- -- --
------ ------- -------
Balance, December 31, 1998.................................. 2,096 16,231 18,327
Additions................................................... -- -- --
------ ------- -------
Balance, December 31, 1999.................................. $2,096 $16,231 $18,327
====== ======= =======
ACCUMULATED AMORTIZATION
Balance, December 31, 1997.................................. $ 250 $ 3,306 $ 3,556
Expense..................................................... 188 495 683
------ ------- -------
Balance, December 31, 1998.................................. 438 3,801 4,239
Expense..................................................... 188 495 683
------ ------- -------
Balance, December 31, 1999.................................. $ 626 $ 4,296 $ 4,922
====== ======= =======
BOOK VALUE
December 31, 1999........................................... $1,470 $11,935 $13,405
====== ======= =======
December 31, 1998........................................... $1,658 $12,430 $14,088
====== ======= =======
</TABLE>
The amortization expense in 1997 was $742.
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 (see Note 3(a)ii).
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).
Goodwill is amortized on a straight line basis over an original period of
40 years.
ii. 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 for a total consideration of $2,096.
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>
12 OTHER ASSETS
Other assets includes the following items:
F-28
<PAGE> 72
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
i. In 1998 and 1997, in partial consideration for container sales to a third
party container owner of $3,914 and $25,800, respectively, the Group received a
residual interest in the containers in the form of non-interest bearing loan
notes totaling $7,300. The loan notes fall due for repayment after certain other
loan notes due to third parties have been repaid from funds generated from the
containers which are managed by the Group. It is anticipated that the loan notes
will not be repaid until 2006 at the earliest. The Group has the option to
acquire 75% of the container owning company for $1.00 in August 2006.
The Group has considered the effect of discounting the loan notes but
concluded that the substance of the transaction was that the non-interest
bearing loan notes and purchase of the option were directly related, in that the
transaction would not have been entered into without both elements being
present. Accordingly, management considered that the accounting for both
elements together was a fair presentation of the transaction.
Consistent with this approach, management has conducted a discounting
exercise on the future revenues to be generated from both the loan notes and
exercise of the option, based on historic and projected trends on per diem
revenues, utilization and container disposal proceeds. The Company considers
that the combined present values of both of these instruments are reflected in
the carrying value of the loan notes.
ii. At December 31, 1998, an amount of $1,598 was held in escrow in connection
with a container sale to a third party container owner during 1997. In March
1999, these escrowed funds were received by the Group.
iii. Amounts of $3,798 and $3,704 were held as retention deposits by financial
institutions in connection with long term funding transactions at December 31,
1999 and 1998, respectively. These amounts will be released on dates between
2000 and 2005 in accordance with the terms of the funding transactions (see Note
13(a)).
iv. At December 31, 1999 and 1998, deposits of $2,026 and $4,450, respectively,
were held in escrow accounts relating to amounts due to third party container
owners (see Note 16ii).
v. At December 31, 1998, an amount of $793 was held in escrow related to the
sale in December 1996 of Cronos Investments B.V. During the year the Company
received $652 in settlement of the escrow. No further payments are anticipated
and the remaining balance has been charged to operations.
vi. At December 31, 1999 an amount of $531 was held as a restricted cash
deposit in an escrow account under the terms of a tax indemnification agreement
(see Note 9ii).
F-29
<PAGE> 73
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13 DEBT AND LEASE OBLIGATIONS
As of December 31, 1999, the Group had $109,978 of term facilities
(including capital lease financing) under which $109,978 was outstanding.
Interest rates under these facilities ranged from 6.4% to 9.8%. The terms of
these facilities extend to various dates through 2005.
Debt and capital lease obligations, summarized by primary finance
providers, are comprised of:
<TABLE>
<CAPTION>
INTEREST
1999 1998 RATES %
-------- -------- ---------
<S> <C> <C> <C>
Debt:
Floating rate debt, due 2004............................ $ 48,125 $ -- 7.6
Fixed rate debt, due 1999 -- 2004....................... 21,399 29,341 8.6 - 9.8
Floating rate debt, due 2004............................ 14,857 17,429 7.7
Floating rate debt, due 1999............................ -- 33,110 10.2
Floating rate debt, due 1999............................ -- 13,906 9.8
Floating rate debt, due 1999............................ -- 10,334 8.0
Other loans, due 1999 -- 2004........................... 13,622 20,387 6.4 - 9.8
-------- --------
Subtotal.................................................. 98,003 124,507
Obligations under capital leases, due 1999 -- 2005........ 11,975 23,959 6.9 - 9.6
-------- --------
Total..................................................... $109,978 $148,466
======== ========
</TABLE>
a) DEBT
Debt is comprised of:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Long-term debt:
Revolving credit............................................ $ -- $15,134
Bank term loans
fixed rate................................................ 29,698 39,980
variable rate............................................. 68,305 69,393
------- -------
98,003 124,507
Less: current maturities of long term debt.................. 14,390 74,820
------- -------
$83,613 $49,687
======= =======
</TABLE>
Bank loans are secured by the Group's container equipment and property,
with installments 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, 1999, 1998 and 1997 were 8.4%, 9.0%, and 8.5%, respectively.
As of December 31, 1999, the estimated fair value of fixed rate long-term
debt was $29,504 (1998 -- $37,625) for which the carrying value was $29,698
(1998 -- $39,980). The fair value of fixed rate long-term debt has been
calculated using the market rates prevailing at December 31, 1999.
In March 1999, the Group agreed to 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 varying principal payments due between April
and November and a final maturity date of November 1999. This facility was
refinanced in August 1999, as discussed below.
F-30
<PAGE> 74
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In March 1999, the Group agreed to a fourth amendment (the "Fourth
Amendment") to a bank facility (the "Bank Facility"), under which the final
maturity date was extended to September 30, 1999. The balance outstanding on the
facility was $33,110 at December 31, 1998. The Group had failed to make
principal payments totaling $33,110, when due, on repayment dates in September
1998 and January 1999. This facility was also refinanced in August 1999, as
discussed below.
In July 1998, the Group agreed to and executed an amendment to a Note
Purchase Agreement, under which $13,900 was outstanding, and which provided for
repayment of 70% of the principal amount on September 30, 1998 and the balance
on January 31, 1999. Neither of these principal payments was made and the
balance outstanding under the facility at December 31, 1998 was $13,900. A
further amendment to the Note Purchase Agreement was executed in 1999 which
extended the final maturity date to September 1999 and also provided for interim
principal payments to be made by April and July. This facility was also
refinanced in August 1999, as discussed below.
On August 2, 1999, the Group refinanced approximately $47,800 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. The Group borrowed $50,000 under the Loan
Facility for the purpose of acquiring containers from three other direct or
indirect wholly-owned subsidiaries of the Company and paying certain fees
associated with the establishment of the Loan Facility and the fees of certain
former lenders. The cash proceeds were utilized to repay $47,800 in principal
due by the Group to eight different creditors or groups of creditors of the
Group, including all indebtedness owed under the Bank Facility.
In conjunction with the new facility, the Company has agreed to new
financial covenant levels with all of its current lenders and obtained waivers
of non-compliance under the original 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. Management believes that the Group
will be in compliance with all such covenants.
As of December 31, 1999, the annual maturities of debt were:
<TABLE>
<CAPTION>
<S> <C>
2000.................................................. $14,390
2001.................................................. 14,612
2002.................................................. 19,954
2003.................................................. 15,046
2004.................................................. 34,001
-------
Total................................................. $98,003
=======
</TABLE>
b) CAPITAL LEASE OBLIGATIONS
The cost and net book value of assets acquired through capital leases was
$20,696 and $13,672, respectively, at December 31, 1999, ($43,158 and $29,878,
respectively, at December 31, 1998). Amortization in respect of these leases is
included in depreciation expense. The aggregate capital lease obligations are
secured by container equipment.
F-31
<PAGE> 75
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of December 31, 1999, the minimum lease payments under capital leases
representing interest and principal were:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST TOTAL
--------- -------- -------
<S> <C> <C> <C>
2000........................................................ $ 2,187 $ 820 $ 3,007
2001........................................................ 1,679 675 2,354
2002........................................................ 1,927 547 2,474
2003........................................................ 1,734 407 2,141
2004........................................................ 2,612 300 2,912
2005........................................................ 1,836 109 1,945
------- ------ -------
Total....................................................... $11,975 $2,858 $14,833
======= ====== =======
</TABLE>
At December 31, 1998 the current maturities under capital leases were
$12,451.
c) OPERATING LEASES
i. Group as lessee
The Group leases container equipment, computer equipment and office space
under operating leases. The total rental expense was $10,339, $8,049 and $6,526
for the years ended December 31, 1999, 1998 and 1997, respectively.
Rental expense for containers, the majority of which is contingent as
described in note 1(a), is shown in the statement of operations as Payments to
container owners. Rental expense for those leases which carry fixed payment
terms was $8,783, $6,456, and $4,978 for the years ended December 31, 1999, 1998
and 1997, respectively.
Rental expense for computer equipment and office space was $1,556, $1,593
and $1,548 for the years ended December 31, 1999, 1998 and 1997, respectively.
As of December 31, 1999 future minimum lease payments under these
non-cancellable operating leases were:
<TABLE>
<CAPTION>
<S> <C>
2000.................................................. $ 9,531
2001.................................................. 9,306
2002.................................................. 8,772
2003.................................................. 5,128
2004.................................................. 4,217
-------
Total................................................. $36,954
=======
</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 $250, $211 and $88 for the years ended December 31, 1999, 1998 and
1997, respectively.
Rental income from sub-leasing containers owned by third party container
owners to ocean carriers was $100,445, $117,690 and $115,414 for the years ended
December 31, 1999, 1998 and 1997, respectively (see Note 2). These amounts are
included in Gross lease revenue in the statement of operations.
F-32
<PAGE> 76
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 6.
14 FINANCIAL INSTRUMENTS-DERIVATIVES
INTEREST RATE SWAP AGREEMENTS
As of December 31, 1999 the Group did not have any outstanding interest
rate swap agreements.
The Group had entered into a limited number of interest rate swap
agreements to hedge the risk associated with the anticipated future cash flows
resulting from changes in interest rates on certain of its floating rate long
term debt. The objective was to swap a variable rate stream of interest for a
fixed rate stream of interest. Any differential was recognized as an adjustment
to interest expense upon settlement of outstanding amounts on the due date of
each quarterly interest rate period. The agreements were with major commercial
banks and expired in 1999.
As a result of these swap agreements interest expense was increased by $0,
$243, and $149 for the years ended December 31, 1999, 1998 and 1997,
respectively.
15 DEFERRED INCOME AND UNAMORTIZED ACQUISITION FEES
Deferred income and unamortized acquisition fees comprise:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Advance billings............................................ $ 1,954 $ 2,681
Unamortized acquisition fees................................ 8,479 10,086
------- -------
$10,433 $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, 1999 unamortized acquisition fees are scheduled
to be recognized as follows:
<TABLE>
<CAPTION>
<S> <C>
2000................................................... $1,798
2001................................................... 1,572
2002................................................... 1,312
2003................................................... 1,138
2004................................................... 900
2005 and thereafter.................................... 1,759
------
Total.................................................. $8,479
======
</TABLE>
16 COMMITMENTS AND CONTINGENCIES (TO BE READ IN CONJUNCTION WITH NOTE 20)
i. COMMITMENTS
The Group had outstanding orders to purchase container equipment at
December 31, 1999 of $4,600. These orders relate to containers to be purchased
for container owners and for the Group.
F-33
<PAGE> 77
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ii. CONTINGENCIES -- GENERAL
At December 31, 1999, the Group had $1,520 of amounts payable to container
owners on deposit in escrow bank accounts pending resolution of certain issues
relating to management agreements.
iii. CONTINGENCY -- SEC INVESTIGATION
During 1999, 1998 and 1997, the Company was subject to an investigation by
the SEC, a United States regulatory agency. This followed the resignation of the
Company's former auditors, Arthur Andersen, due to its inability to obtain what
they considered to be adequate responses to their enquiries regarding the
payment and return of $1,500.
On November 15, 1999, the Company, without admitting or denying the
findings set forth therein, consented to the entry of an administrative
Cease-and-Desist Order (the "Order") by the SEC. As part of the Order, the SEC
requested that the Company co-operate, and the Company has agreed to co-operate,
with the SEC in any administrative proceeding or related proceeding arising from
the SEC's investigation.
While the Order did not impose any fine or penalty against the Company, the
Company is unable to predict what impact, if any, it will have on future
business or whether it will lead to future litigation involving the Company.
Under the Order, the Company has designated an agent for service of process with
respect to any proceeding instituted by the SEC to enforce the Order or with
respect to any future investigation of the Company by the SEC. In addition, the
entry of the Order precludes the Company and persons acting on its behalf from
relying upon certain protections accorded to forward-looking statements by the
Securities Act of 1933 and the Securities Exchange Act of 1934 for each of the
three years ending November 14, 2002.
Management does not believe that there will be a material impact to ongoing
operations as a result of the investigation.
iv. CONTINGENCIES -- AUSTRIAN ALLEGATIONS
Since 1983, a subsidiary of the Company has managed containers for Austrian
investment entities sponsored by companies owned or controlled by Contrin
Holding S.A., a Luxembourg holding company ("Contrin"), and for Contrin itself.
The Company is in a dispute with Contrin over $2,600 that Contrin claims
was remitted to the Group in 1994 for the purchase of containers, but that the
Group asserts that it did not receive. The Company's former Chairman, Mr.
Palatin, purportedly acknowledged in 1995 the receipt of the $2,600 for the
purchase of containers, but the monies were not deposited into a Group account.
Prior to Contrin's allegation that the former Chairman of the Company had
acknowledged receipt of the $2,600, the Company's current management had not
been aware of the Chairman's purported acknowledgement. In addition, the Group
has determined that a distribution of $400 to third party Contrin investors was
paid by the Group in December 1994 into the same bank account into which the
$2,600 was apparently deposited.
In December 1997, further to legal and other consultations, the Group
recorded an accrual of $3,400 relating to the alleged transfer of $2,600, the
related interest, plus the estimated settlement costs of this and other claims
by Contrin. The Company is unable to predict the outcome of the dispute.
During 1999, the Group paid $200 of legal fees related to the settlement
costs. Such fees were charged against the $3,400 accrual thereby reducing the
contingent liability to $3,200 at December 31, 1999.
As the outcome of these items may be dependent on future legal action,
management is unable to determine the date on which the matter will be resolved.
The Group is consulting with legal counsel and is disputing the claim.
F-34
<PAGE> 78
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Contrin investors have also made claims with respect to alleged
transactions between third parties and companies alleged to be connected to Mr.
Palatin, including Transocean Equipment Manufacturing and Trading Limited
("TOEMT"), involving the purchase and sale of containers in a manner designed to
secure a tax mitigation advantage to those third parties. It is alleged that
sums remain owing to the third parties by one or more of these companies in
connection with the pre-arranged trading in containers. Current management of
the Company believes that the Group was not involved in these transactions, that
the Company had no access to the records of the alleged transactions and, so far
as the Company has managed the containers, the Company has acted in accordance
with instructions from authorized representatives of the third parties.
In response to the actions taken by Contrin, the Group terminated certain
of its management agreements with Contrin entities in 1998. New management
agreements were signed in December 1999. The costs associated with terminating
the old, and executing the new, agreements were immaterial.
The gross lease revenue and income before income taxes attributable to the
equipment managed under the terms of the management agreements approximated:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Gross lease revenue......................................... $1,696 $2,127 $2,655
------ ------ ------
Income before income taxes.................................. $ 344 $ 334 $ 457
------ ------ ------
</TABLE>
Management considers that prudent provision has been made in the financial
statements for the matters noted above. There is a reasonable possibility that a
material change could occur with respect to these commitments and contingencies
within one year of the date of these financial statements. Management estimates
that possible losses could exceed the amount accrued by $1,000.
v. CONTINGENCIES -- TOEMT
TOEMT, which is currently in liquidation in the United Kingdom, has been
separately registered in the same name in both the United Kingdom and the Isle
of Man. At December 31, 1999, the Company had $506 of amounts payable to
container owners on deposit in an escrow bank account pending resolution of
certain matters relating to the liquidation process. The Company has recently
become aware that more than one creditor of TOEMT may claim an interest in the
distributions made by the Company with respect to the containers owned by TOEMT.
At the present time, the Company has insufficient information to evaluate the
competing claims or to determine whether the Company may have any liability to
the competing creditors for the prior distributions made with respect to the
TOEMT containers.
vi. 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 related to 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.
F-35
<PAGE> 79
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17 COMMON SHARES
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Common shares outstanding:
At beginning of year.................................... 8,858,378 8,858,378 8,858,378
New common shares issued................................ 300,000 -- --
--------- --------- ---------
At end of year.......................................... 9,158,378 8,858,378 8,858,378
========= ========= =========
</TABLE>
In August 1999, the Company issued an additional 300,000 common shares and
warrants to purchase 200,000 common shares in connection with the Group's
refinancing of approximately $47,800 of its short term and other indebtedness
(see Note 13(a)). The warrants are exercisable at $4.41 per share and expire on
August 15, 2004, plus ninety days or, if later, the date on which there has been
full repayment of the monies borrowed under the associated refinancing. Using a
Black Scholes model, the fair value of the warrant was determined to be $246 and
such amount was credited to Additional paid-in capital. The corresponding debt
discount has been deferred and is being amortized over the life of the
associated refinancing using the interest method in accordance with SFAS 91.
On December 11, 1998, an option to purchase 300,000 common shares was
granted to the Mr. Tietz on his appointment as Chief Executive Officer (see Note
18(b)).
On October 29, 1999, a Shareholder Rights Plan (the "Plan") was adopted.
Under the Plan one common stock purchase right was distributed as a dividend on
each share of the Company's common stock as of the close of business on October
25, 1999. The rights will be attached to and trade with all certificates
representing shares of common stock. The rights expire on October 28, 2009, and
are redeemable by the Company at any time prior to this date. The Rights will
only be exercisable on the acquisition by any person or related group of persons
of 20% or more of the Company's common stock. The rights will entitle the
holder, with the exception of the acquiring person or group, to purchase a
specified number of the Company's common shares for 50% of their market value at
that time. The rights will not be triggered if the Company's Board of Directors
has previously approved such an acquisition.
All common shares rank equally in respect of shareholder rights.
18 STOCK BASED COMPENSATION
Stock based compensation comprises:
a) MANAGEMENT EQUITY INVESTMENT PLAN ("MEIP")
In November 1994, the Company introduced the MEIP for key employees of the
Company. A total of 440,000 common shares have been reserved for issuance under
the MEIP. As of December 31, 1999 outstanding options to acquire 108,000 common
shares were held by 14 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 exercise price for each option was
determined at the date of grant.
ii. Each option vested 25% in the years ended December 31, 1996 and 1995,
respectively. Options may only be exercised in units of each of the four
options. At December 31, 1999, options were exercisable over 56,700 shares.
F-36
<PAGE> 80
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
iii. Members of the MEIP may only exercise vested options within seven years of
November 25, 1994, the date of grant. No options were granted in 1999, 1998 or
1997. Unexercised options will expire thereafter. As of December 31, 1999,
unexercised options have a remaining contractual life of 1 year, 11 months.
The granting of the options did not result in additional compensation in
1999 for the key employees who have joined the MEIP. As of December 31, 1999,
the options are estimated to have a $0 market value based on the share price at
that date and the exercise prices. Total compensation cost recognized in the
income statement for MEIP stock-based employee compensation was $0 for each of
1999, 1998 and 1997. The net income (loss) and net income (loss) per share of
the Group would be unchanged if the compensation cost for the MEIP had been
determined in accordance with SFAS 123.
As of December 31, 1999, outstanding unpaid options amounts to $82,
included as Share Subscriptions Receivable within Shareholders' Equity. The cost
of each option and the associated exercise price at December 31, 1999 was as
follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES OPTION PRICE EXERCISE PRICE
AT DECEMBER 31 PER SHARE PER SHARE
-------------- ------------ --------------
<S> <C> <C> <C>
Option 1............................ 27,000 $1.43 $14.30
Option 2............................ 27,000 $1.56 $15.60
Option 3............................ 27,000 $1.69 $16.90
Option 4............................ 27,000 $1.82 $18.20
-------
Total......................................... 108,000
=======
</TABLE>
The options purchased by key employees represent a potential ownership
interest, on a fully diluted basis, of 1% of common shares. Options over 48,600
shares lapsed during the year as a result of eligible employees leaving the
Company.
b) STOCK OPTIONS
In December 1998, the Company granted Mr. Tietz, on his appointment as
Chief Executive Officer of the Company, the option to acquire 300,000 shares of
common stock in the Company at an exercise price of $4.375 per share, the
closing price of the common stock on the date of the grant. The term of the
option is ten years, and may be exercised, in whole or in part, at any time from
the date of grant. The fair value of the option at the date of the grant was
$683. In order to determine fair value, the Company used the Black Scholes model
using a risk-free interest rate of 8%, an expected life of 10 years, an expected
volatility of 13.9% and no expected dividends. Payment for the shares is to be
by cash, the surrender of shares of the Company's common stock already owned by
the employee (valued at their fair market value on the date of the surrender),
or an alternate form of payment as may be approved by the Company's Compensation
Committee. The number and price of shares subject to the option will be adjusted
in the event of any stock split, declaration of a stock dividend, or like
changes in the capital stock of the Company. The option is not transferable
other than by will or the laws of descent and distribution. No rights as a
shareholder of the Company shall accrue until such time as the shares are
purchased under the option. There were no options exercised, granted or
forfeited during 1999. There were no significant modifications of outstanding
awards during 1999. If the stock options had been accounted for under SFAS 123
the impact on the Company's net income (loss) and net income (loss) per share
would have been as follows:
F-37
<PAGE> 81
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
------ --------
<S> <C> <C>
Net income (loss):
as reported............................................... $1,914 $(16,896)
pro forma................................................. 1,914 (17,346)
Net income (loss) per share (basic and diluted):
as reported............................................... $ 0.21 $ (1.91)
pro forma................................................. $ 0.21 $ (1.96)
</TABLE>
c) STOCK APPRECIATION RIGHTS
On October 13, 1999, the Board resolved to grant stock appreciation rights
("SARs") to a key executive on 200,000 share units. A share unit is defined as
the equivalent of one share of common stock of the Company. The grant of the
SARs entitles the grantee to receive cash payments from the Company as provided
for in the SAR agreement. The share units were granted at a grant price of
$4.375 per share unit. As of the date of the award the closing price of the
Company's common stock was $4.875 per share. The share units are exercisable
over a period of three years, with one-third of the share units exercisable on
each of the first three anniversaries of the date of grant.
In addition, on October 13, 1999, the Board approved the grant of 60,000
SARs representing 15,000 share units for each current non executive director,
with a grant price of $4.094. On October 13, 1999, the closing price of the
Company's common stock was $4.875 per share. The share units vest over a period
of three years, with one-third vesting each year on the earlier of the
anniversary of the date of grant, or seven days before the next scheduled annual
meeting of shareholders for that year.
