<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: ---------- TO ----------.
COMMISSION FILE NUMBER: 0-24464
THE CRONOS GROUP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
LUXEMBOURG NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
16, ALLEE MARCONI, BOITE POSTALE 260, L-2120 LUXEMBOURG
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODES:
(352) 453145
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of Common Shares outstanding as of November 8, 2000:
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
<S> <C>
Common 9,158,378
</TABLE>
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<PAGE> 2
THE CRONOS GROUP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION............................. 1
Item 1 -- Financial Statements............................ 1
Management Representation.............................. 1
Condensed Consolidated Statements of Income............ 2
Condensed Consolidated Balance Sheets.................. 3
Condensed Consolidated Statements of Cash Flows........ 4
Condensed Consolidated Statements of Shareholders'
Equity................................................ 5
Notes to the Condensed Consolidated Financial
Statements............................................ 6
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 10
General................................................ 10
Three Months Ended September 30, 2000 Compared to Three
Months Ended September 30, 1999....................... 11
Nine Months Ended September 30, 2000 Compared to Nine
Months Ended September 30, 1999....................... 12
Liquidity and Capital Resources........................ 13
Item 3 -- Quantitative and Qualitative Disclosures about
Market Risk............................................ 14
PART II -- OTHER INFORMATION................................ 14
Item 1 -- Legal Proceedings............................... 14
Item 2 -- Changes in Securities and Use of Proceeds....... 16
Item 3 -- Defaults Upon Senior Securities................. 16
Item 4 -- Submission of Matters to a Vote of Security
Holders................................................ 16
Item 5 -- Other Information............................... 16
Item 6 -- Exhibits and Reports on Form 8-K................ 16
</TABLE>
i
<PAGE> 3
THE CRONOS GROUP
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
MANAGEMENT REPRESENTATION
The unaudited condensed consolidated interim financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Certain information and
disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These condensed consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
This financial information reflects, in the opinion of management, all
adjustments necessary to present fairly, the results for the interim periods.
Such adjustments consist of only normal recurring adjustments. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year.
1
<PAGE> 4
THE CRONOS GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Gross lease revenue............................... $35,083 $32,307 $103,294 $ 99,139
Commissions, fees and other income:
-- US Limited Partnerships...................... 325 334 990 1,020
-- Unrelated parties............................ 970 1,665 3,479 4,267
Gain on sale of investment:
-- gain on conversion of investment............. 461 613 1,502 613
-- realized holding gain........................ -- 587 2,129 587
------- ------- -------- --------
Total revenues.......................... 36,839 35,506 111,394 105,626
------- ------- -------- --------
Direct operating expenses......................... 7,068 7,365 20,989 23,228
Payments to container owners:
-- US Limited Partnerships...................... 6,627 6,131 19,607 18,666
-- Other container owners....................... 11,499 10,297 33,741 29,535
Depreciation and amortization..................... 3,941 3,991 11,886 12,376
Selling, general and administrative expenses...... 4,692 4,175 13,110 12,314
Interest expense.................................. 2,218 2,288 7,004 8,444
------- ------- -------- --------
Total expenses.......................... 36,045 34,247 106,337 104,563
------- ------- -------- --------
Income before income taxes........................ 794 1,259 5,057 1,063
Income taxes...................................... 158 -- 709 --
------- ------- -------- --------
Net income........................................ 636 1,259 4,348 1,063
Other comprehensive income, net of tax--
Unrealized holding loss on available for sale
securities................................... (366) -- (863) --
------- ------- -------- --------
Comprehensive income.............................. $ 270 $ 1,259 $ 3,485 $ 1,063
======= ======= ======== ========
Net income per common share (basic and diluted)... $ 0.07 $ 0.14 $ 0.47 $ 0.12
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 5
THE CRONOS GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 7,755 $ 8,701
Amounts due from lessees (net).............................. 28,090 26,739
Amounts receivable from container owners.................... 12,129 9,147
New container equipment for resale.......................... 14,754 2,535