If a grantee of share units resigns from the Company or is terminated
(other than for cause) by the Company within twelve months following a "change
in control", then the share units become fully exercisable, at any time within
90 days after the date of such resignation or termination. If not exercised the
share units shall lapse and terminate. The share units similarly vest in the
event that a grantee is terminated by the Company without cause, or upon a
grantee's permanent disability or death. A "change in control" is defined to
include the acquisition by any person or related group of persons of 20% or more
of the Common Stock of the Company. The share units are also fully exercisable
upon any merger of the Company with another corporation or the sale of
substantially all of the assets of the Company.
The share units may be redeemed only for cash and not for the Company's
common stock. A grantee is entitled to an "award payment" at the time of
exercise of share units, equal to the excess if any, of the fair market value of
a share of Common Stock on the date of exercise over the grant price, multiplied
by the number of exercised share units. The number of share units is subject to
adjustment in the event of any subdivision of the outstanding shares of the
common stock of the Company, the declaration of a dividend payable in common
stock of the Company, or like events. In all events, the share units may not be
exercised beyond October 12, 2009. The grant of share units does not entitle the
grantee to any rights as a shareholder of the Company.
In accordance with SFAS 123 the compensation expense incurred in respect of
SAR's is estimated using the price of the Company's common stock on the balance
sheet date as a surrogate for the price on the date of exercise. A liability is
created for the estimated compensation expense and is adjusted up or down for
each balance sheet date for changes in the price of the Company's stock. The
compensation expense recognized for the year ended December 31, 1999, was $13.
No units were redeemed during the year ended December 31, 1999.
F-38
<PAGE> 82
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
d) 1999 STOCK OPTION PLAN
The 1999 Stock Option Plan ("the Plan"), was approved by the Board of
Directors on June 3, 1999, and by the Shareholders at the 1999 Annual Meeting on
January 13, 2000. The Plan is designed to attract, motivate and retain key
employees. The Plan authorizes the issuance of 500,000 shares of common stock
and permits the Company to award to key employees incentive options and
non-qualified stock options. The number of shares available for issuance under
the Plan may be adjusted in the event of any subdivision of the outstanding
shares of the common stock of the Company, the declaration of a dividend payable
in common stock of the Company, or like events. The aggregate number of stock
options that may be awarded to any eligible employee over the term of the Plan
is limited to 80,000 shares. The exercise price of a stock option will be
determined by the Company's Compensation Committee, but will not be less than
the fair market value of the Company's common stock at the date of grant. The
exercise price of a stock option may be paid in cash or previously owned stock
or both. The Plan terminates on December 31, 2002, after which no awards will be
made.
As at December 31, 1999, no awards have been made under the Plan. On
February 4, 2000, the Compensation Committee of the Board authorized the grant
of options for 420,000 shares of common stock to eight officers of subsidiaries
of the Company at an exercise price of $5.25 per share. The options will vest
and be exercisable at the rate of 25% per year over the next four years.
19 RESTRICTED RETAINED EARNINGS
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 related to the outstanding common and preferred
shares. This reserve is not available for dividends. At December 31, 1998, the
legal reserve represented 10% of the stated capital related to outstanding
common shares. Accordingly, no appropriation to the legal reserve was required
for that year. In August 1999, a further amount of $60 was transferred from
Additional paid-in capital following the issuance of an additional 300,000
shares.
20 RELATED PARTY TRANSACTIONS (TO BE READ IN CONJUNCTION WITH NOTE 16)
The Group had the following transactions with related parties during the
three years ended December 31, 1999, 1998 and 1997, respectively:
i. During 1998, an ocean carrier in which a then director of the Company was a
non executive director ceased doing business. The ocean carrier leased
containers from the Company. At December 31, 1998, a specific provision of $553,
representing the total amount due from the carrier of $1,153 less expected
insurance proceeds, was included in the allowance for doubtful accounts. In
1999, the total amount due from the ocean carrier increased by $145. During the
year ended December 31, 1999, insurance proceeds of $648 were received and the
remaining balance of $650 was charged to operations.
ii. In 1996, the Company had an investment in Hinderton Limited ("Hinderton"),
a container investment company incorporated in the Isle of Man. During 1996 the
equity interest was exchanged for subordinated debt. No interest was earned in
any of the periods presented. In 1998 the subordinated debt was assigned to
Hinderton for a nominal consideration. The Group has management agreements
covering the operation of containers owned by Hinderton, under which management
and acquisition fees are receivable. The revenue earned with respect to these
agreements was $399 and $266 for the years ended December 31, 1998 and 1997,
respectively.
iii. During the year ended December 31, 1998, payments totalling $150 were made
to a former non executive director of the Company, for legal fees. In addition
the former non executive director has submitted a statement to the Company for
the balance due for legal services rendered to the Company in the amount of
$100. This item is currently being reviewed by the Special Litigation Committee.
F-39
<PAGE> 83
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
iv. As of January 1, 1996, $4,723 was owed to the Group under an unsecured loan
agreement with Barton Holding Ltd. ("Barton"), the former preferred shareholder.
This amount bore interest at 9% and was repayable in installments on March 31,
1996 and June 30, 1996.
During 1996, Mr. 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. Palatin's
guarantee purported to pledge 1,030,303 Common Shares owned by him in The Cronos
Group. However, the owner of record of these shares was Lambert Business Inc.
which is 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.
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. Palatin entered into a new Loan
Agreement and related Pledge Agreement, each dated as of July 1, 1996, pursuant
to which Mr. 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 an
additional $500 advance. This loan bore interest at 9% per annum and was due on
December 30, 1996. No principal or interest payments were received in 1996. At
December 31, 1996, the outstanding loan due from Mr. Palatin was $5,461. In July
1997, in connection with the execution of an amendment to the Bank Facility, the
Palatin loan was increased to $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. The date of
December 31, 1997 was agreed as the revised repayment date for the loan, however
no principal or interest payments were received.
In January 1997, the Group advanced an additional amount of $3,700 to Mr.
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. Palatin, pursuant to the Bank Facility. This new loan bore interest
at 9% per annum and was secured, together with all other obligations of Mr.
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 (see Note 13(a)).
Interest of $704, $864 and $824 became due under Mr. Palatin's outstanding
loans for the years ended December 31, 1999, 1998 and 1997, respectively. These
amounts have not been recognized in income.
In view of these circumstances and the doubt concerning the Board's ability
to exercise the pledge over the remaining 1,030,303 shares, a provision of
$3,909 was made on December 31, 1997, against Mr. Palatin's outstanding loans.
In March 1999, title to 463,636 of the 1,030,303 shares was granted as security
to the banks under the Bank Facility.
At December 31, 1998, the carrying value of Mr. Palatin's loans was $5,500.
In June 1999, $5,279 of proceeds from the sale of the Company's stock held as
collateral on the Palatin loans were utilized in reducing Mr. Palatin's
indebtedness to the Company. The remaining balance of $221 was charged to
operations.
In October 1999, the Company brought an action against Mr. Palatin, in the
Supreme Court of the State of New York for payment of the remaining balances due
under two promissory notes, both dated July 14, 1997, by and between a
subsidiary of the Company, as payee ("Payee"), and Mr. Palatin, as payor.
F-40
<PAGE> 84
THE CRONOS GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On February 8, 2000, the Supreme Court of the State of New York entered its
default judgment against Mr. Palatin. Pursuant to the judgment, the Payee is to
recover from Mr. Palatin $6,227, plus interest at 9% per annum from June 21,
1999 to February 8, 2000 in the amount of $356, for a total recovery of $6,583.
The Payee currently is pursuing execution of the judgment against Mr.
Palatin's beneficial ownership of the Common Shares of the Company. According to
filings made with the SEC by the shareholder of Klamath Enterprises S.A.
("Klamath"), Mr. Palatin is the beneficial owner of the 1,793,798 outstanding
shares of Common Stock of the Company owned of record by Klamath. On February
28, 2000, the Payee obtained a preliminary injunction order from the Superior
Court of the Commonwealth of Massachusetts against Mr. Palatin and against the
Company's transfer agent, EquiServe Limited Partnership, preliminarily enjoining
them from selling, transferring, assigning, or otherwise encumbering, disposing
of, or diminishing the value of the Common Shares of the Company held of record
by Klamath.
The Company is also pursuing an attachment order in the Swiss courts
against the individual the Company believes is the record owner of the
outstanding shares of Klamath, precluding him from transferring the shares of
Klamath or the Common Shares of the Company owned by Klamath.
The objective of the Company is to satisfy the judgment obtained by the
Payee against Mr. Palatin by a transfer of Common Shares beneficially owned in
the Company by Mr. Palatin to the Payee or by a liquidation of the shares in an
amount sufficient to fully discharge the judgment. The Company is unable to
predict at the present time whether it will succeed in achieving its objectives.
v. Included in Financing and recomposition expenses in 1998 and 1997 were
amounts totalling $232 which were attributed to Mr. Palatin.
On the resignation of Mr. Palatin in 1998, the Group retained $238 of
outstanding payroll to be held as possible settlement against any claims.
In December 1999, the $238 payable to Mr. Palatin was offset against the
$232 payable to the Group.
vi. Amounts of $34, $436 and $618 were paid for services, for the years ended
December 31, 1999, 1998 and 1997, respectively, under the terms of an
information technology agreement with a company, to which Mr. Palatin indicated
that he was related. In November 1999, the Group was advised by a third party
that they had purchased all of the equity of the information technology company
that was previously owned by Mr. Palatin.
vii. As indicated in Note 16iv, it has been asserted by a representative of
Contrin that Mr. 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, TOEMT, 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. The Group has responded to a request for information from the
liquidator relating to the trading transactions with that company.
F-41
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
- ------ ------- ----
<C> <S> <C>
3.1 Coordinated Articles of Incorporation (incorporated by
reference to Exhibit 1.1 to the Company's Annual Report on
Form 20-F for the year ended December 31, 1997 (File No.
0-24464)).
3.2 Policies and procedures with respect to the indemnification
of directors and officers of the Company, as adopted by the
Board of Directors on August 4, 1999 (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-3, dated November 24, 1999).
4.1 Rights Agreement, dated as of October 28, 1999, between the
Company and BankBoston, N.A., as Rights Agent (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A dated October 29, 1999).
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") (incorporated by reference to Exhibit 1.2 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
10.2 First Amendment to the Credit Agreement, dated as of July
14, 1997 (incorporated by reference to Exhibit 1.3 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
10.3 Second Amendment to the Credit Agreement, dated as of
December 3, 1997 (incorporated by reference to Exhibit 1.4
to the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464)).
10.4 Third Amendment to the Credit Agreement, dated as of June
30, 1998 (incorporated by reference to Exhibit 1.5 to the
Company's Annual Report on Form 20-F for the year ended
December 31, 1997 (File No. 0-24464)).
10.5 Confirmation of Guaranties, Agreement and Power of Attorney
by the Cronos Group, dated June 30, 1998, pertaining to the
Credit Agreement (incorporated by reference to Exhibit 1.6
to the Company's Annual Report on Form 20-F for the year
ended December 31, 1997 (File No. 0-24464)).
10.6 Deed in lieu of foreclosure relating to shares given as
collateral to the Palatin loans (incorporated by reference
to Exhibit 10.6 in the Company's Annual Report on Form 10-K
for the period ended December 31, 1998).
10.7 Forbearance Agreement and Fourth Amendment to Amended and
Restated Credit Agreement dated March 31, 1999 (incorporated
by reference to Exhibit 10.7 in the Company's Annual Report
on Form 10-K for the period ended December 31, 1998).
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")
(incorporated by reference to Exhibit 1.7 to the Company's
Annual Report on Form 20-F for the year ended December 31,
1997 (File No. 0-24464)).
10.9 Amendment to the Sun Agreement, dated as of November 1, 1997
(incorporated by reference to Exhibit 1.8 to the Company's
Annual Report on Form 20-F for the year ended December 31,
1997 (File No 0-24464)).
10.10 Second Amendment to the Sun Agreement dated as of January
26, 1999 (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1998).
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
- ------ ------- ----
<C> <S> <C>
10.11 Lambert Confirmation, Acknowledgement and Consent of
Collateral Assignment (incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1998).
10.12 Amendment to the Revolving Credit Facility between Cronos
Containers Limited and China International Marine Containers
(Group) Company Limited, dated March 24, 1999 (incorporated
by reference to Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1998).
10.13 Guarantee, dated as of July 30, 1999, by and between the
Company and MeesPierson, as agent on behalf of itself and
First Union (incorporated by reference to Exhibit 10.20 to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999).
10.14 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 (incorporated by reference to Exhibit
10.21 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1999).
10.15 CFBL Secured Note, dated as of July 30, 1999, in the
principal amount of U.S. $25,000,000, in favor of
MeesPierson (incorporated by reference to Exhibit 10.22 to
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999).
10.16 CFBL Secured Note, dated as of July 30, 1999, in the
principal amount of U.S. $25,000,000, in favor of First
Union (incorporated by reference to Exhibit 10.23 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999).
10.17 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 (incorporated by
reference to Exhibit 10.24 to the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1999).
10.18 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 (incorporated by reference to Exhibit 10.25 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1999).
10.19 Warrant Agreement dated as of July 30, 1999 ("Warrant
Agreement") by and between the Company and MeesPierson N.V
("MeesPierson") and First Union National Bank ("FUNB")
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1999).
10.20 Amendment No.1 to Warrant Agreement, dated as of August 11,
1999, by and among the Company, MeesPierson, and FUNB
(incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30,1999).
Executive Compensation Plans and Arrangements
10.21 Stock Appreciation Rights Agreement by and between the
Company and Peter J Younger, dated as of October 13, 1999
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-3, dated November 24,
1999).
10.22 The Cronos Group Management Equity Investment Plan, dated as
of July 25, 1994 (incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the period
ended December 31, 1998).
10.23 Stock Appreciation Rights Agreement by and between the
Company and S Nicholas Walker and each other party listed on
the schedule thereto, dated October 13, 1999. E1
10.24 1999 Stock Option Plan (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-8,
dated February 25, 2000).
10.25 Employment Agreement by and between Cronos Containers Inc.
and John Foy dated April 1, 1999, as amended on December 1,
1999. E13
10.26 Employment Agreement by and between Cronos Containers Ltd.
and John Kirby dated April 1, 1999, as amended on January
20, 2000. E23
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
- ------ ------- ----
<C> <S> <C>
10.27 Employment Agreement by and between Cronos and Peter J
Younger dated July 1, 1998, as amended March 24, 2000. E37
10.28 Employment Agreement by and between Cronos and Dennis J
Tietz dated December 11, 1998, as amended March 24, 2000. E60
21.1 List of principal wholly-owned subsidiaries at December 31,
1999. E82
22.1 The Company's Form 8-K dated January 21, 2000, reporting on
matters submitted to a vote of shareholders.
27.1 Financial Data Schedule. E84
99.1 Pages 6 through 11 (under the caption "Risk Factors") of the
Company's Registration Statement on Form S-8 dated February
25, 2000. E85
</TABLE>
<PAGE> 1
Exhibit 10.23
Stock Appreciation Rights Agreement between the Company and S. Nicholas Walker
and each other party.
STOCK APPRECIATION RIGHTS AGREEMENT
THIS STOCK APPRECATION RIGHTS AGREEMENT (the "Agreement"), made and
entered into as of this 13th day of October, 1999, by and between The Cronos
Group, a limited liability company organized and existing under the laws of
Luxembourg (the "Company") and S. Nicholas Walker ("Grantee");
W I T N E S S T H:
WHEREAS, at its meeting held on August 4, 1999, in New York, the Board of
Directors ("Board") of the Company approved the Non-Employee Directors' Equity
Plan (the "Directors' Equity Plan") and directed that the Directors' Equity
Plan be submitted to the shareholders of the Company for their approval at the
1999 annual meeting; and
WHEREAS, pursuant to the Directors' Equity Plan, each non-employee
director of the Company was to receive the grant of an option (the "Stock
Option") to acquire 15,000 shares of Common Stock of the Company; and
WHEREAS, the annual meeting of shareholders of the Company was scheduled
to be held on October 26, 1999, in Luxembourg; and
WHEREAS, on September 21, 1999, Interpool, Inc. ("Interpool") a competitor
of the Company, transmitted to the Company its proposal, subject to numerous
conditions, to acquire the Company by merger with Interpool's 50%-owned
subsidiary, Container Applications International, Inc., for $5.00 per share in
cash for all of the outstanding shares of Common Stock of the Company; and
WHEREAS, by letter dated October 8, 1999, the Company advised Interpool
that the Board of the Company had unanimously rejected the Interpool proposal
as inadequate and as not in the best interest of the Company or its
shareholders; and
WHEREAS, the Board has engaged First Union Securities, Inc. ("First
Union") to explore the strategic alternatives available to the Company in light
of the Interpool proposal; and
WHEREAS, the non-employee directors of the Company have, in light of the
Interpool proposal, the engagement of First Union, and the
E-1
<PAGE> 2
postponement of the 1999 annual meeting, been required to devote a substantial
amount of time and effort to the business of the Company; and
WHEREAS, to provide an incentive to the non-employee directors of the
Company to devote their time and effort to the business of the Company, to
better align the interests of non-employee directors of the Company with the
shareholders of the Company, and because the grant of the Stock Option to
Grantee has been deferred, the Board has resolved to award Grantee stock
appreciation rights in lieu of the Stock Option on the terms and conditions set
forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms shall be defined as
follows:
"Award" refers to the number of Share Units granted to Grantee.
"Award Payment" refers to the cash payment, before withholding, to be made
by the Company to Grantee for Exercised Share Units pursuant to the provisions
of Section 6 hereof.
"Board" refers to the Board of Directors of the Company.
"Cause" refers (i) to the willful non-performance of, or willful
misconduct in the performance of, Grantee's duties to the Company, and/or
(ii) to other willful misconduct constituting moral turpitude.
"Change in Control" refers to:
(a) The acquisition by any Person of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as
amended) of 20% or more of the Common Stock then outstanding, but shall not
include any such acquisition by:
(i) The Company;
(ii) Any Subsidiary of the Company;
(iii) Any employee benefit plan of the Company or of any Subsidiary of the
Company;
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(iv) Any Person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such plan;
(v) Any Person who becomes the beneficial owner of 20% or more of the
shares of Common Stock then outstanding as a result of a reduction in the number
of shares of Common Stock outstanding due to the repurchase of shares of Common
Stock by the Company unless and until such Person, after becoming aware that
such Person has become the beneficial owner of 20% or more of the then
outstanding shares of Common Stock, acquires beneficial ownership of additional
shares of Common Stock representing 1% or more of the shares of Common Stock
then outstanding, whereupon a Change in Control shall be deemed to have
occurred; or
(vi) The situation where individuals who, as of the date that this
Agreement is approved by the Board, and subsequently elected members of the
Board whose election is approved or recommended by at least a majority of such
current Board members or their successors whose election was so approved or
recommended (other than any subsequently elected Board members whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board), cease for any reason to constitute at least a majority
of the Board.
"Committee" refers to the Compensation Committee of the Board, any
successor committee thereto or any other committee appointed by the Board to
supervise this Agreement.
"Common Stock" refers to the Common Stock of the Company, par value $2 per
share, or such other class or kind of shares or other securities as may be
applicable under Section 8 hereof.
"Company" refers to The Cronos Group, a Luxembourg holding company, or any
successor to substantially all its business. For purposes of this Agreement,
all references to the "Company," where this Agreement calls for a payment to
Grantee, shall refer to the then Subsidiary of the Company on whose Board of
Directors Grantee sits and, if Grantee sits on the Board of the Cronos Group
and one or more Subsidiaries, then "Company" refers to the Cronos Group.
"Date of Grant" refers to October 13, 1999.
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"Designated Beneficiary" refers to the Person designated, in accordance
with Section 12 hereof, by Grantee to receive payment for Grantee's Share
Units.
"Exercise Date" refers to the date of receipt by the Company of an
Exercise Notice or, if such date is not a business day, then the first business
day occurring after the date of receipt of the Exercise Notice.
"Exercise Notice" refers to a notice substantially in form of Exhibit A
hereto.
"Exercised Share Units" refers to the number of Share Units submitted for
payment by Grantee or an Exercising Party pursuant to Section 5 hereof.
"Exercising Party" refers to the Designated Beneficiary or, if there is no
Designated Beneficiary, to the executor, administrator, or other Person or
Persons who acquire Share Units from Grantee by will or by the laws of descent
and distribution.
"Fair Market Value" refers to the closing sales price of the Common Stock
as reported on the NASDAQ National Market on the applicable Exercise Date or,
if there were no sales on such Exercise Date, the average of the highest and
the lowest quoted selling prices on said market for the preceding business day
on which sales of Common Stock did occur.
"Grant Price" refers to $4.094, the closing price of a share of Common
Stock of the Company, as reported on NASDAQ for August 4, 1999.
"Payment Date" refers to the date on which Grantee first becomes entitled
to receive payment for all or any portion of the Share Units as provided for in
Section 7 hereof.
"Permanent Disability" refers to a physical or mental impairment rendering
Guarantee substantially unable to function as a director of the Company or a
Subsidiary, as the case may be, for any period of six consecutive months. Any
dispute as to whether Grantee is subject to a Permanent Disability shall be
resolved by a physician mutually acceptable to Grantee and the Committee,
whose decision shall be final and binding upon Grantee and the Company.
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"Person" refers to any individual, firm, corporation, limited liability
company, partnership, or other entity.
"Share Unit Account" refers to the account maintained by the Company with
respect to the Award made to Grantee pursuant to Section 3 hereof.
"Share Unit" refers to the equivalent of one share of Common Stock.
"Subsidiary" refers to (i) a corporation or other entity with respect to
which the Company, directly or indirectly, has the power, whether through the
ownership of voting securities, by contract or otherwise, to elect at least a
majority of the members of such corporation's board of directors or analogous
governing body, or (ii) any other corporation or other entity in which the
Company, directly or indirectly, has an equity or similar interest and which
the Committee designates as a Subsidiary for purposes of the Plan.
2. GRANT OF SHARE UNITS
The Company hereby grants to Grantee, effective the Date of Grant, Fifteen
Thousand (15,000) Share Units. The grant of the Share Units to Grantee
entitles Grantee or an Exercising Party, as the case may be, to receive cash
payments from the Company in amounts and on the terms and conditions
hereinafter set forth.
3. SHARE UNIT ACCOUNT
The Company shall record in a separate account (the "Share Unit Account")
the number of Share Units granted to Grantee. The Company shall debit
Grantee's Share Unit Account from time-to-time with all Exercised Share Units,
effective the Exercise Date of such Exercised Share Units, and shall credit or
debit, as appropriate, Grantee's Share Unit Account with any adjustments
required pursuant to Section 8 hereof.
4. TIME OF EXERCISE OF AWARD
(a) The Award shall become exercisable over a period of three (3) years,
as follows. Conditional upon Grantee's continuous service on the Board of the
Company or a Subsidiary following the Date of Grant to the relevant "vesting
date" (as hereinafter defined), and subject to the following subsections of
this Section 4, Grantee shall have the right to exercise the Award on each of
the following dates: one-third (1/3) of the Award on the date that is seven
(7) days prior to the scheduled date of the annual meeting of shareholders of
the Company for the year 2000 or the first anniversary of the Date of Grant,
which ever first occurs; one-third (1/3) of the Award on the date that is seven
(7) days prior to the scheduled date of the annual meeting of
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shareholders of the Company for the year 2001 or the second anniversary of the
Date of Grant, which ever first occurs; and one-third (1/3) of the Award on the
date that is seven (7) days prior to the scheduled date of the annual meeting
of shareholders of the Company for the year 2002 or the third anniversary of
the Date of Grant, which ever first occurs. Any portion of the Award that
Grantee has the right to exercise but elects not to exercise shall remain
available for exercise by Grantee under the terms of this Agreement, subject to
the provisions of Section 10 hereof.
(b) Subject to the provisions of subsection (c) below, if Grantee resigns
from the Company or a Subsidiary, then Grantee may exercise the Award, as to
any portion thereof that Grantee has the right to exercise as of the date of
resignation pursuant to the provisions of subsection (a) above, within ninety
(90) days after the date of such resignation. If Grantee does not exercise the
Award within the time specified herein, then the Award and the Share Units
granted thereunder shall lapse and terminate.
(c) If Grantee resigns from the Company or a Subsidiary, or is terminated
as a director, other than for cause, in either such event within twelve (12)
months following a Change in Control, then and in such event the Award shall
become fully exercisable. In such event, Grantee may exercise the Award at any
time within ninety (90) days after the date of such resignation or termination.
If Grantee does not exercise the Award within the time specified herein, then
the Award and the Share Units then in the Share Unit Account shall lapse and
terminate.
(d) If Grantee's service on the Board is terminated by the Company without
Cause, then and in such event the Award shall become fully exercisable. In
such event, Grantee may exercise the Award at any time within ninety (90) days
after the date of such termination. If Grantee does not exercise the Award
within the time specified herein, then the Award and the Share Units then in
the Share Unit Account shall lapse and terminate. The failure of the
shareholders to elect Grantee to the Board of the Company at an annual meeting
of shareholders at which Grantee is up for election shall not be deemed a
termination within the meaning of this subsection (d).
(e) If Grantee's service on the Board is terminated by the Company for
Cause, then and in such event the Award and the Share Units then in the Share
Unit Account, to the extent Grantee has not exercised the Award prior to the
date of such termination, shall lapse and terminate.
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(f) In the event of a merger of the Company with or into another
corporation, or the sale of substantially all of the assets of the Company,
then and in such event the Award shall become fully exercisable. The Board of
Directors shall provide written notification of such proposed transaction to
Grantee (or, in the event of his death, to the Exercising Party) at least
fifteen (15) days prior to such proposed transaction, and the Award and the
Share Units then in the Share Unit Account, to the extent that the Award is not
fully exercised during such fifteen (15)-day period, shall lapse and terminate
immediately prior to such proposed transaction.
(g) In the event of the proposed dissolution or liquidation of the
Company, then and in such event the Award shall become fully exercisable. The
Board of Directors shall provide written notification of such proposed
transaction to Grantee (or, if he is not then living, to the Exercising Party)
within fifteen (15) days prior to such transaction, and the Award and the Share
Units then in the Share Unit Account, to the extent that the Award is not fully
exercised during such fifteen (15)-day period, shall lapse and terminate
immediately prior to such proposed transaction.
(h) In the event that Grantee becomes subject to a Permanent Disability
while sitting on the Board of the Company or a Subsidiary, then and in such
event the Award shall become fully exercisable by Grantee or by his legal
representative at any time within ninety (90) days from the date of
determination that the Grantee is subject to a Permanent Disability. If
Grantee or his legal representative does not exercise the Award within the time
specified herein, then the Award and the Share Units then in the Share Unit
Account shall lapse and terminate.
(i) In the event of the death of Grantee while employed by the Company or
a Subsidiary, then and in such event the Award shall become fully exercisable
by the Exercising Party at any time within ninety (90) days after the date of
Grantee's death. If the Exercising Party does not exercise the Award within
the time specified herein, then the Award and the Share Units then in the Share
Unit Account shall lapse and terminate.
5. METHOD OF EXERCISE
The Award shall be exercised by the delivery of a written Exercise Notice,
in the form included as Exhibit A hereto, by Grantee (or his legal
representative), or in the case of Grantee's death, the Exercising Party, to
the Company at its principal place of business, stating the election to
exercise the Award and the number of Share Units in respect of which the Award
is being exercised (the "Exercised Share Units"). In no event shall the Award
be
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exercised for fewer than 5,000 Share Units or, if less, the total number
of Share Units then remaining in Grantee's Share Unit Account.
6. AWARD PAYMENT
The Award Payment shall be the amount determined as follows:
(i) by multiplying the excess, if any, of the Fair Market Value of a
share of Common Stock of the Company on the Exercise Date over the Grant Price
by
(ii) the number of Exercised Share Units.
7. PAYMENT FOR EXERCISED SHARE UNITS
Subject to the following subsections of this Section 7, the Award Payment
shall be made by the Company to Grantee (or the Exercising Party, as the case
may be) within ten (10) business days after the Exercise Date. The Company
shall have the right to withhold from the Award Payment such amounts as the
Company deems necessary or appropriate to satisfy any federal, state, local, or
foreign withholding tax requirement, including, but not limited to, income tax,
FICA withholding, and excise tax. Grantee shall be obligated to pay any and
all taxes of any kind which may be imposed on Grantee or result from the Award,
Grantee's rights with respect to the Award, or the exercise of the Award during
the Grantee's lifetime or at death.
8. ADJUSTMENT OF SHARE UNITS UPON CHANGES IN CAPITALIZATION
The number of Share Units covered by this Agreement and the Grant Price
shall be proportionately adjusted in the event of a subdivision of the
outstanding Common Stock of the Company, a declaration of a dividend payable in
Common Stock of the Company, a declaration of a dividend payable in a form
other than Common Stock of the Company in an amount that has a material effect
on the price of the Common Stock of the Company, a combination or consolidation
of the outstanding Common Stock of the Company (by reclassification or
otherwise) into a lesser number of shares of Common Stock, a recapitalization
of the Company, a spin-off, stock split, reverse stock split, or any other
increase or decrease in the number of issued and outstanding shares of Common
Stock of the Company effected without receipt of consideration by the Company;
provided, however, that the
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conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Except as expressly
provided herein, no issuance by the Company of shares of stock of any class or
securities convertible into shares of stock of any class shall affect, and no
adjustment by reason thereof shall be made with respect to, the number of Share
Units subject to the Award or the Grant Price.
9. TRANSFER OF SHARE UNITS
Unless sooner terminated pursuant to the provisions of Sections 4 or 10
hereof,
(a) The Award shall be exercisable during Grantee's lifetime only by
Grantee and may not be transferred or assigned;
(b) The Award is transferable by Grantee upon Grantee's death by will or
by the laws of descent and distribution; and
(c) In the event of Grantee's death, the Exercising Party may exercise any
portion of the Award, as permitted by Section 4 hereof, that is exercisable at
the time of Grantee's death and that has not previously been exercised by
Grantee, provided that any such exercise must be made pursuant to the
provisions of Section 5 above.
(d) Other than as explicitly permitted by this Agreement, Grantee's right
to payment for Exercised Share Units shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors of Grantee or the Exercising Party.
10. TERMINATION OF AWARD
To the extent not earlier terminated by exercise in full in accordance
with this Agreement, the Award and the Share Units granted thereunder shall
terminate on the earliest to occur of the following dates:
(a) October 12, 2009; or
(b) As specified in Section 4 hereof.
11. RIGHTS AS SHAREHOLDER
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Neither Grantee nor any Exercising Party will be deemed to be a holder of
any shares of Common Stock or have any rights as a shareholder of the Company
with respect to the Award or the Share Units.
12. DESIGNATION OF BENEFICIARY
Grantee may at any time designate a beneficiary to receive payment of his
Award in the event of his death. Such designation shall be in writing, signed
by Grantee and delivered to the Company. Such designation may be revoked at
any time in writing by Grantee, in which case, a new designation may be made.
13. MODIFICATION, EXTENSION AND RENEWAL
The Board may modify, extend, or renew the Award or accept an exchange of
the Award (to the extent not theretofore exercised) for the granting of a new
stock award in substitution therefor. However, notwithstanding the foregoing
provisions of this Section 13 or any other provision of this Agreement, there
shall be no modification, extension, or renewal of the Award without the
written consent of Grantee which would in any way alter or impair any right of
Grantee with respect to the Award or under this Agreement.
14. NO RIGHT TO RE-ELECTION
Nothing in this Agreement shall be deemed to create any obligation on the
part of the Board to nominate Grantee for re-election by the Company's
shareholders, nor confer upon Grantee the right to remain a member of the Board
of the Company of a Subsidiary for any period of time or at any particular rate
of compensation.
15. UNFUNDED OBLIGATION
It is the intention of the Company and Grantee that the obligation of the
Company to make any Award Payment under this Agreement be unfunded for tax and
all other purposes. Grantee has the status of a general unsecured creditor of
the Company with respect to the making of any Award Payment by the Company to
Grantee. Prior to the making of any Award Payment for any Exercised Share
Units by the Company to Grantee under this Agreement, nothing contained herein
shall give Grantee any rights that are greater than those of a general
unsecured creditor of the Company.
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16. DISPUTE RESOLUTION
Should any dispute or controversy arising from or related to this
Agreement arise between the parties that the parties are incapable of resolving
themselves through good faith negotiation, then such dispute or controversy
shall be submitted for resolution by J.A.M.S. ("JAMS") in San Francisco,
California, or at such other location as is agreed upon by the parties. Any
dispute shall first be submitted to JAMS for mediation pursuant to the
mediation services provided by JAMS. Should the dispute between the parties
not be successfully mediated by JAMS within 90 days of its submission (subject
to any extension agreed to by the parties) then and in such event the dispute
shall be submitted for binding arbitration by JAMS pursuant to the rules and
practices of JAMS. Unless agreed to by the parties, the representative of JAMS
who attempts to mediate any dispute between the parties shall not be the
representative of JAMS who arbitrates the dispute. Judgment upon any award by
the arbitrator(s) may be entered in any court having jurisdiction thereof. It
is agreed that the prevailing party in any such arbitration or other action
arising from or relating to this Agreement shall be entitled to reimbursement
of its or his reasonable costs and expenses, including attorneys' fees. Each
party consents to the exercise over it or him of personal jurisdiction by the
arbitrator(s) selected by JAMS to resolve any dispute hereunder.
17. NOTICES
(a) Any notice, demand or communication required or permitted to be given
by any provision of this Agreement shall be deemed properly given if given in
writing or by electronic mail and either delivered through a
commercially-recognized overnight delivery service or, if sent by electronic
mail or telecopier, to the party or to an officer of the party to whom the same
is directed, addressed as follows:
(i) If to Cronos, to: The Cronos Group
444 Market Street, 15th Floor
San Francisco, California 94104
Attn: Dennis J. Tietz
Chief Executive Officer
Fax: (415) 677-9196
Email: [email protected]
(ii) If to Grantee, to: S. Nicholas Walker
1285 Avenue of the Americas
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20th Floor
New York, New York 10019-6028
Tel: (212) 649-8200
Fax: (212) 649-8074
Email: [email protected]
(b) Any party identified above may change the address to which notices are
to be given hereunder by giving notice to the other party in the manner herein
provided.
(c) All notices, demands, and requests shall be deemed to have been given
on the business day on which it was delivered by hand or commercial messenger
or air courier service to such party, at his or its address specified above,
or, if sent by facsimile or electronic mail, when electronically confirmed.
Any facsimile transmission or electronic mail not sent on a business day, or
not sent during the hours of 8:30 a.m. to 5:00 p.m. on a business day of the
recipient, shall be deemed sent on the next business day.
18. ENTIRE AGREEMENT
This Agreement (with its exhibit) represents the entire agreement of the
parties with respect to the subject matter hereof, and supersedes in their
entirety all prior agreements and undertakings of the parties with respect to
the subject matter hereof, and may not be modified except by means of a writing
signed by a duly authorized representative of the Company and by Grantee. This
Agreement shall be governed by and construed strictly in accordance with its
terms and by the laws of State of California.
19. BINDING AGREEMENT
This Agreement shall be binding on the Company, its successors and
assigns, and Grantee and his executors, administrators, heirs, successors, and
assigns.
20. COUNTERPARTS
This Agreement may be executed in several counterparts, all of which
together shall constitute one agreement binding upon all parties hereto,
notwithstanding that all parties have not signed the same counterpart.
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IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement
as of the day and year first above written.
THE CRONOS GROUP
By /s/ D J Tietz
Dennis J. Tietz
Chief Executive Officer
And /s/ C Tharp
Charles Tharp
Director & Chair
Compensation Committee
GRANTEE
/s/ S N Walker
[Signature]
S. Nicholas Walker
-----------------------
[Name of Grantee]
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EXHIBIT A
THE CRONOS GROUP
EXERCISE NOTICE
EXERCISE NOTICE
The Cronos Group
444 Market Street, 15th Floor
San Francisco, California 94111
Attention: Compensation Committee
Ladies and Gentlemen:
Reference is made to that certain Stock Appreciation Rights Agreement
between the Company and S. Nicholas Walker, dated as of October 13, 1999
(hereinafter, the "Agreement"). (All defined terms used herein shall have the
meaning given to them by the Agreement).
Pursuant to the Agreement, the undersigned hereby elects to exercise the
Award on 15,000 Share Units (hereinafter, the "Exercised Share Units").
The undersigned understands that the Company may withhold from the Award
Payment such amounts as it deems to be necessary to satisfy federal, state,
local, or foreign withholding tax requirements, and that the undersigned is
responsible for the payment of taxes of any kind which may be imposed on the
undersigned as a result of the grant or exercise of the Award.
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DATED: _______________________________ EXERCISING PARTY
_______________________________
(name)
_______________________________
(address)
NOTICE OF EXERCISE
ACKNOWLEDGED AND ACCEPTED:
THE CRONOS GROUP
By _______________________________
Its ______________________________
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Schedule to Stock Appreciation Rights Agreement between
the Company and S. Nicholas Walker
Pursuant to Instruction 2 to Item 601(a) of Regulation S-K, this Schedule
identifies omitted Stock Appreciation Rights Agreement between the Company and
each of the following parties, which are substantially identical in all
material respects except as to the parties thereto:
1. Stock Appreciation Rights Agreement between the Company and Robert M.
Melzer, dated as of October 13, 1999;
2. Stock Appreciation Rights Agreement between the Company and Maurice
Taylor, dated as of October 13, 1999; and
3. Stock Appreciation Rights Agreement between the Company and Charles
Tharp, dated as of October 13, 1999.
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Exhibit 10.25
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made as of the lst day of
April 1999, by and between CRONOS CONTAINERS INC., a California corporation (the
"Employer"), and JOHN M. FOY (the "Employee"),
WITNESSETH
WHEREAS, since 1985 Employee has been an employee of Employer or one or
more of affiliates of Employer, and has served as President of Employer since
1991; and
WHEREAS, Employer and Employee desire to state in writing the terms and
conditions of Employee's employment by Employer.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the parties hereto agree as follows:
FIRST: The Employer agrees to employ the Employee, and the Employee agrees
to serve in the employ of the Employer, on an exclusive and fill time basis, as
President of Employer, subject to the supervision and direction of its Board of
Directors ("Board"), from the date hereof through March 31, 2001, unless such
period is sooner terminated pursuant to the provisions of Paragraphs "FIFTH,"
"SIXTH," or "SIXTEENTH" below. Employee's duties hereunder shall include
service as an officer and/or director of such affiliated companies of Employer
as are delegated to Employee by the Board of Employer.
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SECOND: The Employee hereby warrants and represents that he has the full
right, power, and authority to enter into this Agreement and to perform all of
his obligations hereunder and that he is not party to any other agreement or
understanding which might conflict with the provisions hereof or affect or
interfere with the full performance by him of all of his obligations hereunder.
For the entire term hereof or any extensions, the Employee's duties shall
always consist of those of an executive capacity and shall never be relegated
below the status that is normally assigned an officer of similar companies.
The Employee's office and the principal place for the performance of his duties
hereunder, except for travel reasonably required, shall be at the place of
business of the Employer in San Francisco, California.
THIRD: For all services to be rendered by him in an executive capacity
only (including, but not limited to, service as an officer or director of
Employer or of any affiliate of Employer, or member of any committee or
otherwise) the Employer agrees to pay the Employee as long as he shall be
employed hereunder:
(a) An annual salary of One Hundred Fifty-Six Thousand One Hundred
Seventy-Six Dollars ($156,176), to be paid in accordance with Employer's
standard payroll practices; after December 31, 1999, Employee's annual salary
may be increased, in the discretion of the Board of Employer, but shall not be
reduced; and
(b) Bonus compensation at such times, and in such amounts, as are
determined in the discretion of the Board.
FOURTH: The Employee agrees that during the period of his employment he
will not, without the prior approval of the Board, be an officer, director or
employee of any other company (other than an affiliate of Employer), nor shall
he engage in or carry on, or have any interest in any business or activity at
the time carried on by Employer or any of its affiliates, nor shall he own of
record or
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beneficially an interest in any entity which markets or provides services sold
or provided by the Employer or any of its affiliates; provided, however, that
Employee may own or acquire, without the necessity of obtaining the prior
approval of the Board, publicly-traded securities of an entity which markets or
provides services sold or provided by the Employer or its affiliates so long as
Employee and an affiliates of Employee (not including, as affiliates of
Employee, for this purpose only, Employer and Employer's affiliates) do not own,
in the aggregate, more than one percent (1%) of the outstanding class of the
securities acquired and held by Employee and affiliates of Employee.
FIFTH: (a) Any provision of this Agreement to the contrary notwithstanding,
in the event the Employee shall, during the term of his employment hereunder,
fail to perform his duties hereunder owing to illness or other incapacity which
continues for a period of more than six (6) consecutive months, the Employer
shall have the right, by notice sent to the Employee by first-class mail,
postage prepaid, to terminate the Employee's employment hereunder as of a date
(not less than thirty (30) days after the date of the sending of such notice) to
be specified in such notice, and the Employee shall be entitled to receive all
compensation provided in Paragraph "THIRD" hereof computed to or on the basis of
the date specified in said notice. However, if prior to the date specified in
such notice, the Employee shall resume the performance of his duties hereunder,
said notice shall be deemed to be cancelled and rendered null and void.
(b) In the event this Agreement is terminated pursuant to the provisions of
Paragraph "FIFTH (a)" above, the Employee shall receive, for a period of six (6)
months following the effective date of said termination, the compensation that
he
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would have received pursuant to Paragraph "THIRD (a)" above had this Agreement
continued in full force and effect without interruption.
(c) In the event of the Employee's death during the term of his employment
hereunder, Employee's Beneficiary (as defined in Paragraph "EIGHTH" hereof)
shall be entitled to receive the compensation as provided in Paragraph
"THIRD (a)" hereof to the last day of the sixth month following the month in
which the Employee's death shall have occurred.
SIXTH: (a) Except as provided in Paragraph "FIFTH" above, this Agreement
may not be cancelled by the Employer prior to its expiration except for the
Employee's non-performance of, or wilfull misconduct in the performance of, his
duties hereunder.
(b) If the Employer intends to terminate this Agreement pursuant to
Paragraph "SIXTH (a)" above (except for the Employee's wilfull misconduct
amounting to moral turpitude so as to affect his ability to adequately perform
services on behalf of the Employer), it shall give the Employee detailed written
notice by first-class mail, postage prepaid, to that effect at least thirty (30)
days prior to the effective date of any such termination. If the cause of such
proposed termination is cared during the period between the time notice of
intention to terminate is sent to the Employee and the effective date thereof,
the notice of intention to terminate shall be deemed to be withdrawn and of no
effect. The Employer may terminate this Agreement effective immediately upon
giving the Employee written notice thereof for wilfull misconduct of the
Employee amounting to moral turpitude so as to affect his ability to perform
services on behalf of the Employer.
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SEVENTH: The Employer shall provide sufficient services, facilities and
personnel for the Employee to perform his services hereunder and shall reimburse
him for all ordinary and necessary business expenses incurred in performing such
services.
EIGHTH: The Employee by written notice (first-class mail, postage prepaid)
sent to the Employer during the term of this Agreement and signed by him, may
designate one or more persons or entities (including a trust or trusts or his
estate) to receive any balance of compensation payable to him under this
Agreement in the event of his death prior to full payment thereof and if he
shall designate more than one person, the proportion in which each is to receive
such payment. He may also designate the person or persons who shall succeed to
the rights of the person or persons originally designated, in case the latter
should die. He may from time to time change any designation so made, and the
last written notice (first-class mail, postage prepaid) given by him before his
death shall be controlling. In the absence of a designation made by the Employer
pursuant to this Paragraph "EIGHTH" or in the event of the death of a person to
whom payments were being made pursuant to this Paragraph "EIGHTH" before such
payments are completed, and, failing any other designation by the Employee, such
payments or any balance thereof shall be paid to his legal representative. The
person or persons entitled to payments pursuant to the provisions of this
Paragraph "EIGHTH" are referred to in this Agreement as the Employee's
"Beneficiary."
NINTH: The Employee agrees that he will not, without the written consent of
the Employer, disclose to anyone not properly entitled thereto any confidential
information relative to the business, sales, customers, customized software,
financial condition, or other activities of the Employer or any affiliate
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<PAGE> 6
thereof, except to Persons to whom such information is furnished in the normal
course of business under established procedures of the Employer and such other
persons as are legally entitled to such information.
TENTH: Nothing in this Agreement shall be construed as limiting or
restricting any benefit to the Employee, his legal representatives or
Beneficiary, under any pension or profit-sharing or similar retirement plan, or
under any group life or group health or accident or other plan of the Employer
for the benefit of its employees generally or a group of them, or under any
other agreement between Employer and Employee now or hereafter in existence, nor
shall any payment under this Agreement be deemed to constitute payment to the
Employee, his legal representatives or Beneficiary in lieu of or in reduction of
any benefit or payment under any such plan or agreement. It is expressly
understood and agreed that the Employer shall offer to and provide the Employee
with all other benefits, employee programs, facilities and emoluments which are
offered to any other officer of the Employer now or at any time hereinafter,
unless the terms of such plans specifically exclude him or he is ineligible to
participate in such plans under the terms thereof or applicable law.