Net investment in direct finance leases..................... 210 1,090
Investments................................................. 676 1,707
Container equipment (net)................................... 139,365 137,547
Building and other equipment (net).......................... 1,080 11,807
Cash deposits (restricted).................................. 1,531 --
Intangible assets........................................... 12,873 13,405
Other assets including prepayments.......................... 17,886 19,189
-------- --------
Total assets...................................... $236,349 $231,867
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts payable to container owners......................... $ 25,056 $ 26,620
Amounts payable to container manufacturers.................. 20,122 3,609
Other amounts payable and accrued expenses.................. 16,783 13,799
Debt and capital lease obligations.......................... 94,456 109,978
Current and deferred income taxes........................... 7,401 7,058
Deferred income and unamortized acquisition fee............. 8,676 10,433
-------- --------
Total liabilities................................. 172,494 171,497
-------- --------
SHAREHOLDERS' EQUITY
Common shares............................................... 18,317 18,317
Additional paid-in capital.................................. 49,928 49,928
Share subscriptions receivable.............................. (82) (82)
Accumulated other comprehensive income, net of tax.......... 414 1,277
Accumulated deficit......................................... (4,722) (9,070)
-------- --------
Total shareholders' equity........................ 63,855 60,370
-------- --------
Total liabilities and shareholders' equity........ $236,349 $231,867
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 6
THE CRONOS GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net cash provided by operating activities................... $ 13,615 $ 8,874
-------- --------
Investing activities
Purchase of container and other equipment................... (2,339) (304)
Proceeds from sale of building.............................. 8,732 --
Proceeds from sales of container and other equipment........ 1,315 19,553
Proceeds from sale of investment............................ 764 --
Proceeds from sale of investment in finance lease
equipment................................................. -- 1,000
Proceeds from release of escrow deposits.................... 1,245 --
-------- --------
Net cash provided by investing activities................... 9,717 20,249
-------- --------
Financing activities
Proceeds from issuance of debt.............................. 1,956 50,208
Repayments of term debt and capital lease obligations....... (24,703) (80,443)
Cash deposits (restricted).................................. (1,531) --
-------- --------
Net cash used in financing activities....................... (24,278) (30,235)
-------- --------
Net decrease in cash and cash equivalents................... (946) (1,112)
Cash and cash equivalents at beginning of period............ 8,701 9,281
-------- --------
Cash and cash equivalents at end of period.................. $ 7,755 $ 8,169
======== ========
Supplementary disclosure of cash flow information:
Cash paid during the period for:
-- interest............................................... $ 6,317 $ 8,519
-- income taxes........................................... 747 483
Cash received during the period for:
-- interest............................................... 550 416
Non-cash activities:
-- container equipment acquired under capital lease....... 6,080 1,257
-- container equipment/amounts payable to container
manufacturers.......................................... 5,051 --
-- capital lease/amounts payable to container
manufacturers.......................................... 1,145 --
-- reduction of debt/other amounts receivable from related
parties................................................ -- 5,279
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 7
THE CRONOS GROUP
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL SHARE OTHER RETAINED TOTAL
COMMON PAID-IN SUBSCRIPTIONS COMPREHENSIVE EARNINGS ACCUMULATED SHAREHOLDERS'
SHARES CAPITAL RECEIVABLE INCOME UNRESTRICTED DEFICIT EQUITY
------- ---------- ------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999.... $18,317 $49,928 $(82) $1,277 $1,832 $(10,902) $60,370
Net income.................... 4,348 4,348
Change in unrealized holding
gain on available for sale
securities, net of tax...... (863) (863)
------- ------- ---- ------ ------ -------- -------
Balance, September 30, 2000... $18,317 $49,928 $(82) $ 414 $1,832 $ (6,554) $63,855
======= ======= ==== ====== ====== ======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 8
THE CRONOS GROUP
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. The condensed consolidated financial statements include the accounts of
The Cronos Group and its wholly-owned subsidiaries (the "Company"). All material
intercompany accounts and transactions have been eliminated.