ELEVENTH: The Employee agrees that he will not, during the term of his
employment hereunder or thereafter, make use of or divulge to any other person,
firm or corporation, or himself use, any trade or business secret, process,
method or means, or any other confidential information concerning the business
or policies of the Employer or any of its affiliates which he may have learned
as a result of his employment hereunder which if divulged would result in
appreciable harm to the Employer. The provisions of this Paragraph "ELEVENTH"
shall survive the
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<PAGE> 7
expiration or termination, for any reason, of this Agreement or the Employee's
employment hereunder.
TWELFFH: (a) This Agreement shall inure to the benefit of the Employee's
Beneficiary, but except as authorized by Paragraph "EIGHTH" above, neither this
Agreement nor any rights or interest under this Agreement shall be assignable by
the Employee or by the Employee's Beneficiary without the Employer's prior
written consent.
(b) This Agreement and the rights and obligations hereunder, shall not be
assignable or delegable by either party or by the Employee's Beneficiary or
spouse except as expressly provided in this Agreement or required by applicable
law.
THIRTEENTH: (a) Any notice to the Employer under this Agreement shall be
deemed to have been given if and when mailed by first-class mail, postage
prepaid, to Employer at its principal office, or such other address as the
Employer may from time to time designate in writing by notice to the Employee
given pursuant to Paragraph "THIRTEENTH (b)" hereof.
(b) Any notice to the Employee under this Agreement shall be deemed to have
been given if and when mailed by first-class mail, postage prepaid, to the
Employee at his address hereinbelow given or such other address the Employee may
from time to time designate in writing by notice to the Employer given pursuant
to Paragraph "THIRTEENTH (a)" above.
(c) Any notice to the Employee's Beneficiary under this Agreement shall be
deemed to have been given if and when mailed by first-class mail, postage
prepaid, to such Beneficiary in care of the Employee's estate or at such other
address or respective addresses as Employee or such Beneficiary may from time to
time
E-23
<PAGE> 8
respectively designate in writing to the Employer by notice or notices given
pursuant to Paragraph "THIRTEENTH (a)" hereof
FOURTEENTH: (a) No amendment or modification of this Agreement shall be
deemed effective unless and until executed in writing by the parties hereto With
the same formality attending execution of this Agreement.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel to enforce any provision of this
Agreement, except by written instrument of the party charged with such
waiver or estoppel executed with the same formality attending execution of
this Agreement.
FIFTEENTH: This Agreement and the provisions thereof shall be governed by
and construed in accordance with the laws of the State of California, and all
matters with respect to the validity, interpretation, performance and
enforcement of this Agreement shall be determined by reference to the laws of
the State of California. In the event that any provision or any obligation under
this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions or obligations shall not
in any way be affected or impaired thereby.
SIXTEENTH: This Agreement and all rights and obligations set forth herein
shall terminate upon the filing by Employer of a certificate of election to wind
up and dissolve pursuant to the provisions of Sections 1900 et seq. of the
California Corporations Code. In such event, Employee shall be entitled to
receive all compensation provided in Paragraph "THIRD" hereof computed to the
date of filing of said certificate of election by Employer.
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<PAGE> 9
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed
by its officers thereunto duly authorized, and the Employee has signed this
Agreement, effective as of the date and year first above written.
"EMPLOYER"
CRONOS CONTAINERS INC.
By /s/ D J Tietz
Dennis J. Tietz
Director
And /s/ P J Younger
Peter J. Younger
Director
"EMPLOYEE" /s/ J M Foy
E-25
<PAGE> 10
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT EMPLOYMENT AGREEMENT (the "Amendment"), made as of this lst
day of December, 1999, by and between CRONOS CONTAINERS INC., a California
corporation (the "Employer"), and John M. Foy (the "Employee"),
WITNESSETH:
WHEREAS, Employer and Employee entered into an Employment Agreement, dated
as of April 1, 1999 (hereinafter, the "Employment Agreement"); and
WHEREAS, pursuant to paragraph one of the Employment Agreement, Employer
agreed to employ Employee, and Employee agreed to serve in the employ of the
Employer, on an exclusive and full-time basis, as the Senior Vice President of
Employer, through March 31, 2001, subject to earlier termination pursuant to
the provisions of the Employment Agreement; and
WHEREAS, Employer and Employee desire to extend the term of the Employment
Agreement, and Employer desires to confirm, as part of the Employment
Agreement, Employer's severance policy;
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<PAGE> 11
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the parties hereto agree as follows:
1. Extension of Term of Employment Agreement. Employer agrees to employ the
Employee, and the Employee agrees to serve in the employ of the Employer on an
exclusive and full-time basis, in the position identified for Employee in the
Employment Agreement, subject to the supervision and direction of that person or
persons set forth in the Employment Agreement, through November 30, 2001, unless
such period is sooner terminated pursuant to the provisions of paragraphs
"FIFTH," "SIXTH," or "SIXTEENTH" of the Employment Agreement.
2. Severance Policy. Employer hereby confirms to Employee that the terms
and provisions of Employer's severance policy, set forth on Exhibit A hereto
(the "Severance Policy"), apply to the employment by Employer of Employee. In
the event of the termination of Employee under the Employment Agreement without
cause, with "cause" defined as set forth of paragraph 1 of the Severance Policy
or as set forth in the Employment Agreement, whichever applies, then and in such
event, Employee shall be paid an amount equal to the greater of Employee's
annual salary under the Employment Agreement for the balance of the
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<PAGE> 12
term of the Employment Agreement or that amount called for by the Severance
Policy.
3. Continuance in Force of Employment Agreement. Other than as specifically
amended hereby, the terms and provisions of the Employment Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the Employer and the Employee have signed this
Amendment, effective as of the date and year first above written.
"EMPLOYER"
by /s/ D J Tietz
its President
And /s/ P J Younger
Its Vice President
"EMPLOYEE"
signature /S/ J M Foy
print name John M Foy
address Lafayette CA 94549
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<PAGE> 13
Exhibit A
COMPANY'S SEVERANCE POLICY
1. Any employee terminated by the Company without "cause" shall be paid
severance in an amount equal to the product obtained by multiplying the
employee's monthly salary at the time of termination by the number of years that
the employee has worked for the Company, with a maximum severance payment of one
year's salary;
2. No severance shall be paid to an employee terminated for cause," with
cause defined, in the absence of any specific definition in any employment or
severance agreement between the employee and the Company, to mean the
non-performance of, or willful misconduct in the performance of, the employee's
duties to the Company, or to willful misconduct of the employee amounting to
moral turpitude so as to affect his or her ability to adequately perform
services on behalf of the Company;
3. For purposes of the Company's severance policy, the term "Company" shall
refer to the Cronos Group or to the subsidiary of the Cronos Group that is the
employer of the employee for tax purposes;
4. The Company's severance policy shall be subject to any provision of
local law of the country of the employee's principal place of business that may
call for a higher severance payment in the event of a termination of the
employee without cause;
5. The Company's severance policy shall be subject to any provision of any
employment or severance agreement between the Company and the employee that
calls for a severance payment different than that specified in the Company's
severance policy;
6. No severance shall be payable by the Company to any employee who
voluntarily resigns his or her employment with the Company; and
7. Any severance payment called for under the Company's severance policy
shall be paid to the terminated employee in one lump sum, within 30 days of his
or her termination of employment.
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<PAGE> 1
Exhibit 10.26
CRONOS
Cronos Container
Orchard Lea
20 January 2000 Winkfield Lane
Winkfield
Windsor
Berkshire
SL4 4RU
Mr John Kirby England
Scipetts Lodge
Holyport
Berkshire
SL6 2NN
Dear John
Your Service Agreement
I am pleased to advice you that the Board of Directors has decided to offer you
further employment security by extending your appointment under your Service
Agreement with the Company from 31 March 2001 to 30 November 2001.
Accordingly clause 2.2 of your Service Agreement would read:
"The appointment commenced on I April 199Y and shall continue (subject to
earlier termination as provided in this Agreement) until November 2001 and
thereafter shall continue until terminated by either party giving to the
other not less than 3 months written notice
As this will constitute a change to your terms of employment your agreement is
required. If the extension of your appointment is acceptable to you please
sign and return the duplicate copy of this letter
Yours sincere
Peter Young
Director:
I have read and accept the above change to the terms of my employment.
Signed /s/ J c Kirby Dated 20th January 2000
E-30
<PAGE> 2
CRONOS CONTAINERS LIMITED
AND
JOHN KIRBY
SERVICE AGREEMENT
Edwin Coe
2 Stone Buildings
Lincoln's Inn
London WCZA 3TH
Ref RJH/ZS/66 10846
E-31
<PAGE> 3
Index to Clauses
<TABLE>
<S> <C>
1 Interpretation
2 Appointment and duration
3 Duties of the Executive
4 Place of work and residence
S Pay
6 Pension
7 lnsurancc benefits
8 Car
9 Expenses
10 Holiday
11 Sickness
12 Confidentiality
13 Termination of agreement
14 Provisions after Termination
15 General
Schedule 1 Paxticularc Required by the ~mployment Rights Act 1996
</TABLE>
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<PAGE> 4
SERVICE AGREEMENT
THIS AGREEMENT is made this 1st day of April 1999.
BETWEEN:-
(1) CRONOS CONTAINERS LIMITED a company incorporated in England and W21es with
company number 154391Y and whose registered office is at Orchard Lea, Winkfield
Lane, Winkfield, Windsor SL4RU ("the Company"), and
(2) JOHN KIRBY of The Annex, Scripetts Lodge, Forest Green Road, Holyport,
Maidenhead, Berkshire. SL6 2NN ("the Executive").
WHEREAS.
(A) The Executive employment with the Company commenced on 1 January 1985
(B) The Company has appointed the Executive in the capacity as Senior Vice
President -Operations of the Company.
NOW THEREFORE in consideration of the mutual obligations and covenants
contained herein, the adequacy and sufficiency of which are hereby
acknowledged, the parties HAVE AGREED AS FOLLOWS:-
I INTERPRETATION
1.1 The headings and marginal headings to the clauses are for convenience only
and have no legal effect.
1.2 Any reference in this Agreement to any Act or delegated legislation
includes any statutory modification or re-enactment of it or the provision
referred to.
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<PAGE> 5
1.3 In this Agreement:
'THE BOARD' means the Board of Directors of the Company), and includes any
committee of the Board duly appointed by it.
'GROUP COMPANY' means any company which for the time being is a company having
in ordinary share capital (as defined in s 832 of the Income and Corporation
Taxes Act 1988) of which not loss than 25 percent is owned directly or
indirectly by the Company or its holding company applying the provisions of s
839 of the Income and Corporation Taxes Act 1988 in the determination of
ownership.
'CHAIRMAN' means the Chairman of the Board or any person or persons jointly
holding such office of the Company from time to time and includes any person(s)
exercising substantially the functions of a managing director or chief
executive, officer of the Company.
2 Appointment and duration
2.1 The Company appoints the Executive and the Executive agrees to serve as
Senior Vice President - Operations of the Company or in such other appointment
as may from time to time be agreed. The Executive accepts, that the Company
may at its discretion direct him to perform other duties or tasks not within
the scope of his normal duties and the Executive agrees to perform such duties
or undertake such tasks as if they were specifically required under this
Agreement provided performance of any such duties or tasks by the Executive
shall not affect The Executive's right to the remuneration provided for under
this Agreement.
2.2 The appointment commenced on 1 April 1999 and shall continue (subject to
earlier termination as provided in this Agreement) until 31 March 2001 and
thereafter shall continue until terminated by either party giving to the other
not less than 3 months written notice.
2.3 The Company may from time to time appoint any other person or persons to
act jointly with the Executive in his appointment.
2.4 The Executive warrants that by virtue of entering into this Agreement or
any other agreement between a Group Company and the Executive, he will not be
in breach of
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<PAGE> 6
any express or implied terms of any contract with or of any other obligation to
any third party binding upon him.
3 Duties of the Executive
3.1 The Executive shall at all time during the period of this Agreement-
3.1.1 devote the whole of his time., attention and ability to the
duties his appointment;
3.1.2 faithfully and diligently perform those duties and exercise
such powers consistent with them which are time to time vested in
him;
3.1.3 obey all lawful and reasonable directions of Chairman of the
Company and/or the board.
3.1.4 use his best endeavours to promote the interests of the Company
and its Group Companies;
3.1.5 keep the Chairman and/or the Board promptly and fully informed
(in writing if so requested) of his conduct of the business
or affairs of the Company ;and its Group Companies and provide
such explanations as the Chairman and/or the Board may require;
3.1.6 not at any time make any untrue or misleading statements relating
to the Company or any Group Company.
3.1.7 not take any action prejudicial to the interests of the Company
or any Group Company.
3.2 The Executive shall (without further remuneration) if and for so long as
the Company require during the period of the Agreement:
3.2.1 carry out the duties of his appointment on behalf of any Group
Company;
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<PAGE> 7
3.2.2 act as an officer of any Group Company or hold any other
appointment or office as nominee or representative of the Company
or any Group Company;
3.2.3 carry out such duties and the duties attendant on any such
appointment as if they were duties to be performed by him on
behalf of the Company.
4 PLACE OF WORK AND RESIDENCE
The Executive shall perform his duties at the business premises of the Company
at Orchard Lea, Winkfield Lane, Winkfield, Windsor, Berkshire, England and/or
such other place of business of the Company or of any Group Company as the
Company requires.
5 PAY
5.1 During his appointment the Company shall pay the Executive:-
5.1.1 a salary at the rate of GBP 97,890.00 per year which shall
accrue day-to-day and be payable by equal monthly instalments in
arrears on or about the 25th day of each month. 'The salary shall
be deemed to include any fees receivable by the Executive as a
Director of the Company or any Group Company, or of any other
company or incorporated body in which he holds office as nominee
or representative of the Company or any Group Company; and
5.1.2 The Executive shall be entitled to participate in the Company's
discretionary bonus programme in accordance with its terms and
conditions and which pays a discretionary bonus based on Company
and personal performance. The entitlement to participate in the
Company's discretionary bonus programme will cease on termination
of employment or if the Executive is placed on garden leave
pursuant to the provisions of clause 13.5 hereof
5.2 The Executive's salary may be reviewed by the Board annually on 1st January
and the rate of salary may be increased by the Company with effect from
that date and by such amount if any as it shall in its absolute discretion
think fit;
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<PAGE> 8
6 PENSION
6.1 The Company does not operate a contracted-out pension scheme, so there is
no contracting out certificate in force.
6.2 At the Company's discretion, the Executive may be entitled to participate
in the Company's Group Personal Pension Plan subject to the terms of the
rules from time to time which are available for inspection from the Human
Resources Department. The Company shall be entitled at any time to
terminate the plan or the Executive's membership of it.
6.3 The Company will continue to make the current level of payments into
the Executive's pension scheme with Windsor Life Retirements Savings
Account for the duration of the Executive's employment. Entitlement to such
payments will cease on termination of the Executive's employment.
7 INSURANCE BENEFITS
7.1 The Executive shall be entitled to participate at the Company's expense
in the Company's Life Assurance Scheme and Permanent Health insurance
Scheme and in the Company's private medical expenses insurance scheme,
for himself, his spouse and dependent children subject always to the
rules of such schemes details of which are available from the Human
Resources Department.
8 CAR
8.1 Subject to the Executive holding a current full driving licence the
Company shall provide the Executive, for his sole business use and
private use by him and his spouse with a car of a make, model and
specification selected by the Company (which in the reasonable opinion
of the Board is commensurate with the status of the Executive and the
image of the Company). The entitlement to the provision of a company
car shall cease on the termination of his employment.
8.2 The Company shall bear all standing and running expenses of the car
except for use of the car by the Executive for holiday purposes and
any additional insurance costs incurred to permit the Executive to use
the car outside of the United Kingdom for private
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<PAGE> 9
purposes and shall replace such car as provided in the Company's car
scheme policy in effectt from time to time. The entitlement to fuel
consumed during private use of the car shall cease should the Company
place the Executive on garden leave to the provisions of clause 13.5
hereof.
8.3 The Executive shall always comply with all regulations laid down by
the Company from time to time with respect to company cars; shall
forthwith notify the Company of any accidents involving his company
car and of any charges of driving offences which are brought against
him and, on the termination of his appointment, shall forthwith return
his company car to the Company at its head office.
8.4 The Executive has a duty to produce and the Company has a right to
examine the current driving licence of the Executive at the request of
the Company at any time during normal working hours on reasonable
notice throughout the term of the Executive's employment or his
retention of the company car when at the risk of the Company or in the
ownership of the Company.
9 EXPENSES
9.1 The Company shall reimburse to the Executive on a monthly basis
travelling, hotel, entertainment and other expenses reasonably
incurred by him in the proper performance of his duties subject to
the production to the Company of such vouchers or other evidence of
actual payment of the expenses as the Company may reasonably
require.
9.2 Where the Company issues a company sponsored credit or charge card to
the Executive he shall use such card only for expenses reimbursable
under clause 9.1 above, and shall return it to the Company forthwith
on the termination of his employment.
10 HOLIDAY
10.1 In addition to English public holidays The Executive is entitled to 25
working days paid holiday in each year (which runs from 1st January to
31 December) to be taken at such time or times as are agreed with the
Board. The Executive shall not without the consent of The Board carry
forward (save for a maximum of 5 days) any unused part of his holiday
entitlement to a subsequent holiday year.
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<PAGE> 10
10.2 For the holiday year during which his appointment commences or
terminates the Executive is entitled to 2 working days holiday for
each complete calendar month of his employment by the Company during
that holiday year. On the termination of his appointment for whatever
reason, the Executive shall either be entitled to pay in lieu of
outstanding entitlement or be required to repay to the Company any
salary received for holiday taken in excess of his actual entitlement.
The basis for payment and repayment shall be 1/260 x of the
Executive's annual basic salary for each day.
11 SICKNESS
11.1 If the Executive; is absent because of sickness (including mental
disorder) or injury he shall report this fact forthwith to the Human
Resources Department and if the Executive is so prevented for seven or
more consecutive days, he shall provide a medical practitioner's
statement on the eighth day and weekly thereafter so that the whole
period of absence is certified by such statements. Immediately
following his return to work after a period of absence the Executive
shall complete a Self-Certification form available from the Human
Resources Department detailing the reason for his absence.
11.2 If the Executive shall be absent due to sickness (including mental
disorder) or injury duly certified in accordance with the provisions
of clause 11.1 hereof, he shall be entitled to his full basic salary
hereunder for a period up to six months of continuous absence or 25
days absence in aggregate in any period of 12 months and thereafter
such remuneration, if any, as the Board shall from time to time
determine provided that such remuneration shall be inclusive of any
statutory sick pay to which the Executive is entitled to under the
provisions of the Social Security benefits Act 1992 and any Social
security Sickness Benefit or other benefit recoverable by the
Executive (whether or not recovered) may be deducted therefrom.
11.3 For Statutory Sick Pay purposes the Executive's qualifying days shall
be his normal working days.
11.4 At any time during the period of his appointment, (but not normally
more often than once every second year) the Executive shall at the
request and expense of the Company permit himself to be examined by a
registered medical practitioner to be selected by the
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<PAGE> 11
Company and shall authorise such medical practitioner to disclose to
and discuss with the Company's medical adviser the results of such
examination and any matters which arise from it in order that the
Company's medical adviser can notify the Company of any matters which,
in his opinion, might hinder or prevent the Executive (if during
period of incapacity) from returning to work for any period or (in
other circumstances) from properly performing any duties of his
appointment at any time.
12 CONFIDENTIALITY
12.1 The Executive acknowledges that during his employment with the Company
he will have access to and will be entrusted with confidential
information and trade secrets relating to the business of the Company,
other Group Companies and their customers and suppliers ("Confidential
Information").
12.2 The Executive will not during the term of the appointment (otherwise
than in the proper performance of his duties and then only to those
who need to know Confidential Information) or thereafter (except with
the written consent of the Board or as required by law);
(a) divulge of communicate to any person (including any
representative of the press or broadcasting or other media);
(b) cause or facilitate any unauthorised disclosure through any
failure by him to exercise all due care and diligence, or
(c) make use of (other than for the benefit of any Group Company)
any Confidential Information which may have come to his knowledge
during his employment with the Company or in respect of which a Group
Company may be bound by an obligation of confidence to any third party
provided the Executive is or has been made aware of such obligation or
confidence. The Executive will also use all reasonable endeavours to
prevent the publication or disclosure of any Confidential Information.
These restrictions will not apply to Confidential Information which
after the appointment has been terminated has become available the
public generally otherwise than through unauthorised disclosure or is
disclosed 'in any legal proceeds.
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<PAGE> 12
12.3 All notes-, memoranda and other records (whether in documentary form
or stored on computer disk or tape) made by The Executive during his
employment with the Company and which relate to the business of any
Group Company shall belong to such Group Company and the Executive
shall, from time to time, promptly hand over such notes, memoranda and
other records to the Company (or as the Company may direct).
13 TERMINATION OF AGREEMENT
13.1 AUTOMATIC TERMINATION
This Agreement shall automatically terminate:
13.1.1 on the Executive reaching his 65th birthday; or
13.1.2 if the Executive becomes prohibited by law from being a
director; or
13.1.3 if he resigns his office;
13.2 SUSPENSION
In order to investigate a complaint against the Executive of
misconduct the Company is entitle to suspend the Executive on full pay
for so long as may be necessary to carry out a proper investigation
and hold a disciplinary hearing.
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<PAGE> 13
13.3 IMMEDIATE DISMISSAL
The Company may by notice-terminate this Agreement with immediate effect if the
Executive:
13.3.1 commits any act of gross misconduct or repeat-or continues (after
written warning) any other breach of his obligations under this,
Agreement; or
13.3.2 is guilty of any conduct which in the reasonable opinion of the
Board brings him, the Company or any Group Company into
disrepute: or
13.3.3 is convicted of any criminal offence (excluding an offence under
road traffic legislation in the United Kingdom or elsewhere for
which he is not sentenced to any term of imprisonment whether
immediate or suspended), or
13.3.4 commits any act dishonesty whether relating to the Company, or
Group Company, any of its or their employees or otherwise; or
13.3.5 becomes bankrupt or makes any arrangement or composition with his
creditors generally; or
13.3.6 is in the reasonable opinion of the Board incompetent in the
performance of his duties.
13.4 PAY IN LIEU
On serving notice for any reason to terminate this Agreement or at any time
thereafter during the currency of such notice the Company shall be entitled
(but not obliged) to pay to the Executive his basic salary (at the rate
then payable under clause 5 hereof) for the unexpired portion of his
entitlement to notice.
13.5 GARDEN LEAVE
The Company shall have the right at its discretion during the period of
notice and any part thereof to assign the Executive to any other duties or
to change the Executive's duties as and when required by the Company or to
place the Executive on leave, in either case paying the basic salary and
benefits excluding bonus due to the Executive.
13.6 MISCELLANEOUS
On the termination of this Agreement for whatever reason,, the Executive
shall at the request of the Company resign (without prejudice to any claims
which the Executive may have against any company arising out of this
Agreement or the termination thereof) from all and any offices which he may
hold as a Director of the Company or of any Group Company and from all
other appointments or offices which he holds as nominee or representative
of the, Company or any Group Company and if he should fail to do so within
seven days the Company is hereby irrevocably authorised to appoint
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<PAGE> 14
some person in his name and on his behalf to sign any document or do any
things necessary or requisite to effect such resignation(s) and/or
transfer(s).
14 PROVISION AFTER TERMINATION
14.1 The Executive agrees that he will not at any time after the
termination of this Agreement either personally or by his agent,
directly or indirectly:
14.1.1 represent himself any being in any way connected with or
interested in the business of the Company or any Group
Company;
14.1.2 use or disclose to any person, firm or company any
confidential information directly or indirectly relating to
the affairs of the Company or any Group Company or to a
customer of the Company or any Group Company which may have
been acquired by him in the course of or incidental to his
employment by the Company for his own benefit or for the
benefit of others or to the detriment of the Company or any
Group Company or such customer. The restriction shall
continue to apply after the termination of this Agreement
but shall cease to apply to information or knowledge which
may come into the public domain otherwise than through
unauthorised disclosure by the Executive or any other
person.
14.2 The Executive shall not for a period of 6 months after the termination
of this Agreement directly or indirectly and whether on his own behalf
or on behalf of any other business, concern, person, partnership,
firm, company or other body which is wholly or partly in competition
with the business carried on by the Company or any Group Company;
14.2.1 canvass, solicit or approach or cause to be canvassed or
solicited or approached for orders in respect of any
services provided or goods dealt in by the Company or any
Group Company in respect of the provision or sale of which
the Executive was engage during the last 12 months of his
employment with the Company, any person who at the date of
termination of this Agreement was negotiating with the
Company or Group Company for the supply of services or goods
or within 12 prior to such date is or was client or
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customer of the Company or any Group Company or was in the
habit of dealing with the Company or Group Company and with
whom Executive shall have dealt.
14.2.2 interfere or seek to interfere or take such steps as may
interfere with the continuance of supplies to the Company or
any Group Company (or the terms relating to such supplies)
from any suppliers who have been supplying components,
materials or services to the Company or any Group Company at
any time during the last 12 month of this Agreement;
14.2.3 solicit or entire or endeavour to solicit or entice away
from the Company or any Group Company or offer or cause to
be offered any employment to any person employed by the
Company or any Group Company in an executive capacity at the
date of such termination for whom the executive is
responsible;
14.2.4 deal with any person or person who or which at any time
during the period of 12 months prior to termination of this
Agreement have been in the habit of dealing under contract
with the Company or any Group Company.
14.3 The restrictions contained in this clause are separate and severable
and enforceable accordingly and considered reasonable by the parties
(the Executive acknowledging the legitimate need for the Company and
the Group Companies to protect their business interests) but in the
event that any such restriction shall be found or held to void
circumstances where it would be valid if some part therefore were
deleted or distance of application reduced, then the parties agree
that such restriction shall apply with such modification as may be
necessary to make it valid and effective.
15 GENERAL
15.1 STATUTORY PARTICULARS
The further particulars of term of employment not contained in the
body of this Agreement which must be given to the Executive in
compliance with the Employment Rights Act 1996 are given in
Schedule 1.
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<PAGE> 16
15.2 PRIOR AGREEMENTS
This Agreement acts out the entire agreement and understanding of the
parties and is in substitution for any previous contracts of
employment or for services between the Company or any of its Group
Companies and the Executive (which shall be deemed to have been
terminated by mutual consent).
15.3 ACCRUED RIGHTS
The expiration or termination of this Agreement however arising shall
not operate to affect such of the provisions of this Agreement as are
expressed to operate or have effect after then and shall be without
prejudice to any accrued rights or remedies of the parties.
15.4 PROPER LAW
The validity construction and performance of this Agreement shall be
governed by English law.
15.5 ACCEPTANCE OF JURISDICTION
All disputes claims or proceedings between the parties relating to the
validity construction or performance of this Agreement shall be
subject to the non-exclusive jurisdiction of the High Court of Justice
in England and Wales ('the High Court') to which the parties
irrevocably submit.
15.6 NOTICES
Any notice to be given by a party under this Agreement must be in
writing and must be given by delivery at or by sending by first class
post or other faster postal service, or telex, facsimile transmission
or other means of telecommunication in permanent written form
(provided the addressee has his or its own facilities for receiving
such transmission) to the last know postal address or relevant
telecommunications number of the other party. Where notice is given by
sending in a prescribed manner it shall be deemed to have been
received when in the ordinary course of the means of transmission it
would be received by the addressee. To prove the giving of a notice it
shall be
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<PAGE> 17
sufficient to show it was despatched. A notice shall have effect from
the sooner of its actual or deemed receipt by the addressee.
IN WITNIESS WHEREOF THE EXECUTIVE AND THE COMPANY HAVE EXECUTED
THIS DOCUMEENT AS A DEED THE DAY AND YEAR FIRST BEFORE WRITTEN
Signed and delivered as /s/ J C kirby
a deed by the Executive
in the presence of /s/ K Cuzner
Name:
Address:
Occupation:
Signed and delivered as a deed
By [ ] Director and /s/ P J Younger
[ ] (Director/Secretary) /s/ D J Tietz
for and on behalf of the Company
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<PAGE> 18
SCHEDULE 1
Employment Rights Act 1996
The following information is given to supplement the information given in the
body of the Agreement in order to comply with the requirements of the Act
1 The Executive's appointment by the Company commenced on 1 April 1999,
2 The Executive's period of continuous employment with the Company began on 1
January 1985.
3 The Executive's hours of work are the normal hours of the Company from
9.00 am to 5:30 pm Monday to Friday each week together with such
additional hours as may be necessary so as properly to fulfil his duties.
4 No Contracting-Out Certificate pursuant to provisions of the Pensions
Scheme Act 1993 is held by the Company in respect of the Executive's
employment.
5 There is not formal disciplinary procedure applicable to this employment.
The Executive is expected to exhibit a high standard of proprietary,
integrity and efficiency in all his dealings with and in the name of the
Company and Group Company and may suspended on basic pay and benefits
(excluding bonus) or required to take leave during any investigations
which it may be necessary for the Company to undertake.
6 If the Executive has any grievance relating to his employment (other than
one relating to a disciplinary decision) he should refer such grievance to
the Chairmen and if the grievance is not resolved by discussion with him
it will referred to the Board for resolution.
7 There are no collective agreement which directly or indirectly affect the
Executive's terms and conditions of employment.
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<PAGE> 1
Exhibit 10.27
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into effective as of March 24, 2000 (the "Effective Date") by and
between Peter J. Younger ("Younger") and The Cronos Group, a limited liability
company organized and existing under the laws of Luxembourg (the "Company")
(collectively, the "Parties").
R E C I T A L S
WHEREAS, since 1987, Younger has been employed as an officer by the Company
and/or one or more direct or indirect wholly-owned subsidiaries of the Company;
WHEREAS, since March 1997, Younger has served as the Chief Financial Officer of
the Company and as the Chief Financial Officer and/or an executive officer of
one or more subsidiaries of the Company;
WHEREAS, Younger is currently a party to an Employment Agreement, dated as of
July 1, 1998 (the "Prior Employment Agreement") and a severance agreement, dated
as of the same date, ("Severance Agreement") with Cronos Containers Limited, a
United Kingdom corporation and a wholly-owned subsidiary of the Company ("CCL");
WHEREAS, the Parties" desire to amend and restate, in its entirety, Younger's
Prior Employment Agreement and to replace it with this Agreement;
WHEREAS, the Parties also desire to terminate the Severance Agreement;
WHEREAS, effective as of the date hereof, the Parties hereby agree that the
terms of this Agreement shall supercede, in its entirety, the terms of the Prior
Agreement and that the Severance Agreement shall be terminated; and
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<PAGE> 2
WHEREAS, the Parties further agree that this Agreement shall govern, in all
respects, the terms of the employment of Younger by the Company.
NOW, THEREFORE, the Parties agree as follows:
1. POSITION
During the term of this Agreement ("Term"), Younger shall be employed by the
Company as its Chief Financial Officer and shall be nominated to the Company's
Board of Directors (the "Board") to serve as a member of the Board. Younger
shall also serve as the Chief Financial Officer and/or director of one or more
subsidiaries of the Company, including CCL, as designated from time to time by
the Board and/or by the Chief Executive Officer of the Company (hereinafter, the
"Subsidiaries").
2. TERM
(a) The Term shall commence on the Effective Date and shall continue until
December 31, 2000. Thereafter, the Term shall continue for an additional year
ending on December 31, 2001. Any further extensions shall only occur upon the
written agreement of the Parties hereto.
(b) Younger shall work exclusively for the Company (which, for the purposes of
this provision, includes the Subsidiaries) during the Term.
3. ANNUAL SALARY
Younger's annual salary for services rendered under this Agreement shall be Two
Hundred Fifty Thousand Dollars ($250,000), (the "Initial Base Salary") paid in
accordance with the Company's standard payroll practices. Commencing January 1,
2001, Younger's annual salary may be increased, in the discretion of the Board,
but shall not be reduced. In all events, Younger's annual salary for the year
2001, and for each year thereafter during the Term shall be increased, at a
minimum, in accordance with the ratio that the consumer price index compiled and
published by the United States Department of Labor's Bureau of Labor Statistics
for the San Francisco/Oakland Metropolitan area ("CPI") for the year just ended
bears to said figure for the calendar year preceding the year just ended. Such
increased CPI shall be
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<PAGE> 3
applied to the Initial Base Salary, as previously increased by the CPI, and not
necessarily to the prior year's annual salary. For accounting and tax reporting
purposes, the annual salary, bonus, and other compensation and benefits payable
to Younger shall be allocated among the Company and the Subsidiaries based upon
the services rendered by Younger to the Company and the Subsidiaries.
4. BONUS
(a) For each calendar year that ends during the Term of this Agreement, the
Company shall pay a cash bonus to Younger which, with respect to the 1999
calendar year, shall be in an amount equal to up to 50% of Younger's annual
salary and shall be calculated on the basis of the performance goals established
by the Compensation Committee of the Board at its meeting of June 3, 1999, and,
with respect to any subsequent calendar year (including, but not limited to, the
2000 calendar year), on the basis of comparable performance goals or such other
criteria determined by the Board, in its discretion with respect to such
calendar year.
(b) In the event that during the Term, any "Change in Control" (as defined in
Exhibit A hereto) of the Company occurs, Younger shall receive a single sum cash
bonus (the "Transaction Bonus") in a dollar amount which shall be determined and
paid to Younger in accordance with the terms and provisions of Exhibit B also
attached hereto. Notwithstanding any contrary provision in this Agreement,
payment of the Transaction Bonus shall be subject to any reduction required by
Section 13 hereof.
5. ALLOCATION OF COMPENSATION AMONG THE COMPANY AND SUBSIDIARIES
For accounting and tax reporting purposes, the annual salary, bonus, and other
compensation and benefits (collectively, "Compensation") payable to Younger
shall be allocated among the Company and the Subsidiaries based upon the
services rendered by Younger to the Company and the Subsidiaries. Younger shall,
within ninety (90) days of the date of this Agreement, in consultation with the
Company's accounting staff and outside auditors, and subject to the approval of
the Audit Committee of the Board, develop an allocation method and procedures
for the purpose of allocating Younger's Compensation among the Company and the
Subsidiaries. The
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<PAGE> 4
procedures selected shall be designed to fairly reflect an allocation of
Younger's Compensation among the Company and the Subsidiaries based upon the
services rendered by Younger to the Company and the Subsidiaries, in accordance
with sound accounting practice.
6. GROUP/EXECUTIVE BENEFITS
(a) Except as otherwise specifically provided herein, Younger and his family
shall participate, on terms no less favorable than were provided to other
executive officers of the Company, in any group and/or executive life,
hospitalization or disability insurance plan, health program, pension, profit
sharing, 401(k) and similar benefit plans (qualified, non-qualified and
supplemental) that the Company sponsors for its officers or employees, and in
other fringe benefits, including any automobile allowance or arrangement, club
memberships and dues, and similar programs (collectively referred to as the
"Benefits"). All waiting periods for such plans shall be waived, except with
respect to any pension plan where waiver of the applicable waiting period is not
permitted. It is understood that participating on the "same terms" as other
executive officers of the Company means the same rules and/or policies shall
apply, recognizing that the result upon applying them can be affected by
different credited years of service.
(b) Without limiting the generality of the foregoing provisions of this Section
6, the Company shall provide the following specific benefits to Younger:
(i) Health Benefits. Younger, on behalf of himself and his family, at
Company expense, shall be entitled to secure medical care which is, in his sole
discretion, of the same quality and convenience they would receive, and at the
same total expense to Younger, as if Younger were an employee of Cronos Capital
Corp. ("CCC"), a U.S. Subsidiary of the Company, were Younger a participant in
CCC's medical, dental and other health-related benefit plans. To the extent that
Younger has unreimbursed medical expenses resulting from medical treatment for
himself or his family, he may submit a statement of such expenses to the officer
of CCC in charge of medical benefits, together with any other information
required by CCC, for reimbursement pursuant to the standards set forth in this
paragraph. The decision of the executive in charge of medical benefits
concerning the amount of
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<PAGE> 5
reimbursement due Younger shall be final, unless not made in good faith. The
Company shall not be responsible for consequences or damages flowing from any
act or omission by the Company in providing medical care to Younger or his
family. The maximum amount of expense reimbursement under this paragraph to
which Younger is entitled for medical expenses for himself and his family for
any calendar year shall not exceed L.15,000.
(ii) Automobile. For the Company's convenience, and as a condition to
Younger's employment by the Company, Younger shall, to the extent reasonably
possible, use a luxury automobile to be provided and maintained by the Company.
The Company shall also provide, at the Company's expense, adequate personal
injury and property damage insurance covering such automobile.
(iii) Tax Preparation and Planning. The Company will pay the fees for
outside tax planning and tax return preparation services for Younger, by
recognized experts in such fields, and any fees or expenses incurred by Younger
in connection with any investigation or audit of such returns by any taxing
authority.
(iv) Mitigation Tax for Incremental Taxes. In recognition of the fact that
Younger currently resides in England, the Company shall reimburse Younger for
any additional income taxes payable by him on his income earned as an officer of
the Company or any Subsidiary over the income taxes that would be payable on
such income were Younger a resident of the State of California. The amount of
any such reimbursement shall be confirmed by the outside auditors of the
Company, and shall be payable to Younger on or prior to August 31st of each year
for income earned by Younger for the prior calendar year.
(iii) Vacation. Younger shall be entitled to twenty-five (25) business days
of vacation during each calendar year during the term of this Agreement and any
extensions thereof, prorated for partial years. Younger may carry over to the
subsequent year up to five (5) business days of vacation each year that he does
not use.
(ivi) Life Insurance. For the term of this Agreement and any extensions
thereof, the Company shall, at its expense, procure and keep in
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<PAGE> 6
effect life insurance on the life of Younger, payable to such beneficiaries as
he may from time to time designate, in such amounts as called for by the
Company's current policy with respect to the provision of life insurance to
senior executives of the Company.
(vii) Moving and Housing Allowance. In recognition of the fact that Younger
relocated to England to render services to the Company, the Company agrees to
reimburse Younger should his employment by the Company be terminated, for any
reason, for all moving or relocation costs reasonably incurred by him and his
family in relocating after any such termination to the United States. Such
moving and relocation costs may include, without limitation, transportation
costs, living expenses while Younger finds accommodations in the United States,
the costs of moving furniture and personal belongings, and any other similar
costs and expenses. Any such costs and expenses shall be paid within ten (10)
days of Younger's submission of invoices setting forth such costs and expenses.
7. EQUITY BASED INCENTIVE COMPENSATION
(a) The Company currently has in place an incentive stock option plan pursuant
to the provisions of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") (hereinafter, the "Option Plan"). The Company agrees that
Younger, as the Chief Financial Officer of the Company, shall participate in the
Option Plan, at the time or times and consistent with the terms and vesting
rules generally applicable to other senior executives of the Company under the
Option Plan.
(b) If there is a generally applicable award of options or restricted shares to
senior executives of the Company other than an award of options under the Option
Plan, Younger shall participate in such award(s) on terms consistent with the
Company's then-current practices with respect to awards made to other senior
executives. The Compensation Committee of the Board, in its sole discretion,
shall determine whether and to what extent stock options shall be granted to
Younger under the Option Plan.
(c) In accordance with the terms of the Stock Appreciation Rights Agreement
dated as of October 13, 1999 between the Company and Younger (the "SAR
Agreement"), the Company granted to Younger 200,000
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<PAGE> 7
Share Units (as defined in the SAR Agreement). All other terms and conditions
applicable to the grant of the Share Units are set forth in the SAR Agreement.
(d) In the event of an "Equity Change in Control" of the Company, as that term
is defined in Exhibit C hereto, then all of Younger's awards of stock options,
restricted shares or similar equity-based interests which have not already
vested shall immediately vest in full.
8. EVENTS TRIGGERING SEVERANCE BENEFITS
Upon the termination of Younger's employment for any of the reasons described in
subsections (a) - (c) below, he will be entitled to receive the severance
benefits described in Section 9 hereof:
(a) The Company terminates Younger's employment without "Cause."
(b) Younger terminates his employment with the Company "For Good Reason," which
means he terminates it within six (6) months of any event that constitutes "Good
Reason," as defined in subsection (d) below (the phrase "Without Good Reason"
means any termination by Younger other than within six (6) months of an event
constituting Good Reason).
(c) Younger resigns, with or without Good Reason within the thirty (30) day
period commencing one (1) year following an "Equity Change in Control" of the
Company, as that term is defined in Exhibit C hereto.
(d) Definitions:
(i) "Cause" refers to Younger's willful dishonesty toward, fraud upon,
or deliberate injury or attempted injury to, the Company, or by reason of
Younger's willful material breach of this Agreement which has resulted in a
material injury to the Company; provided, however, that Cause shall not be
deemed to exist as a result of any act or omission believed by Younger, in good
faith, to have been in the interest of the Company.
(ii) "Good Reason" for Younger to resign shall exist if any of the
following events occur without his consent: (A) the Company fails to pay or
provide required compensation, after the omission has been called to
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<PAGE> 8
the Company's attention and it has been given a reasonable opportunity to cure
the situation; or (B) the Company materially reduces Younger's titles, position,
duties and/or authority; or (C) the Company fails to nominate Younger to serve
on the Board, or (D) the Company materially breaches the terms of this
Agreement, provided, however, Younger has called the breach to the Company's
attention and allowed the Company a reasonable opportunity to cure it.
(iii) "Notice of Termination" shall mean a written notice which (A)
indicates the type of termination under this Agreement (e.g., for Cause) and
cites the applicable provision of this Agreement, (B) briefly describes the
facts and circumstances claimed to provide a basis for the stated type of
termination, if applicable, and (C) specifies the date of termination from
active service, provided, however, if Younger is eligible for the
Non-Solicitation Payment payable pursuant to Section 10 hereof, the Company
shall provide Younger with thirty (30) days" advance written notice of his date
of termination in order to enable him to make a timely election to receive the
Non-Solicitation Payment provided under Section 10 hereof.
(e) Termination because of Younger's death or disability will not require
payment of the severance benefits described in Section 9, nor will termination
for Cause or Younger's termination of employment Without Good Reason.
(i) For purposes of this Agreement, Younger will be deemed to be disabled
from performing his duties upon the earlier of: (A) the end of a six (6)
consecutive month period during which, for any reason, he has been unable to
substantially perform his usual and customary duties as Chief Financial Officer;
or (B) the date when it becomes apparent that, for any reason, he will be unable
to substantially perform his usual and customary duties as Chief Financial
Officer for a period of at least six (6) consecutive months, provided, however,
that in the case of a physical or mental injury or disease, his disability must
be determined in writing by a reputable physician or psychologist, selected
jointly by the Board and Younger (or his personal representative). The Company
shall promptly give Younger written notice of any determination that Younger is
disabled from working and of any decision by the Board to terminate his
employment by reason thereof. In the event of disability, until the date of
termination from active service, the base salary payable to Younger under
Section 3 hereof shall be reduced dollar-for-dollar by
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<PAGE> 9
the amount of disability benefits paid to Younger in accordance with any
disability plan, policy or program of the Company.
9. SEVERANCE BENEFITS
If Younger qualifies for severance benefits under the provisions of Section 8
hereof, then the following terms and conditions shall apply:
(a) The Company shall pay Younger all "Accrued Obligations" in a lump sum in
cash within thirty (30) days following his last day of active service; provided,
however, that any portion of the Accrued Obligations which consists of bonus,
deferred compensation, or incentive compensation shall be determined and paid in
accordance with the terms of the relevant plan or provision. "Accrued
Obligations" shall mean, as of the last day of active service, the sum of: (i)
his base salary under Section 3 hereof through the date of termination from
active service, to the extent not already paid; (ii) the amount of any bonus,
incentive compensation, deferred compensation and other cash compensation
accrued by Younger as of his last day of active service, to the extent not
already paid; and (iii) any vacation pay, expense reimbursements and other cash
entitlements accrued by Younger as of his last day of active service, to the
extent not already paid. For purposes of this Section, amounts shall be deemed
to accrue ratably over the period during which they are earned, but no
discretionary compensation shall be deemed earned or accrued until it is
specifically approved by the Board in accordance with the applicable plan,
program or policy.
(b) Within thirty (30) days after Younger's last day of active service, the
Company shall pay him a lump sum equal to the amount that results when the
fraction described in subsection (i) below is multiplied times the sum described
in subsection (ii) below:
(i) A fraction, the numerator of which is the lesser of (A) the number of
days remaining from Younger's last day of paid active service until the last day
of the term of this Agreement or (B) 365, and the denominator of which is 365;
(ii) The sum of his: (A) then-current annual salary and (B) then-current
annual performance bonus target or, if not yet established, his most recent
annual bonus payment.
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<PAGE> 10
However, the payment to Younger under this paragraph (b) shall be conditioned
upon his compliance with the Company's policy (as in effect on the Effective
Date or on his last day of active service, whichever is more favorable to
Younger) regarding all salaried employees executing a waiver and release prior
to receiving severance compensation.
(c) Within thirty (30) days after Younger's last day of active service, the
Company shall pay him a lump sum that represents a pro-rated annual bonus for
the year of termination. This amount shall be calculated by taking his target
bonus (which, in the case of the target bonus for the 1999 calendar year shall
be in an amount equal to up to 50% of Younger's annual salary and shall be
calculated on the basis of the objective criteria approved by the Compensation
Committee of the Board at its meeting of June 3, 1999 (but excluding for
purposes of this Section, the Committee's subjective determination with respect
to Younger's overall performance for the year)) or, if such target bonus has not
been established (e.g. the bonus for the 2000 calendar year), his bonus for the
prior year, for the year of termination and multiplying it times a fraction (i)
whose numerator is the number of days elapsed in the current calendar year from
January 1 of that year through his final day of active service, and (ii) whose
denominator is 365 (e.g., if his last day of active service was February 5, then
this fraction would be .10, calculated as follows: 36 days elapsed in year
divided by 365 days).