The Company's accounting records are maintained in United States dollars
and the condensed consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America.
2. OPERATING SEGMENT DATA
Condensed segment information is provided in the tables below:
<TABLE>
<CAPTION>
OTHER
US LIMITED CONTAINER OWNED
PARTNERSHIPS OWNERS CONTAINERS TOTAL
------------ --------- ---------- --------
<S> <C> <C> <C> <C>
Three months ended September 30, 2000
Gross lease revenue................... $10,768 $15,836 $ 8,479 $ 35,083
Operating profit before indirect
items.............................. 1,823 1,860 1,531 5,214
Operating profit...................... 532 571 826 1,929
Segment assets........................ 17,263 16,986 161,379 195,628
Three months ended September 30, 1999
Gross lease revenue................... $10,629 $14,063 $ 7,615 $ 32,307
Operating profit before indirect
items.............................. 1,967 1,214 1,331 4,512
Operating profit...................... 375 89 651 1,115
Segment assets........................ 19,859 20,048 160,655 200,562
Nine months ended September 30, 2000
Gross lease revenue................... $32,790 $46,353 $ 24,151 $103,294
Operating profit before indirect
items.............................. 6,255 5,343 4,064 15,662
Operating profit...................... 2,103 1,248 1,888 5,239
Segment assets........................ 17,263 16,986 161,379 195,628
Nine months ended September 30, 1999
Gross lease revenue................... $33,162 $41,841 $ 24,136 $ 99,139
Operating profit before indirect
items.............................. 6,488 4,316 2,635 13,439
Operating profit...................... 1,755 271 73 2,099
Segment assets........................ 19,859 20,048 160,655 200,562
</TABLE>
Reconciliation of operating profit for reportable segments to income before
income taxes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
2000 1999 2000 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating profit............................. $ 1,929 $1,115 $ 5,239 $ 2,099
Gain on sale of investment................... 461 1,200 3,631 1,200
Selling, general and administrative
expenses................................... (1,418) (885) (3,279) (1,724)
Amortization of intangibles.................. (178) (171) (534) (512)
------- ------ ------- -------
Income before income taxes................... $ 794 $1,259 $ 5,057 $ 1,063
======= ====== ======= =======
</TABLE>
6
<PAGE> 9
THE CRONOS GROUP
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
3. EARNINGS PER COMMON SHARE (US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
The components of basic and diluted net income per share were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income available for common
shareholders.................... $ 636 $ 1,259 $ 4,348 $ 1,063
---------- ---------- ---------- ----------
Average outstanding shares of
common stock.................... 9,158,378 9,058,378 9,158,378 8,925,045
Dilutive effect of:
Executive officer common share
options...................... 27,674 -- 38,583 --
Warrants........................ 16,997 -- 24,328 --
1999 stock option plan.......... -- -- 6,871 --
---------- ---------- ---------- ----------
Common stock and common stock
equivalents..................... 9,203,049 9,058,378 9,228,160 8,925,045
---------- ---------- ---------- ----------
Basic and diluted net income per
share........................... $ 0.07 $ 0.14 $ 0.47 $ 0.12
========== ========== ========== ==========
</TABLE>
4. AMOUNTS RECEIVABLE FROM CONTAINER OWNERS
Amounts receivable from container owners include amounts due from related
parties of $8.3 million and $5.9 million at September 30, 2000 and December 31,
1999, respectively.
5. INVESTMENTS
Investments include investments in related parties, which comprise general
partnership investments and further limited partnership investments in ten
sponsored funds. These general and limited partnership investments are accounted
for on the equity method. The subsidiary of the Company that acts as a general
partner maintains insurance for bodily injury, death and property damage for
which a partnership may be liable, and may be contingently liable for uninsured
obligations of the partnerships.