(d) All options and restricted stock (including both shares and units) that were
granted before the date of termination but have not yet vested shall immediately
vest upon Younger's final day of active service. All such options, and also
options that previously vested but have not yet been exercised, shall remain
exercisable in accordance with the Option Plan's terms for retirees.
The Company may at any time discharge Younger from active service without
advance notice, by providing a Notice of Termination. Nothing in this Agreement
shall be construed as requiring the Company to allow Younger to continue
actively performing the duties of Chief Financial Officer. Regardless of the
reason for such termination or whether it constitutes a breach by the Company of
this Agreement, Younger's exclusive remedy shall be payment of the severance
benefits described in subsections 9(a) - 9(d) hereof; he shall not be entitled
to reinstatement, nor to any other damages for wrongful
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<PAGE> 11
termination; nor, after his termination from active service, shall he be
entitled to any other salary, benefits or other compensation under this
Agreement.
10. NON-SOLICITATION PAYMENT
In the event that Younger's employment with the Company terminates under
circumstances that would entitle him to the payment of severance under Section
9(b) hereof, then Younger shall be eligible to receive, at his option, an
additional single lump sum payment in a dollar amount equal to 100% of the
annual salary and bonus payable to him under Section 9(b) for a 12-month period
in exchange for his agreement to comply with the non-solicitation and
confidentiality requirements contained in Section 12 hereof (the
"Non-Solicitation Payment"). In order to receive the Non-Solicitation Payment
Younger must, on or before his last day of service with the Company, notify the
Company in writing of his election to receive the Non-Solicitation Payment and,
in connection therewith, Younger must consent in writing to comply with the
requirements of Section 12 for a twenty-four (24) month period. Within thirty
(30) days after Younger" last day of service with the Company, the Company shall
pay Younger the Non-Solicitation Payment; provided, however, that if Younger
violates the provisions of Section 12 hereof at any time during the twenty-four
(24) month period, Younger shall promptly repay to the Company the
Non-Solicitation Payment.
11. OBLIGATIONS OF THE COMPANY UPON TERMINATION BY DEATH, DISABILITY,
DISCHARGE FOR CAUSE, OR RESIGNATION WITHOUT GOOD REASON
In the event this Agreement terminates due to the death or disability of
Younger, or due to a termination for Cause or resignation or Younger's
retirement Without Good Reason, the Company shall pay to Younger all Accrued
Obligations in a lump sum in cash within thirty (30) days after his last day of
active service; provided, however, that any portion of the Accrued Obligations
which consists of bonus, deferred compensation, or incentive compensation shall
be determined and paid in accordance with the terms of the relevant plan or
provision. Nothing in this Section shall limit or otherwise adversely affect any
rights Younger may have under applicable law, under any other agreement with the
Company including, without limitation, the
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<PAGE> 12
Indemnification Agreement, or under any compensation or benefit plan or policy
of the Company.
12. NON-SOLICITATION AND CONFIDENTIALITY
(a) If Younger's employment with the Company is terminated for any reason that
entitles him to receive severance benefits pursuant to Section 9 of this
Agreement, and he elects to receive the Non-Solicitation Payment, then for a
period of twenty-four (24) months immediately following his last day of active
service, Younger shall comply with the requirements of this Section 12.
(i) Non-Solicitation of Business Contacts. Younger shall not directly or
indirectly, solicit or interfere with any relationship with any customer,
supplier, investor, limited partner or deal referral source of the Company, CCC,
or any other affiliate.
(ii) Non-Solicitation of Employees. Younger shall not directly or
indirectly solicit or encourage any Existing Company Employee to leave the
Company or to accept any position with any other company that currently engages
in business with the Company. "Existing Company Employee" shall mean someone
who: (a) became employed by the Company before Younger's active service
terminates, and (b) is still employed by the Company as of the date when the
facilitating act or solicitation takes place, and (c) holds a manager, director,
or officer level position at the Company (or an equivalent position based on job
duties).
(b) Confidentiality. Younger shall not use or disclose to anyone any
Confidential Information regarding the Company and its affiliates. "Confidential
Information" shall include all non-public information Younger acquires by virtue
of his positions with the Company which might be of material value to a
competitor or which might cause any economic loss (directly or via loss of an
opportunity) or substantial embarrassment to the Company or its customers,
lessees, or suppliers if disclosed. Examples of such Confidential Information
include, without limitation, non-public information about the Company's
strategic or marketing plans; its lessees, customers, and suppliers; its
business operations and structure; its pricing policies, or its non-public
financial data.
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<PAGE> 13
(c) Remedies. In the event of a breach or threatened breach of any term of this
Section 12, the Company shall be entitled to injunctive relief and/or damages.
The Parties agree that breach of this Section 12 would cause irreparable injury
to the Company for which there would be no adequate remedy at law, due among
other reasons to the inherent difficulty of determining the precise causation
for loss of customers or measuring the exact impact of losing key employees or
having Confidential Information disclosed.
(d) Recitals. Younger acknowledges that by virtue of the positions he will hold
with the Company, he will acquire Confidential Information, including, without
limitation, knowledge of operational plans, strategic long-range plans, and
leasing and marketing plans. Younger also acknowledges that by virtue of the
positions he will hold with the Company, he will learn which Existing Company
Employees are critical to the Company's success and will develop relationships
he otherwise would not have had with such employees and with customers,
suppliers, investors, limited partners and deal referral sources.
13. GOLDEN PARACHUTE EXCISE TAX
(a) In the event any payment that is either received by Younger or paid by the
Company on his behalf or any property or any other benefit provided to him under
this Agreement or under any other plan, arrangement or agreement with the
Company or any other person whose payments or benefits are treated as contingent
on a change of ownership or control of the Company (or in the ownership of a
substantial portion of the assets of the Company) or any person affiliated with
the Company or such person (but only if such payment or other benefit is in
connection with Younger's employment by the Company) (collectively the "Company
Payments"), will be subject to the tax (the "Excise Tax") imposed by Section
4999 of the Code (and any similar tax that may hereafter be imposed by any
taxing authority), the amounts of any Company Payments shall be automatically
reduced to an amount one dollar less than an amount that would subject Younger
to the Excise Tax. The dollar amount of the reduction, if any, to be made with
respect to any Company Payments shall be determined by the Company's Accountants
(as such term is defined in Section 13(b) below) on or before the date such
Company Payments are due and payable to Younger.
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(b) For purposes of determining whether any of the Company Payments will be
subject to the Excise Tax and the amount of such Excise Tax, (x) the Company
Payments shall be treated as "parachute payments" within the meaning of Section
280G(b)(2) of the Code, and all "parachute payments" in excess of the "base
amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated
as subject to the Excise Tax, unless and except to the extent that, in the
opinion of the Company's independent certified public accountants, Deloitte &
Touche LLP, San Francisco (the "Accountants") such Company Payments (in whole or
in part) either do not constitute "parachute payments," represent reasonable
compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code in excess of the "base amount" or are otherwise not
subject to the Excise Tax, and (y) the value of any non-cash benefits or any
deferred payment or benefit shall be determined by the Accountants in accordance
with the principles of Section 280G of the Code. In the event that the
Accountants are serving as accountant or auditor for the individual, entity or
group effecting the Change in Control, Younger may appoint another nationally
recognized accounting firm to make the determinations hereunder (which
accounting firm shall then be referred to as the "Accountants" hereunder). All
determinations hereunder shall be made by the Accountants which shall provide
detailed supporting calculations both to the Company and Younger at such time as
it is requested by the Company or Younger. If the Accountants determine that
payments under this Agreement must be reduced pursuant to this paragraph, they
shall furnish Younger with a written opinion to such effect. The determination
of the Accountants shall be binding upon the Company and Younger.
(c) The Company agrees that it shall be responsible for all charges of the
Accountant.
14 NO DUTY TO MITIGATE
With respect to the severance benefits provided under Section 9 and 10 of this
Agreement, Younger shall not have any duty to mitigate his income loss after a
termination by finding alternative employment nor shall amounts he earns from
other employment be offset against those benefits.
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15 TERMINATION BY EXECUTIVE
Younger shall have no personal liability for damages to the Company for
voluntarily terminating his employment at any time, with or Without Good Reason,
so long as he gives at least thirty (30) days prior written notice.
16 ARBITRATION
Should any dispute or controversy arising from or related to this Agreement
arise between the Parties that the Parties are incapable of resolving themselves
through good faith negotiation, then such dispute or controversy shall be
submitted for resolution by J.A.M.S./ENDISPUTE ("JAMS") in San Francisco,
California, or at such other location as is agreed upon by the Parties. Any
dispute shall first be submitted to JAMS for mediation pursuant to the mediation
services provided by JAMS. Should the dispute between the Parties not be
successfully mediated by JAMS within ninety (90) days of its submission (subject
to any extension agreed to by the Parties) then and in such event the dispute
shall be submitted for binding arbitration by JAMS pursuant to the rules and
practices of JAMS. Unless agreed to by the Parties, the representative of JAMS
who attempts to mediate any dispute between the Parties shall not be the
representative of JAMS who arbitrates the dispute. Judgment upon any award by
the arbitrator(s) may be entered in any court having jurisdiction thereof. It is
agreed that the prevailing party in any such arbitration or other action arising
from or relating to this Agreement shall be entitled to reimbursement of its or
his reasonable costs and expenses, including attorneys" fees. Each Party
consents to the exercise over it or him of personal jurisdiction by the
arbitrator(s) selected by JAMS to resolve any dispute hereunder.
17 FEES OF NEGOTIATING THIS AGREEMENT
The Company will pay all legal, accounting and other professional fees and
related expenses reasonably incurred by Younger in connection with the
negotiation and preparation of this Agreement.
18 INDEMNIFICATION
To the fullest extent permitted by law and the Company's bylaws (and/or
resolutions or policies adopted by the Board), the Company shall
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indemnify Younger (including the advancement of expenses) for any judgments,
fines, amounts paid in settlement and reasonable expenses, including attorneys"
fees, incurred by Younger in connection with the defense of any lawsuit or other
claim to which he is made a party by reason of being an officer, director or
employee of the Company or any of its Subsidiaries. The Company and Younger have
entered into an Indemnification Agreement for the purpose of implementing the
indemnification commitment of this Section 18.
19 BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the heirs and
representatives of Younger and the successors and assigns of the Company. The
Company shall require any successor (whether direct or indirect, by purchase,
merger, reorganization, consolidation, acquisition of property or stock,
liquidation or otherwise) to all or a substantial portion of its assets to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place; provided, however, that Younger shall have the same obligations
to the successor as he would have had to the Company. Regardless of whether such
an agreement is executed, this Agreement shall be binding on any successor of
the Company in accordance with the operation of law, and such successor shall be
deemed "the Company" for all purposes under this Agreement.
20 NOTICES
Any notice, demand or communication required or permitted to be given by any
provision of this Agreement shall be deemed properly given if given in writing
or by electronic mail and either delivered through a commercially recognized
overnight delivery service or, if sent by electronic mail or telecopier, to the
party or to an officer of the party to whom the same is directed, addressed as
follows:
(a) If to Cronos, to: The Cronos Group
444 Market Street, 15th Floor
San Francisco, California 94111
Attn: Dennis J. Tietz
Chief Executive Officer
Fax: (415) 677-9196
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(b) If to Younger, to: Peter J. Younger
Orchard Lea, Winkfield Windsor
Berkshire SL44RU
England
Fax: 011-44-1344-894-102
Any party identified above may change the address to which notices are to be
given hereunder by giving notice to the other party in the manner herein
provided.
21 AMENDMENT OF AGREEMENT
This Agreement may not be amended except by written agreement signed by both
Parties. Only the Board has the authority to authorize such an amendment on
behalf of the Company.
22 SEVERABILITY
Each term of this Agreement is deemed severable, in whole or in part, and if any
provision of this Agreement or its application in any circumstance is found to
be unlawful or invalid, the remaining terms and provisions shall remain in full
force and effect.
23 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York without reference to conflict of law principles.
24 EXECUTION IN COUNTERPARTS
This Agreement may be executed by the Parties hereto in counterparts, each of
which shall be deemed to be an original, but all such counterparts shall
constitute one and the same instrument, and all signatures need not appear on
any one counterpart.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
day and year first above written.
THE CRONOS GROUP
By: /s/ D J Tietz
---------------------------------
Dennis J. Tietz
Chief Executive Officer
/s/ P J Younger
Peter J. Younger
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EXHIBIT A
DEFINITION OF CHANGE IN CONTROL
For purposes of Section 4(b) of the Agreement, the term "Change in Control"
shall be defined to mean the occurrence of any of the following events:
(i) any "person" as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or
other fiduciary holding securities under any employee benefit plan of the
Company, or any company owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportions as their ownership of Common
Stock of the Company), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the combined voting power of the
Company's then outstanding securities;
(ii) the closing of an agreement and plan of merger or consolidation of the
Company with any other corporation is approved, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; provided, however, that a merger
or consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no person acquires more than twenty-five percent
(25%) of the combined voting power of the Company's then outstanding securities
shall not constitute a Change in Control of the Company for purposes of this
Exhibit A and the Agreement; or
(iii) the closing of an agreement for the sale or disposition by the Company of
all or substantially all of the Company's assets other than the sale of all or
substantially all of the assets of the Company to person or persons who
beneficially own, directly or indirectly, at least fifty percent (50%) or more
of the combined voting power of the outstanding voting securities of the Company
at the time of the sale.
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EXHIBIT B
TRANSACTION BONUS
1. (a) If a Change in Control of the Company, as defined in Exhibit A occurs,
Younger shall receive a Transaction Bonus calculated in accordance with the
provisions of this Exhibit B.
(b) The Company shall pay Younger the full dollar amount of the Transaction
Bonus calculated hereunder no later than thirty (30) days after the date of such
Change in Control, as defined in Exhibit A, has occurred; provided, however,
payment of the Transaction Bonus calculated under this Exhibit B shall be
subject to the reduction, if any, required under Section B of this Agreement.
2. The Transaction Bonus shall be calculated as follows:
(a) On the closing date of the Change in Control transaction (the "Transaction
Date"), the dollar amount of the negotiated purchase price per share(1) of the
Company's common stock, net of all transaction costs and expenses, (the
"Purchase Price") shall be multiplied by the total number of the Company's
outstanding shares of common stock, determined as of the Transaction Date;
(b) The dollar amount determined in Section 2(a) above shall be multiplied by a
percentage which shall be calculated pursuant to the following formula: [X -
Y]/10 x .25, where "X" equals the Purchase Price and "Y" equals $5.40;
(c) The dollar amount determined in Section 2(b) shall be multiplied by 40% to
arrive at the lump sum cash dollar amount of the Transaction Bonus payable to
Younger.
_______________
(1) Based on current outstanding shares, which price shall be adjusted for
stock splits, stock dividends or other recapitalization or redemption, all as
determined in the sole discretion of the Board.
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EXHIBIT C
DEFINITION OF EQUITY CHANGE IN CONTROL
(a) For purposes of Section 7(d) and 8(c) under the Agreement, "Equity Change in
Control" shall mean any one of the following events:
(i) Schedule 13D or 13G filing. A Schedule 13D or 13G is filed pursuant to
the Exchange Act indicating that any person or group (as such terms are defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") has become the holder of more than twenty percent (20%) of the
outstanding Voting Shares. For purposes of calculating the percentage of Voting
Shares, such person or group shall be deemed the owner of any Voting Shares
which such person or group may acquire upon conversion of securities or upon the
exercise of options, warrants or rights.
(ii) Certain Changes in Directors. As a result of or in connection with any
cash tender offer, merger, or other business combination, sale of assets or
contested election, or combination of the foregoing, the persons who were
directors of the Company just prior to such event shall cease within one year to
constitute a majority of the Board.
(iii) Going Private. The Company's stockholders approve a definitive
agreement providing for a transaction in which the Company will cease to be an
independent publicly-owned corporation.
(iv) Certain Corporate Transactions. The stockholders of the Company
approve a definitive agreement (i) to merge or consolidate the Company with or
into another corporation in which the holders of Voting Shares immediately
before such merger or reorganization will not, immediately following such merger
or reorganization, hold as a group on a fully-diluted basis both the ability to
elect at least a majority of the directors of the surviving corporation and at
least a majority in value of the surviving corporation's outstanding equity
securities, or (ii) to sell or otherwise dispose of all or substantially all of
the assets of the Company.
(v) Tender or Exchange Offer. An Offer is made by a person or group (as such
terms are defined in Section 13(d)(3) of the Exchange Act) and such Offer has
resulted in such person or group holding an aggregate of twenty percent (20%) or
more of the outstanding Voting Shares. For purposes of this sub-section (v),
Voting Shares held by such person or group shall be calculated in accordance
with the last sentence of Section (a)(i) hereof.
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Exhibit 10.28
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into effective as of March 24, 2000 (the "Effective Date") by and
between Dennis J. Tietz ("Tietz's) and The Cronos Group, a limited liability
company organized and existing under the laws of Luxembourg (the "Company")
(collectively, the "Parties").
R E C I T A L S
WHEREAS, the Parties entered into an employment agreement (the "Prior
Agreement") effective as of December 11, 1998;
WHEREAS, the Parties entered into a severance agreement ("Severance Agreement")
effective as of December 11, 1998;
WHEREAS, the Parties desire to amend and restate the Prior Agreement to reflect
certain changes in the terms and conditions of Tietz's employment with the
Company, as more fully set forth in this Agreement;
WHEREAS, the Parties also desire to terminate the Severance Agreement;
WHEREAS, effective as of the date hereof, the Parties hereby agree that the
terms of this Agreement shall supercede, in its entirety, the terms of the Prior
Agreement and that the Severance Agreement shall be terminated; and
WHEREAS, the Parties further agree that this Agreement shall govern, in all
respects, the terms of the employment of Tietz by the Company.
NOW, THEREFORE, the Parties agree as follows:
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1. POSITION
During the term of this Agreement ("Term"), Tietz shall be employed by the
Company as its Chief Executive Officer and shall be nominated to the Company's
Board of Directors (the "Board") and nominated to serve as Chairman of the
Board. If requested by the Board, Tietz shall also serve, without additional
compensation, as the President and director of one or more subsidiaries of the
Company, including, without limitation, Cronos Capital Corporation, a California
corporation ("CCC" and collectively, the "Subsidiaries").
2. TERM
(a) The Term shall commence on the Effective Date and shall continue until
December 31, 2000. Thereafter, the Term shall continue for an additional year
ending on December 31, 2001. Any further extensions shall only occur upon the
written agreement of the Parties hereto.
(b) Tietz shall work exclusively for the Company (which, for the purposes of
this provision, includes the Subsidiaries) during the Term.
3. ANNUAL SALARY
Tietz's annual salary for services rendered under this Agreement shall be Three
Hundred Thousand Dollars ($300,000) (the "Initial Base Salary"), paid in
accordance with the Company's standard payroll practices. Commencing January 1,
2001, Tietz's annual salary may be increased, in the discretion of the Board,
but shall not be reduced. In all events, Tietz's annual salary for the year
2001, and for each year thereafter during the Term shall be increased, at a
minimum, in accordance with the ratio that the consumer price index compiled and
published by the United States Department of Labor's Bureau of Labor Statistics
for the San Francisco/Oakland Metropolitan area ("CPI") for the year just ended
bears to said figure for the calendar year preceding the year just ended. Such
increased CPI shall be applied to the Initial Base Salary, as previously
increased by the CPI, and not necessarily to the prior year's annual salary.
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4. BONUS
(a) For each calendar year that ends during the Term of this Agreement, the
Company shall pay a cash bonus to Tietz which, with respect to the 1999 calendar
year, shall be in an amount equal to up to 50% of Tietz's annual salary and
shall be calculated on the basis of the performance goals established by the
Compensation Committee of the Board at its meeting of June 3, 1999, and, with
respect to any subsequent calendar year (including, but not limited to, the 2000
calendar year), on the basis of comparable performance goals or such other
criteria determined by the Board, in its discretion with respect to such
calendar year.
(b) In the event that during the Term, any "Change in Control" (as defined in
Exhibit A hereto) of the Company occurs, Tietz shall receive a single sum cash
bonus (the "Transaction Bonus") in a dollar amount which shall be determined and
paid to Tietz in accordance with the terms and provisions of Exhibit B also
attached hereto. Notwithstanding any contrary provision in this Agreement,
payment of the Transaction Bonus shall be subject to any reduction required by
Section 13 hereof.
5. ALLOCATION OF COMPENSATION AMONG THE COMPANY AND SUBSIDIARIES
For accounting and tax reporting purposes, the annual salary, bonus, and other
compensation and benefits (collectively, "Compensation") payable to Tietz shall
be allocated among the Company and the Subsidiaries based upon the services
rendered by Tietz to the Company and the Subsidiaries. Tietz shall, within
ninety (90) days of the date of this Agreement, in consultation with the
Company's accounting staff and outside auditors, and subject to the approval of
the Audit Committee of the Board, develop an allocation method and procedures
for the purpose of allocating Tietz's Compensation among the Company and the
Subsidiaries. The procedures selected shall be designed to fairly reflect an
allocation of Tietz's Compensation among the Company and the Subsidiaries based
upon the services rendered by Tietz to the Company and the Subsidiaries, in
accordance with sound accounting practice.
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6. GROUP/EXECUTIVE BENEFITS
(a) Except as otherwise specifically provided herein, Tietz and his family shall
participate, on terms no less favorable than were provided to the immediately
preceding Chief Executive Officer of Company, in any group and/or executive
life, hospitalization or disability insurance plan, health program, pension,
profit sharing, 401(k) and similar benefit plans (qualified, non-qualified and
supplemental) that the Company sponsors for its officers or employees, and in
other fringe benefits, including any automobile allowance or arrangement, club
memberships and dues, and similar programs (collective referred to as the
"Benefits"). All waiting periods for such plans shall be waived, except with
respect to any pension plan where waiver of the applicable waiting period is not
permitted. It is understood that participating on the "same terms" as the
immediately preceding Chief Executive Officer of the Company means the same
rules and/or policies shall apply, recognizing that the result upon applying
them can be affected by different credited years of service.
(b) Without limiting the generality of the foregoing provisions of this Section
6, the Company shall provide the following specific benefits to Tietz:
(i) Automobile. For the Company's convenience, and as a condition to
Tietz's employment by the Company, Tietz shall, to the extent reasonably
possible, use a luxury automobile to be provided and maintained by the Company.
The Company shall also provide, at the Company's expense, adequate personal
injury and property damage insurance covering such automobile.
(iii) Vacation. Tietz shall be entitled to twenty-five (25) business days
of vacation during each calendar year during the term of this Agreement and any
extensions thereof, prorated for partial years. Tietz may carry over to the
subsequent year up to five (5) business days of vacation each year that he does
not use.
(iii) Life Insurance. For the term of this Agreement and any extensions
thereof, the Company shall, at its expense, procure and keep in effect life
insurance on the life of Tietz, payable to such beneficiaries as he may from
time to time designate, in such amounts as called for by the Company's
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current policy with respect to the provision of life insurance to senior
executives of the Company.
7. EQUITY BASED INCENTIVE COMPENSATION
(a) The Company currently has in place an incentive stock option plan pursuant
to the provisions of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") (hereinafter, the "Option Plan"). The Company agrees that
Tietz, as the Chief Executive Officer of the Company, shall participate in the
Option Plan, at the time or times and consistent with the terms and vesting
rules generally applicable to other senior executives of the Company under the
Option Plan.
(b) If there is a generally applicable award of options or restricted shares to
senior executives of the Company other than an award of options under the Option
Plan, Tietz shall participate in such award(s) on terms consistent with the
Company's then-current practices with respect to awards made to other senior
executives. The Compensation Committee of the Board, in its sole discretion,
shall determine whether and to what extent stock options shall be granted to
Tietz under the Option Plan.
(c) In accordance with the terms of the Prior Agreement, the Company granted to
Tietz an option (the "Option") to acquire 300,000 shares (the "Option Shares")
of the Company's common stock, $2.00 par value, at an exercise price of $4.375
per share, the closing price of the Company" s common stock, as quoted on
NASDAQ, as of the close of business on December 11, 1998, the date of grant. The
terms of the Option are set forth in a separate Non-Qualified Stock Option
Agreement entered into between the Company and Tietz.
(d) In the event of an "Equity Change in Control" of the Company, as that term
is defined in Exhibit C hereto, then all of Tietz's awards of stock options,
restricted shares or similar equity-based interests which have not already
vested shall immediately vest in full.
(e) CCC is an indirect wholly-owned subsidiary of the Company. CCC serves as
the general partner or managing general partner of eleven (11) California
limited partnerships organized to own and manage marine cargo containers.
Since 1992, Tietz has served as President of CCC. Tietz shall
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continue to serve as President of CCC during the Term. Under the relevant
partnership agreements of the container partnerships, CCC, as general partner,
is entitled to various forms of compensation. The Company agrees to allocate and
distribute to Tietz, as additional incentive compensation, for the term of the
container partnerships paying such compensation, three percent (3%) of the
container partnerships" fees and distributions payable and distributable to CCC.
The incentive compensation payable to Tietz under the provisions of this
subsection (e) shall be payable to him by CCC quarterly and shall be paid to
Tietz regardless of the termination of this Agreement by either Party prior to
the expiration of the term of container partnerships" agreements with CCC.
8. EVENTS TRIGGERING SEVERANCE BENEFITS
Upon the termination of Tietz's employment for any of the reasons described in
subsections (a) - (c) below, he will be entitled to receive the severance
benefits described in Section 9 hereof:
(a) The Company terminates Tietz's employment without "Cause."
(b) Tietz terminates his employment with the Company "For Good Reason," which
means he terminates it within six (6) months of any event that constitutes "Good
Reason," as defined in subsection (d) below (the phrase "Without Good Reason"
means any termination by Tietz other than within six (6) months of an event
constituting Good Reason).
(c) Tietz resigns, with or without Good Reason within the thirty (30) day period
commencing one (1) year following an "Equity Change in Control" of the Company,
as that term is defined in Exhibit C hereto.
(d) Definitions:
(i) "Cause" refers to Tietz's willful dishonesty toward, fraud upon, or
deliberate injury or attempted injury to, the Company, or by reason of Tietz's
willful material breach of this Agreement which has resulted in a material
injury to the Company; provided, however, that Cause shall not be deemed to
exist as a result of any act or omission believed by Tietz, in good faith, to
have been in the interest of the Company.
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(ii) "Good Reason" for Tietz to resign shall exist if any of the following
events occur without his consent: (A) the Company fails to pay or provide
required compensation, after the omission has been called to the Company's
attention and it has been given a reasonable opportunity to cure the situation;
or (B) the Company materially reduces Tietz's titles, position, duties and/or
authority; or (C) the Company fails to nominate Tietz to serve on the Board or
to serve as Chairman of the Board; or (D) the Company materially breaches the
terms of this Agreement, provided, however, Tietz has called the breach to the
Company's attention and allowed the Company a reasonable opportunity to cure it.
(iii) "Notice of Termination" shall mean a written notice which (A)
indicates the type of termination under this Agreement (e.g., for Cause) and
cites the applicable provision of this Agreement, (B) briefly describes the
facts and circumstances claimed to provide a basis for the stated type of
termination, if applicable, and (C) specifies the date of termination from
active service, provided, however, if Tietz is eligible for the Non-Solicitation
Payment payable pursuant to Section 10 hereof, the Company shall provide Tietz
with thirty (30) days advance notice of his date of termination in order to
enable him to make a timely election to receive the Non-Solicitation Payment
under Section 10 hereof.
(e) Termination because of Tietz's death or disability will not require payment
of the severance benefits described in Section 9, nor will termination for Cause
or Tietz' termination of employment Without Good Reason.
(i) For purposes of this Agreement, Tietz will be deemed to be disabled
from performing his duties upon the earlier of: (A) the end of a six (6)
consecutive month period during which, for any reason, he has been unable to
substantially perform his usual and customary duties as Chief Executive Officer;
or (B) the date when it becomes apparent that, for any reason, he will be unable
to substantially perform his usual and customary duties as Chief Executive
Officer for a period of at least six (6) consecutive months, provided, however,
that in the case of a physical or mental injury or disease, his disability must
be determined in writing by a reputable physician or psychologist, selected
jointly by the Board and Tietz (or his personal representative). The Company
shall promptly give Tietz written notice of any
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determination that Tietz is disabled from working and of any decision by the
Board to terminate his employment by reason thereof. In the event of disability,
until the date of termination from active service, the base salary payable to
Tietz under Section 3 hereof shall be reduced dollar-for-dollar by the amount of
disability benefits paid to Tietz in accordance with any disability plan, policy
or program of the Company.
9. SEVERANCE BENEFITS
If Tietz qualifies for severance benefits under the provisions of Section 8
hereof, then the following terms and conditions shall apply:
(a) The Company shall pay Tietz all "Accrued Obligations" in a lump sum in cash
within thirty (30) days following his last day of active service; provided,
however, that any portion of the Accrued Obligations which consists of bonus,
deferred compensation, or incentive compensation shall be determined and paid in
accordance with the terms of the relevant plan or provision. "Accrued
Obligations" shall mean, as of the last day of active service, the sum of: (i)
his base salary under Section 3 hereof through the date of termination from
active service, to the extent not already paid; (ii) the amount of any bonus,
incentive compensation, deferred compensation and other cash compensation
accrued by Tietz as of his last day of active service, to the extent not already
paid; and (iii) any vacation pay, expense reimbursements and other cash
entitlements accrued by Tietz as of his last day of active service, to the
extent not already paid. For purposes of this Section, amounts shall be deemed
to accrue ratably over the period during which they are earned, but no
discretionary compensation shall be deemed earned or accrued until it is
specifically approved by the Board in accordance with the applicable plan,
program or policy.
(b) Within thirty (30) days after Tietz's last day of active service, the
Company shall pay him a lump sum equal to the amount that results when the
fraction described in subsection (i) below is multiplied times the sum described
in subsection (ii) below:
(i) A fraction, the numerator of which is the lesser of (A) the number of
days remaining from Tietz's last day of paid active service until
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the last day of the term of this Agreement or (B) 365, and the denominator of
which is 365;
(ii) The sum of his: (A) then-current annual salary and (B) then-current
annual performance bonus target or, if not yet established, his most recent
annual bonus payment.
However, the payment to Tietz under this paragraph (b) shall be conditioned upon
his compliance with the Company's policy (as in effect on the Effective Date or
on his last day of active service, whichever is more favorable to Tietz)
regarding all salaried employees executing a waiver and release prior to
receiving severance compensation.
(c) Within thirty (30) days after Tietz's last day of active service, the
Company shall pay him a lump sum that represents a pro-rated annual bonus for
the year of termination. This amount shall be calculated by taking his target
bonus (which, in the case of the target bonus for the 1999 calendar year shall
be in an amount equal to up to 50% of Tietz's annual salary and shall be
calculated on the basis of the objective criteria approved by the Compensation
Committee of the Board at its meeting of June 3, 1999 (but excluding for
purposes of this Section, the Committee's subjective determination with respect
to Tietz's overall performance for the year)) or, if such target bonus has not
been established (e.g. the bonus for the 2000 calendar year), his bonus for the
prior year, for the year of termination and multiplying it times a fraction (i)
whose numerator is the number of days elapsed in the current calendar year from
January 1 of that year through his final day of active service, and (ii) whose
denominator is 365 (e.g., if his last day of active service was February 5, then
this fraction would be .10, calculated as follows: 36 days elapsed in year
divided by 365 days).
(d) All options and restricted stock (including both shares and units) that were
granted before the date of termination but have not yet vested shall immediately
vest upon Tietz's final day of active service. All such options, and also
options that previously vested but have not yet been exercised, shall remain
exercisable in accordance with the Option Plan's terms for retirees.
The Company may at any time discharge Tietz from active service without advance
notice, by providing a Notice of Termination. Nothing in this
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<PAGE> 10
Agreement shall be construed as requiring the Company to allow Tietz to continue
actively performing the duties of Chief Executive Officer. Regardless of the
reason for such termination or whether it constitutes a breach by the Company of
this Agreement, Tietz's exclusive remedy shall be payment of the severance
benefits described in subsections 9(a) - 9(d) hereof; he shall not be entitled
to reinstatement, nor to any other damages for wrongful termination; nor, after
his termination from active service, shall he be entitled to any other salary,
benefits or other compensation under this Agreement. Notwithstanding anything to
the contrary in the preceding sentences, Tietz shall be entitled to receive the
incentive compensation called for by the provisions of Section 7(e) of this
Agreement for the term of the container partnerships" paying such compensation,
and Tietz shall be entitled to the benefits of the Indemnification Agreement
previously entered into by the Company with Tietz.
10. NON-SOLICITATION PAYMENT
In the event that Tietz's employment with the Company terminates under
circumstances that would entitle him to the payment of severance under Section
9(b) hereof, then Tietz shall be eligible to receive, at his option, an
additional single lump sum payment in a dollar amount equal to 100% of the
annual salary and bonus payable to him under Section 9(b) for a 12-month period
in exchange for his agreement to comply with the non-solicitation and
confidentiality requirements contained in Section 12 hereof (the
"Non-Solicitation Payment"). In order to receive the Non-Solicitation Payment
Tietz must, on or before his last day of service with the Company, notify the
Company in writing of his election to receive the Non-Solicitation Payment and,
in connection therewith, Tietz must consent in writing to comply with the
requirements of Section 12 for a twenty-four (24) month period. Within thirty
(30) days after Tietz's last day of service with the Company, the Company shall
pay Tietz the Non-Solicitation Payment; provided, however, that if Tietz
violates the provisions of Section 12 hereof at any time during the twenty-four
(24) month period, Tietz shall promptly repay to the Company the
Non-Solicitation Payment.
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<PAGE> 11
11. OBLIGATIONS OF THE COMPANY UPON TERMINATION BY DEATH, DISABILITY,
DISCHARGE FOR CAUSE, OR RESIGNATION WITHOUT GOOD REASON
In the event this Agreement terminates due to the death or disability of Tietz,
or due to a termination for Cause or resignation or Tietz's retirement Without
Good Reason, the Company shall pay to Tietz all Accrued Obligations in a lump
sum in cash within thirty (30) days after his last day of active service;
provided, however, that any portion of the Accrued Obligations which consists of
bonus, deferred compensation, or incentive compensation shall be determined and
paid in accordance with the terms of the relevant plan or provision. Nothing in
this Section shall limit or otherwise adversely affect any rights Tietz may have
under applicable law, under any other agreement with the Company including,
without limitation, the Indemnification Agreement, or under any compensation or
benefit plan or policy of the Company.
12. NON-SOLICITATION AND CONFIDENTIALITY
(a) If Tietz's employment with the Company is terminated for any reason that
entitles him to receive severance benefits pursuant to Section 9 of this
Agreement, and he elects to receive the Non-Solicitation Payment, then for a
period of twenty-four (24) months immediately following his last day of active
service, Tietz shall comply with the requirements of this Section 12.
(i) Non-Solicitation of Business Contacts. Tietz shall not directly or
indirectly, solicit or interfere with any relationship with any customer,
supplier, investor, limited partner or deal referral source of the Company, CCC,
or any other affiliate.
(ii) Non-Solicitation of Employees. Tietz shall not directly or indirectly
solicit or encourage any Existing Company Employee to leave the Company or to
accept any position with any other company that currently engages in business
with the Company. "Existing Company Employee" shall mean someone who: (a) became
employed by the Company before Tietz's active service terminates, and (b) is
still employed by the Company as of the date when the facilitating act or
solicitation takes place, and (c) holds a manager, director, or officer level
position at the Company (or an equivalent position based on job duties).
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<PAGE> 12
(b) Confidentiality. Tietz shall not use or disclose to anyone any Confidential
Information regarding the Company and its affiliates. "Confidential Information"
shall include all non-public information Tietz acquires by virtue of his
positions with the Company which might be of material value to a competitor or
which might cause any economic loss (directly or via loss of an opportunity) or
substantial embarrassment to the Company or its customers, lessees, or suppliers
if disclosed. Examples of such Confidential Information include, without
limitation, non-public information about the Company's strategic or marketing
plans; its lessees, customers, and suppliers; its business operations and
structure; its pricing policies, or its non-public financial data.
(c) Remedies. In the event of a breach or threatened breach of any term of this
Section 12, the Company shall be entitled to injunctive relief and/or damages.
The Parties agree that breach of this Section 12 would cause irreparable injury
to the Company for which there would be no adequate remedy at law, due among
other reasons to the inherent difficulty of determining the precise causation
for loss of customers or measuring the exact impact of losing key employees or
having Confidential Information disclosed.
(d) Recitals. Tietz acknowledges that by virtue of the positions he will hold
with the Company, he will acquire Confidential Information, including, without
limitation, knowledge of operational plans, strategic long-range plans, and
leasing and marketing plans. Tietz also acknowledges that by virtue of the
positions he will hold with the Company, he will learn which Existing Company
Employees are critical to the Company's success and will develop relationships
he otherwise would not have had with such employees and with customers,
suppliers, investors, limited partners and deal referral sources.
13. GOLDEN PARACHUTE EXCISE TAX
(a) In the event any payment that is either received by Tietz or paid by the
Company on his behalf or any property or any other benefit provided to him under
this Agreement or under any other plan, arrangement or agreement with the
Company or any other person whose payments or benefits are treated as contingent
on a change of ownership or control of the Company (or in the ownership of a
substantial portion of the assets of the Company) or any person affiliated with
the Company or such person (but only if such payment or other
E-80
<PAGE> 13
benefit is in connection with Tietz's employment by the Company) (collectively,
the "Company Payments"), will be subject to the tax (the "Excise Tax") imposed
by Section 4999 of the Code (and any similar tax that may hereafter be imposed
by any taxing authority), the amounts of any Company Payments shall be
automatically reduced to an amount one dollar less than an amount that would
subject Tietz to the Excise Tax. The dollar amount of the reduction, if any, to
be made with respect to any Company Payments shall be determined by the
Company's Accountants (as such term is defined in Section 13(b) below) on or
before the date such Company Payments are due and payable to Tietz.
(b) For purposes of determining whether any of the Company Payments will be
subject to the Excise Tax and the amount of such Excise Tax, (x) the Company
Payments shall be treated as "parachute payments" within the meaning of Section
280G(b)(2) of the Code, and all "parachute payments" in excess of the "base
amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated
as subject to the Excise Tax, unless and except to the extent that, in the
opinion of the Company's independent certified public accountants, Deloitte &
Touche LLP, San Francisco (the "Accountants") such Company Payments (in whole or
in part) either do not constitute "parachute payments," represent reasonable
compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code in excess of the "base amount" or are otherwise not
subject to the Excise Tax, and (y) the value of any non-cash benefits or any
deferred payment or benefit shall be determined by the Accountants in accordance
with the principles of Section 280G of the Code. In the event that the
Accountants are serving as accountant or auditor for the individual, entity or
group effecting the Change in Control, Tietz may appoint another nationally
recognized accounting firm to make the determinations hereunder (which
accounting firm shall then be referred to as the "Accountants" hereunder). All
determinations hereunder shall be made by the Accountants which shall provide
detailed supporting calculations both to the Company and Tietz at such time as
it is requested by the Company or Tietz. If the Accountants determine that
payments under this Agreement must be reduced pursuant to this paragraph, they
shall furnish Tietz with a written opinion to such effect. The determination of
the Accountants shall be binding upon the Company and Tietz.
(c) The Company agrees that it shall be responsible for all charges of the
Accountant.
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<PAGE> 14
14. NO DUTY TO MITIGATE
With respect to the severance benefits provided under Section 9 and 10 of this
Agreement, Tietz shall not have any duty to mitigate his income loss after a
termination by finding alternative employment nor shall amounts he earns from
other employment be offset against those benefits.
15. TERMINATION BY EXECUTIVE
Tietz shall have no personal liability for damages to the Company for
voluntarily terminating his employment at any time, with or Without Good Reason,
so long as he gives at least thirty (30) days prior written notice.
16. ARBITRATION
Should any dispute or controversy arising from or related to this Agreement
arise between the Parties that the Parties are incapable of resolving themselves
through good faith negotiation, then such dispute or controversy shall be
submitted for resolution by J.A.M.S./ENDISPUTE ("JAMS") in San Francisco,
California, or at such other location as is agreed upon by the Parties. Any
dispute shall first be submitted to JAMS for mediation pursuant to the mediation
services provided by JAMS. Should the dispute between the Parties not be
successfully mediated by JAMS within ninety (90) days of its submission (subject
to any extension agreed to by the Parties) then and in such event the dispute
shall be submitted for binding arbitration by JAMS pursuant to the rules and
practices of JAMS. Unless agreed to by the Parties, the representative of JAMS
who attempts to mediate any dispute between the Parties shall not be the
representative of JAMS who arbitrates the dispute. Judgment upon any award by
the arbitrator(s) may be entered in any court having jurisdiction thereof. It is
agreed that the prevailing party in any such arbitration or other action arising
from or relating to this Agreement shall be entitled to reimbursement of its or
his reasonable costs and expenses, including attorneys" fees. Each Party
consents to the exercise over it or him of personal jurisdiction by the
arbitrator(s) selected by JAMS to resolve any dispute hereunder.
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<PAGE> 15
17. FEES OF NEGOTIATING THIS AGREEMENT
The Company will pay all legal, accounting and other professional fees and
related expenses reasonably incurred by Tietz in connection with the negotiation
and preparation of this Agreement.
18. INDEMNIFICATION
To the fullest extent permitted by law and the Company's bylaws (and/or
resolutions or policies adopted by the Board), the Company shall indemnify Tietz
(including the advancement of expenses) for any judgments, fines, amounts paid
in settlement and reasonable expenses, including attorneys" fees, incurred by
Tietz in connection with the defense of any lawsuit or other claim to which he
is made a party by reason of being an officer, director or employee of the
Company or any of its subsidiaries. The Company and Tietz have entered into an
Indemnification Agreement for the purpose of implementing the indemnification
commitment of this Section 18.
19. BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the heirs and
representatives of Tietz and the successors and assigns of the Company. The
Company shall require any successor (whether direct or indirect, by purchase,
merger, reorganization, consolidation, acquisition of property or stock,
liquidation or otherwise) to all or a substantial portion of its assets to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place; provided, however, that Tietz shall have the same obligations
to the successor as he would have had to the Company. Regardless of whether such
an agreement is executed, this Agreement shall be binding on any successor of
the Company in accordance with the operation of law, and such successor shall be
deemed "the Company" for all purposes under this Agreement.
20. NOTICES
Any notice, demand or communication required or permitted to be given by any
provision of this Agreement shall be deemed properly given if given in writing
or by electronic mail and either delivered through a
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<PAGE> 16
commercially recognized overnight delivery service or, if sent by electronic
mail or telecopier, to the party or to an officer of the party to whom the same
is directed, addressed as follows:
(a) If to Cronos, to: The Cronos Group
444 Market Street, 15th Floor
San Francisco, California 94111
Attn: Charles Tharp
Chairman of the Compensation Committee
of the Board of Directors
Fax: (415) 677-9196
(b) If to Tietz, to: Dennis J. Tietz
Cronos Capital Corp.
444 Market Street, 15th Floor
San Francisco, California 94111
Fax: (415) 677-9196
Any party identified above may change the address to which notices are to be
given hereunder by giving notice to the other party in the manner herein
provided.
21. AMENDMENT OF AGREEMENT
This Agreement may not be amended except by written agreement signed by both
Parties. Only the Board has the authority to authorize such an amendment on
behalf of the Company.
22. SEVERABILITY
Each term of this Agreement is deemed severable, in whole or in part, and if any
provision of this Agreement or its application in any circumstance is found to
be unlawful or invalid, the remaining terms and provisions shall remain in full
force and effect.
E-84
<PAGE> 17
23. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York without reference to conflict of law principles.
24. EXECUTION IN COUNTERPARTS
This Agreement may be executed by the Parties hereto in counterparts, each of
which shall be deemed to be an original, but all such counterparts shall
constitute one and the same instrument, and all signatures need not appear on
any one counterpart.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
day and year first above written.
THE CRONOS GROUP
By: /s/ C Tharp
----------------------------------------
Charles Tharp
Chairman of the Compensation Committee
of the Board of Directors
/s/ D J Tietz
Dennis J. Tietz
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<PAGE> 18
EXHIBIT A
DEFINITION OF CHANGE IN CONTROL
For purposes of Section 4(b) of the Agreement, the term "Change in Control"
shall be defined to mean the occurrence of any of the following events:
(i) any "person" as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 ("Act") (other than the Company, any
trustee or other fiduciary holding securities under any employee benefit
plan of the Company, or any company owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of Common Stock of the Company), is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Act), directly or indirectly,
of securities of the Company representing fifty percent (50%) or more of
the combined voting power of the Company's then outstanding securities;
(ii) the closing of an agreement and plan of merger or consolidation of
the Company with any other corporation is approved, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; provided,
however, that a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
person acquires more than twenty-five percent (25%) of the combined voting
power of the Company's then outstanding securities shall not constitute a
Change in Control of the Company for purposes of this Exhibit A and the
Agreement; or
(iii) the closing of an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets other than the
sale of all or substantially all of the assets of the Company to person or
persons who beneficially own, directly or indirectly, at least fifty
percent (50%) or more of the combined voting power of the outstanding
voting securities of the Company at the time of the sale.
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<PAGE> 19
EXHIBIT B
Transaction Bonus
1. (a) If a Change in Control of the Company, as defined in Exhibit A occurs,
Tietz shall receive a Transaction Bonus calculated in accordance with the
provisions of this Exhibit B.
(b) The Company shall pay Tietz the full dollar amount of the Transaction Bonus
calculated hereunder no later than thirty (30) days after the date of such
Change in Control, as defined in Exhibit A, has occurred; provided, however,
payment of the Transaction Bonus calculated under this Exhibit B shall be
subject to the reduction, if any, required under Section 13 of the Agreement.
2. The Transaction Bonus shall be calculated as follows:
(a) On the closing date of the Change in Control transaction (the "Transaction
Date"), the dollar amount of the negotiated purchase price per share(2) of the
Company's common stock, net of all transaction costs and expenses, (the
"Purchase Price") shall be multiplied by the total number of the Company's
outstanding shares of common stock, determined as of the Transaction Date;
(b) The dollar amount determined in Section 2(a) above shall be multiplied by a
percentage which shall be calculated pursuant to the following formula: [X -
Y]/10 x .25, where "X" equals the Purchase Price and "Y" equals $5.40;
(c) The dollar amount determined in Section 2(b) shall be multiplied by 60% to
arrive at the lump sum cash dollar amount of the Transaction Bonus payable to
Tietz.
_________________
(2) Based on current outstanding shares, which price shall be adjusted for stock
splits, stock dividends or other recapitalization or redemption, all as
determined in the sole discretion of the Board.
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<PAGE> 20
EXHIBIT C
DEFINITION OF EQUITY CHANGE IN CONTROL
(a) For purposes of Section 7(d) and 8(c) under the Agreement, "Equity Change in
Control" shall mean any one of the following events:
(i) Schedule 13D or 13G filing. A Schedule 13D or 13G is filed pursuant to
the Exchange Act indicating that any person or group (as such terms are defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") has become the holder of more than twenty percent (20%) of the
outstanding Voting Shares. For purposes of calculating the percentage of Voting
Shares, such person or group shall be deemed the owner of any Voting Shares
which such person or group may acquire upon conversion of securities or upon the
exercise of options, warrants or rights.
(ii) Certain Changes in Directors. As a result of or in connection with any
cash tender offer, merger, or other business combination, sale of assets or
contested election, or combination of the foregoing, the persons who were
directors of the Company just prior to such event shall cease within one year to
constitute a majority of the Board.
(iii) Going Private. The Company's stockholders approve a definitive
agreement providing for a transaction in which the Company will cease to be an
independent publicly-owned corporation.
(iv) Certain Corporate Transactions. The stockholders of the Company
approve a definitive agreement (i) to merge or consolidate the Company with or
into another corporation in which the holders of Voting Shares immediately
before such merger or reorganization will not, immediately following such merger
or reorganization, hold as a group on a fully-diluted basis both the ability to
elect at least a majority of the directors of the surviving corporation and at
least a majority in value of the surviving corporation's outstanding equity
securities, or (ii) to sell or otherwise dispose of all or substantially all of
the assets of the Company.
(v) Tender or Exchange Offer. An Offer is made by a person or group (as
such terms are defined in Section 13(d)(3) of the Exchange Act) and such Offer
has resulted in such person or group holding an aggregate of twenty percent
(20%) or more of the outstanding Voting Shares. For purposes of this sub-section
(v), Voting Shares held by such person or group shall be calculated in
accordance with the last sentence of Section (a)(i) hereof.
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<PAGE> 1
Exhibit 21.1
Subsidiaries
The Company's principal wholly owned subsidiaries at December 31, 1999 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) Administration and marketing - Hong
Limited* Hong Kong Kong and Australasia
Cronos Container Leasing GmbH Germany Administration and marketing - Germany
Cronos Containers (Leasing) N.V.* Netherlands Antilles Container management, financing and administration
Cronos Equipment (Jersey) Ltd* Jersey Container Investment
Cronos Equipment S.A.* Liberia Container Investment
Cronos Equipment (Bermuda) Ltd* Bermuda Container Investment
Cronos Finance (Bermuda) Ltd* Bermuda Container Investment
Cronos Equipment Limited UK Administration and container investment
Advanced Property Services Limited UK Property investment
C G Finance B.V. Netherlands Financing
</TABLE>
E-89
<PAGE> 2
<TABLE>
<S> <C> <C>
Cronos Management N.V.* Netherlands Antilles Holding Company and provision of
Executive services
Cronos Containers Scandinavia AB Sweden Intermodal equipment management
Intermodal Leasing AB Sweden Intermodal equipment management
Cronos Containers (Cayman) Ltd.* Cayman Islands Container Investment
Cronos Holdings Investments Inc.* USA Holding Company
C G Finance B.V. Netherlands Financing
</TABLE>
* Denotes companies owned directly by the Company. All the other companies are
owned indirectly.
E-90
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets at December 31, 1999 and 1998, and the consolidated
income statement for the years ended December 31, 1999 and 1998, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 8,701 9,281
<SECURITIES> 1,673 1,403
<RECEIVABLES> 30,301 37,661
<ALLOWANCES> 3,562 4,446
<INVENTORY> 2,535 315
<CURRENT-ASSETS> 56,212 80,778
<PP&E> 228,542 251,295
<DEPRECIATION> 79,188 69,779
<TOTAL-ASSETS> 231,867 279,979
<CURRENT-LIABILITIES> 65,590 147,636
<BONDS> 109,978 148,466
0 0
0 0
<COMMON> 18,317 17,717
<OTHER-SE> 42,053 38,370
<TOTAL-LIABILITY-AND-EQUITY> 231,867 279,979
<SALES> 132,140 157,746
<TOTAL-REVENUES> 140,378 163,655
<CGS> 0 0
<TOTAL-COSTS> 95,122 110,845
<OTHER-EXPENSES> 32,769 53,253
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,809 15,718
<INCOME-PRETAX> 1,678 (16,590)
<INCOME-TAX> (236) 306
<INCOME-CONTINUING> 1,914 (16,896)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,914 (16,896)
<EPS-BASIC> 0.21 (1.91)
<EPS-DILUTED> 0.21 (1.91)
</TABLE>
<PAGE> 1
Exhibit 99.1
Pages 6 through 11 of Form S-8 dated February 25, 2000
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this Prospectus before investing in our common shares.
Investing in our common shares involves a high degree of risk. Any of the
following factors could harm our business and could result in a partial or
complete loss of your investment.
OUR BUSINESS IS CYCLICAL
Demand for leased containers and container leasing rates depend largely
upon levels of world trade. Recessionary business cycles and worldwide
oversupplies of containers can negatively impact our operating results. During
economic downturns, ocean carriers tend to lease fewer containers and rely on
their own fleets to satisfy a greater percentage of their requirements. Thus, a
decrease in the volume of world trade could adversely affect our financial
results.
Our industry has experienced cyclical downturns during the last fifteen
years. Since 1996, the container leasing industry has experienced declines in
container utilization and daily container rental rates due to consolidation in
the global shipping industry. While we have observed an improvement in terms of
world trade since the second quarter of 1999, as the economies of Asia and Latin
America recover from the financial crises that affected them in 1997, and while
we have seen indications that containerized trade volumes from North America and
Europe to Asia may be increasing, these positive signs have yet to have a
positive impact upon Cronos' operating performance. At December 31, 1999, the
combined utilization of our container fleet (based on approximate original
equipment cost) stood at 80%. This utilization represents an improvement over
the utilization of 75% reported at the end of 1998. However, our utilization at
December 31, 1999 was still lower than it was during the first six months of
1998. During the course of 1999, our per diem container rental rate fell by
approximately 11%.
Other factors that affect the demand for leased containers and utilization
and per-diem rental rates include the supply and pricing of new and used
containers, economic conditions in the shipping industry, the availability of
financing, fluctuations in interest rates, currency valuations, import-export
restrictions, quotas, tariffs, exchange restrictions, other governmental
regulations, and other factors that are inherently unpredictable and beyond the
control of Cronos.
DEPENDENCE ON FINANCING
We are heavily dependent upon third parties to supply us with the capital
needed to acquire containers. Our operations require significant capital on an
ongoing basis to expand the size of our fleet and to replace our existing fleet
of containers. We have historically funded container fleet expansion through a
combination of secured debt financings, capital leases, management of containers
for third-party container owners, and the sponsorship of public limited
partnerships in the United States.
All of the containers owned by Cronos are pledged to secure borrowings.
Additional financing will be necessary if we are to continue to increase the
rate of expansion of our fleet. We may not be able to obtain such financing when
needed or on terms favorable to us. Furthermore, delays in obtaining financing
for containers Cronos has ordered from container manufacturers could require
Cronos to reduce or curtail future orders, resulting in a reduction in the
expansion of our container fleet.
As of December 31, 1999, approximately 35% of our total container fleet had
been financed by United States public limited partnerships. During 1997, 1998,
and 1999 approximately 34%, 40%, and 43% respectively, of our gross lease
revenue was generated by containers managed by Cronos for third parties, and
approximately 38%, 35%, and 33% respectively, of our gross lease revenue was
generated from containers owned by public limited partnerships. We have not
offered a public limited
6
<PAGE> 2
partnership since 1997. While we intend to offer a limited partnership to the
public in the year 2000, there can be no assurance that we will be successful in
doing so or that the financing of our container fleet through the offering of
public limited partnerships will be a source of financing for us in the future.
As of December 31, 1999, we had total borrowings of $110 million, of which
$30 million (27%) bore interest at fixed rates and the remaining $80 million
(73%) bore interest at variable rates. All of the variable rate borrowings bear
interest at a margin over an established market rate (e.g., LIBOR) or over the
lender's own base rate. An increase of 1% in these base rates, leaving all other
factors constant, would increase our annual interest expense on the borrowings
outstanding at December 31, 1999, by $0.8 million.
WE FACE STIFF COMPETITION
We compete for lessees of our containers with several large container
leasing companies that have substantially greater financial and other resources
than we do. Competition among container leasing companies is based upon several
factors, including the location and availability of inventory, lease rates,
service, and the quality of containers. The industry has been in a period of
consolidation since 1993. As of December 31, 1999, the two largest container
leasing companies had fleets totaling approximately 2.3 million TEUs, or 42% of
the worldwide leased container fleet. Our larger competitors might be able to
exploit their greater financial resources and economies of scale and reduce
per-diem rates to enhance their market share. In addition, an increase in the
availability of capital or sustained low rates of interest could provide an
incentive for ocean carriers to purchase containers rather than to lease them
from the container leasing industry.
DEFAULTS BY LESSEES
We are dependent upon our lessees continuing to make lease payments for
their containers. A default by a lessee under a lease may cause us to lose
revenues for past services as well as future revenues. In addition, the
equipment may be returned to us in a location where we may be unable to arrange
efficiently for the re-leasing or the sale of such equipment, in which event we
could incur additional operating expenses. Consequently, defaults may prevent us
from being able to recover our investment in such equipment. In addition, due to
a variety of factors, repossession from defaulting lessees may be difficult in
certain jurisdictions.
In each of the last five years, Cronos' write-offs for specific doubtful
accounts have been less than 2% of annual gross lease revenue, although no
assurance can be given that the level of lessee defaults will remain at this
level or not increase to an extent that would materially affect our results of
operations or financial condition.
DISPUTE WITH THE CONTRIN GROUP
We manage containers for investment entities sponsored or affiliated with
Contrin Holding S.A., a Luxembourg holding company (collectively "Contrin").
Approximately 1.6% (measured by TEUs) of the fleet of containers we manage for
third parties is owned by members of the Contrin Group. We are in a dispute with
Contrin over funds that Contrin claims to have remitted to Cronos for the
purchase of containers. Contrin claims that in 1994 it transmitted $2.6 million
to Cronos for the purchase of containers. We believe that these funds were not
received by us but were diverted to an account in the name of and/or controlled
by our former chairman, Stefan M. Palatin, and that this was known or should
have been known by Contrin. We also believe that the bank that received the
funds is at fault. Contrin's counsel has advised us that Contrin will institute
proceedings for the recovery of the $2.6 million against Cronos, together with
accrued interest. While we believe that we
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have meritorious defenses to Contrin's claims, if a proceeding is instituted, we
could lose and be obligated to pay Contrin the money it is demanding.
THE SEC'S NOVEMBER 15, 1999 CEASE-AND-DESIST ORDER
On November 15, 1999, we consented to the entry by the SEC of an
administrative cease and desist order (the "Order"). Without admitting or
denying the findings made by the SEC in the Order, we agreed to cease and desist
from committing or causing any future violation of certain antifraud, reporting,
and recordkeeping provisions of the Federal securities laws. The SEC's
investigation of the Company began in February 1997 and was triggered by the
actions of our former chairman, Stefan M. Palatin. Cronos' Board removed Mr.
Palatin as CEO in May 1998 and, in July 1998, Mr. Palatin resigned from our
Board. While Mr. Palatin is no longer an officer or director of the Company, he
continues to control approximately 20% of our outstanding common shares.
The SEC made certain findings by its Order. We neither admitted nor denied
the findings made by the SEC. The SEC found that Cronos, under the domination
and control of Mr. Palatin, misrepresented, through affirmative misstatements
and omissions in its public statements and filings with the SEC, transactions it
had with Mr. Palatin for the period from December 1995 through 1997, including:
- That Mr. Palatin had intercepted payments between Cronos and one of its
major customers (which Mr. Palatin also controlled);
- That Cronos paid Mr. Palatin millions of dollars in 1994 before Cronos
first sold its shares of Common Stock to the public;
- That Mr. Palatin sold shares in Cronos' initial public offering through
another entity which he controlled;
- That Cronos paid additional monies to Mr. Palatin shortly after the 1995
offering; and
- That Mr. Palatin did not own certain collateral that he pledged to
secure loans he owed to Cronos.
The SEC further found that Cronos systematically fired or demoted employees
and directors who challenged or questioned Mr. Palatin's transactions or the
disclosures of the Company related thereto.
While the Order did not impose any fine or penalty against Cronos, we are
unable to predict what impact, if any, it will have on our future business or
whether it will lead to future litigation involving Cronos. Under the Order, we
have designated an agent for service of process with respect to any proceeding
instituted by the SEC to enforce the Order or with respect to any future
investigation of the Company by the SEC. In addition, the entry of the Order
precludes the Company and persons acting on its behalf from relying upon certain
protections accorded to forward-looking statements by the Securities Act of 1933
and the Securities Exchange Act of 1934 for the three years ended November 14,
2002.
CONTROL BY PRINCIPAL SHAREHOLDERS
Our four largest shareholders or groups of shareholders control
approximately 60% of our outstanding common shares. These shareholders,
individually, or as a group (were they to associate as a group), could have the
ability to elect members of our Board of Directors and to control the outcome of
certain matters submitted to a vote of shareholders, such as any proposed merger
or consolidation of Cronos.
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Our largest shareholder remains Stefan M. Palatin, our former Chief
Executive Officer and Chairman of the Board. We are in a dispute with Mr.
Palatin over monies he owes to us under promissory notes he signed in favor of a
subsidiary of the Company. In November 1999, we brought an action in New York
State Court to collect on the promissory notes, and on February 8, 2000, we
obtained a default judgment against Mr. Palatin in the amount of $6,583,666. We
do not know whether we will be able to collect on this judgment against Mr.
Palatin, as he is not resident in the United States. As a result of this and
other disputes between the Company and Mr. Palatin, we anticipate that Mr.
Palatin will vote the common shares that he exercises control over against the
recommendations of management on proposals we may submit to our shareholders.
LACK OF LIQUIDITY FOR OUR COMMON SHARES
Because of the percentage of our common shares controlled by a few
shareholders or groups of shareholders, the trading volume in our common shares
is low. For 1999, the average daily trading volume in our shares was 9,288
shares, or approximately 0.1% of our outstanding shares as of December 31, 1999.
The effect of limited liquidity can be to make it more difficult to sell our
common shares and can increase the volatility of the price of our common shares.
OUR SHAREHOLDER RIGHTS PLAN MAY LIMIT THE VALUE OF OUR COMMON SHARES
On October 25, 1999, we adopted a shareholder rights plan, commonly
referred to as a "poison pill." We adopted the plan in response to the
unsolicited proposal by one of our competitors, Interpool, Inc., to acquire the
Company by merger with Interpool's 50%-owned subsidiary, Container Applications
International, Inc., for $5.00 per share in cash for all of our outstanding
common shares. We discuss Interpool's proposal under "Recent Developments"
above.
Pursuant to the shareholder rights plan, Cronos declared an allocation of
one right to purchase one-tenth of a share of our common stock for each
outstanding share of common stock, payable to our shareholders of record on
October 25, 1999. Each right, when it becomes exercisable, entitles the
registered holder to purchase from Cronos one-tenth of a share of common stock
at a price per whole share of common stock of $16, subject to adjustment. The
rights generally become exercisable when a person or a group of persons acquires
the beneficial ownership of 20% or more of our outstanding common shares, or
after the commencement of or announcement of an intention to make a tender or
exchange offer for our shares that would result in a person or group becoming
the beneficial owner of 20% or more of our shares. The rights would not be
triggered in the event that an acquisition, or a tender or exchange offer, is at
a price and on terms that the Board of Cronos determines to be adequate and in
the best interest of Cronos and its shareholders. The plan is designed to
prevent takeover attempts of the Company, including any such attempt by
Interpool, without the approval of the Company's Board. The plan can also have
the effect of discouraging bidders interested in taking over the Company and of
depressing the price at which our common shares would otherwise trade to reflect
this reduced interest.
SHARES ELIGIBLE FOR FUTURE SALE
There are currently 9,158,378 shares of our common stock outstanding. In
addition, our Chief Executive Officer, Mr. Tietz, holds an option to acquire
300,000 of our common shares, and the Board adopted, and the shareholders at our
meeting held January 13, 2000 approved, our 1999 Stock Option Plan, which
authorizes the grant of options to our officers and employees for the purchase
of 500,000 common shares. On February 4, 2000, the Compensation Committee of our
Board authorized the grant of options for 420,000 of our common shares under the
1999 Stock Option Plan to eight
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officers of subsidiaries of the Company. In addition, two of our lenders hold
warrants to purchase, in the aggregate, 200,000 of our common shares.
Other than for the shares held by certain of our largest shareholders,
virtually all of our outstanding common shares are available for immediate
resale without restriction. In addition, by the Registration Statement of which
this Prospectus is a part and by a separate Registration Statement, the
1,000,000 shares issuable upon exercise of options granted to Mr. Tietz and that
have been or may be granted to officers and employees of the Company, or
issuable to our lenders under the warrants held by them, may upon issuance to
the option holders and/or warrant holders be generally resold without
restriction. Given the limited liquidity of the market for our common shares,
the sale of the common shares covered hereby in open market transactions, or
sales of common stock by our existing shareholders in material amounts, could
depress the market price of our common shares.
WE ARE DEPENDENT UPON KEY MANAGEMENT
Most of our senior executives and other management-level employees have
been with us for over five years and have significant industry experience. The
loss of the services of one or more of them could have a material adverse effect
on our business. We believe that our future success will depend on our ability
to retain key members of our management team and to attract capable management
in the future. There can be no assurance that we will be able to do so. We do
not maintain "key man" life insurance on any of our officers.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES COULD REDUCE OUR PROFITABILITY
Substantially all of our revenues are billed and paid in U.S. dollars, and
approximately 78% of our costs in 1999 were incurred and paid in U.S. dollars.
Of the remaining costs, most are not predictable and individually are of small
amounts and in various denominations, and thus are not suitable for
cost-effective hedging. From time to time we hedge a portion of the expenses
which are predictable and are principally in U.K. pounds sterling. In addition,
almost all of our container purchases are paid for in U.S. dollars. There can be
no assurance that exchange rate fluctuations will not adversely affect our
results of operations and financial condition.
WE MAY BE LIABLE FOR ENVIRONMENTAL CLEANUP AS THE OWNER OF CONTAINERS
Under the state and federal laws of the United States and the laws of
certain other countries, the owner of a container may be liable for
environmental damage, cleanup or other costs in the event of actual or
threatened contamination resulting from discharge of material from a container.
There is a possibility that such liability or a portion thereof may be imposed
on a container owner, such as Cronos, even if the owner is not at fault.
Although we maintain insurance against property damage and bodily injury and
generally we require lessees of containers to obtain similar insurance, there
can be no assurance that such insurance will protect us fully against damages
stemming from this risk or that we will be able to avoid liability for
environmental damages or costs relating to the operations of our lessees.
Many countries, including the United States, have taken action, both
collectively and individually, to regulate chlorofluorocarbon compounds
("CFCs"). CFCs historically have been used in the manufacture and operation of
refrigerated containers, including those we purchased prior to June 1993.
Refrigerated containers that we have purchased since that date do not use CFCs
as a refrigerant gas. The possibility exists that at some time in the future
market pressures or possible governmental regulations may require refrigerated
containers using CFCs to be retrofitted with non-CFC refrigerants. Also, there
can be no assurance that the replacement refrigerant used in our new
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refrigerated containers will not become subject to similar market pressures or
governmental regulations. We may have to bear all or a substantial portion of
such costs relating to retrofitting the refrigerated containers that we own.
Although no assurance can be given in this regard, we do not believe that any
such further expenses would be material in relation to our financial position
and results of operation. In addition, refrigerated containers that are not
retrofitted may command lower prices in the market for used containers once we
retire these containers from our fleet.
CONSEQUENCES OF LUXEMBOURG INCORPORATION
We are organized as a Luxembourg company, and are governed by our Articles
of Incorporation, the Luxembourg Company Act of August 10, 1915, as amended, and
the Luxembourg Law on Holding Companies of July 31, 1929. Luxembourg law differs
in certain respects from the corporate laws of most states of the United States.
Principles of law relating to such matters as corporate procedures, fiduciary
duties of management, and the rights of our shareholders may differ from those
that would apply if we were incorporated in a state of the United States. For
example, our authorized but unissued capital stock is eliminated every five
years unless the shareholders reauthorize it, which is not typically required in
the United States, and shareholders have preemptive rights unless such rights
are suppressed every five years. In addition, Luxembourg law imposes a 1.0% tax
on most new issuances of shares that increase shareholders' equity.
HOLDING COMPANY STRUCTURE
We are a holding company. We derive all of our operating income and cash
flow from our subsidiaries. We rely upon distributions from our subsidiaries and
intercompany borrowings to generate the funds necessary to meet our obligations.
The ability of our subsidiaries to make payments to us is subject, among other
things, to applicable laws of their respective jurisdictions of incorporation
and such restrictions as may be contained in credit agreements or other
financing arrangements entered into by such subsidiaries. Claims of creditors of
our subsidiaries will generally have priority as to the assets of such
subsidiaries over our claims and those of our shareholders.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common shares that
the Selling Shareholder may sell pursuant to this Prospectus.
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