The net investment in US Limited Partnerships was $0.08 million and $0.03
million at September 30, 2000 and December 31, 1999, respectively.
6. CONTAINER EQUIPMENT
Container equipment is net of accumulated depreciation of $74.7 million and
$67.6 million at September 30, 2000 and December 31, 1999, respectively.
7. AMOUNTS PAYABLE TO CONTAINER OWNERS
Amounts payable to container owners include amounts payable to related
parties of $12.1 million and $12.3 million at September 30, 2000 and December
31, 1999, respectively.
7
<PAGE> 10
THE CRONOS GROUP
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
8. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations include amounts due within twelve months
of $17.3 million and $16.6 million at September 30, 2000 and December 31, 1999,
respectively.
9. COMMITMENTS AND CONTINGENCIES (TO BE READ IN CONJUNCTION WITH NOTE 16 TO THE
1999 CONSOLIDATED FINANCIAL STATEMENTS)
i. Contingencies -- Austrian allegations
Since 1983, the Company has managed containers for Austrian investment
entities sponsored by companies owned or controlled by Contrin Holding S.A., a
Luxembourg holding company ("Contrin") and for Contrin itself.
The Company is in a dispute with Contrin over $2.6 million that Contrin
claims was remitted to the Company in 1994 for the purchase of containers, but
that the Company did not receive. A former Chairman and Chief Executive Officer
of the Company, Stefan M. Palatin, purportedly acknowledged in 1995 the receipt
of the $2.6 million for the purchase of containers, but the monies were not
deposited into a Company account. Prior to Contrin's allegation that Mr. Palatin
had acknowledged receipt of the $2.6 million, the Company's current management
had not been aware of Mr. Palatin's purported acknowledgement. In addition, the
Company has determined that a distribution of $0.4 million to third party
Contrin investors was paid by the Company in December 1994 into the same bank
account into which the $2.6 million was apparently deposited.
In December 1997, further to legal and other consultations, the Company
recorded an accrual of $3.4 million relating to the alleged transfer of $2.6
million, the related interest, plus the estimated settlement costs of this and
other claims by Contrin. On September 30, 2000, the balance of this accrual was
$3.1 million.
In August 2000, Contrin filed an action against the Company seeking
recovery of $2.6 million, together with interest and costs. The Company is
consulting with legal counsel and intends to contest Contrin's claims, but is
unable to predict the outcome of the dispute.
Contrin investors have also made claims with respect to alleged
transactions between third parties and companies alleged to be connected to Mr.
Palatin, 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 Company was not involved in these transactions,
that the Company had no access to the records of the alleged transactions and
insofar as the Company has managed the containers, the Company has acted in
accordance with instructions from authorized representatives of the third
parties.
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. In such an event,
management estimates that possible losses could exceed the amount accrued by
$1.2 million.
ii. 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. Over the past year, the Company has become aware that more than one
creditor of TOEMT may claim an interest in the distributions made by the
8
<PAGE> 11
THE CRONOS GROUP
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(US DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
iii. Contingencies -- Other
A former outside director of the Company, Dr. Axel Friedberg, has submitted
a statement to the Company for the balance due for legal services purportedly
rendered to the Company from November 30, 1997 to December 31, 1998 in the
amount of $0.1 million. In the report of the Special Litigation Committee of the
Company's Board of Directors (the "Committee"), dated March 31, 2000, the
Committee recommended that the Company reject Dr. Friedberg's statement, and the
Company has done so.
10. NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") no. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB issued
SFAS no. 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The amendment included expanding the
normal purchase and sale exemption for supply contracts, permitting the
offsetting of certain intercompany foreign currency derivatives and thus
reducing the number of third party derivatives, permitting hedge accounting for
foreign-currency denominated assets and liabilities, and redefining interest
rate risk to reduce sources of ineffectiveness. The Company has appointed a team
to implement SFAS 133 on a global basis for the Company. The team has been
implementing a SFAS 133 compliant risk management information system, globally
educating both financial and non-financial personnel, inventorying embedded
derivatives and addressing various other SFAS 133 related issues. The Company
will adopt SFAS 133 and the corresponding amendments under SFAS 138 on January
1, 2001. Our SFAS 133 team is currently determining the impact of SFAS 133 on
our consolidated results of operations and financial position. This statement
should have no impact on consolidated cash flows.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin
("SAB") no. 101 "Revenue Recognition in Financial Statements". SAB 101 was to
have been effective in the first quarter of 2000. During 2000, the Staff of the
SEC delayed the implementation date of SAB 101 until no later than the fourth
quarter of 2000, for registrants with fiscal years beginning after December 15,
1999. The Company is evaluating the impact, if any, of SAB 101 and does not
expect it to have a material impact on its consolidated results of operations or
financial position.
9
<PAGE> 12
THE CRONOS GROUP
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company generates revenues by leasing to ocean carriers marine
containers that are owned either by third-party container owners or by the
Company itself. These leases, which generate most of the Company's revenues, are
generally operating leases.
The following chart summarizes the composition of the Cronos fleet (based
on original equipment cost) at September 30 for each of the periods indicated:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
US Limited Partnerships..................................... 32% 34%
Other Container Owners...................................... 45% 44%
Owned Containers............................................ 23% 22%
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
All containers, whether owned or managed, are operated as part of a single
fleet. The Company has discretion over which ocean carriers, container
manufacturers and suppliers of goods and services it deals with. Since the
Company's 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 the Company's management fee. The majority of
payments to container owners are therefore dependent upon the leasing of the
containers by the Company to ocean carriers and the collection of lease rentals.
Minimum lease payments on the agreements that have fixed payment terms are
presented in Note 13 to the Company's 1999 Consolidated Financial Statements.
For the nine months ended September 30, 2000, over 88% of payments to container
owners represented agreements under the terms of which the amount due to the
container owner was dependent upon the leasing of the containers by the Company
to ocean carriers and the collection of lease rentals.
The following chart summarizes the composition of the Cronos fleet (based
on TEU thousands), by equipment type, at September 30:
<TABLE>
<CAPTION>
2000 1999
----- -----
<S> <C> <C>
Dry cargo................................................... 372.3 341.7
Refrigerated................................................ 12.7 13.9
Cellular palletwide containers ("CPCs")..................... 3.3 2.5
Roll-Trailer................................................ 2.4 1.9
Tank........................................................ 2.0 2.0
Other dry freight specials.................................. 3.0 2.6
----- -----
Total fleet....................................... 395.7 364.6
===== =====
</TABLE>
During 2000, growth in the volume of containerized trade has improved and
this has resulted in increased demand in many locations, but most significantly
throughout Asia. In addition, new container prices, as well as interest rates,
have been rising from historically low levels. During such times, ocean carriers
tend to reduce their capital spending on their owned fleets of containers and
increase the quantity of containers leased. Lease rates have generally remained
unchanged since the beginning of 2000. Over the course of the last twelve
months, the Company's combined per diem rate fell by approximately 5% from the
combined rate at September 30, 1999.
10
<PAGE> 13
THE CRONOS GROUP
In the nine months ended September 30, 2000, inventories of idle equipment
decreased in Europe but there has been no appreciable reduction in the US where
imports continue to exceed exports. The Company will seek to strengthen
utilization by repositioning equipment to locations of greatest demand as well
as pursuing leasing opportunities.
The following chart summarizes the combined utilization of the Cronos fleet
(based on approximate original equipment cost) at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Utilization................................. 77.9% 77.0%
</TABLE>
During the nine months ended September 30, 2000, the Company explored
various transactions including a possible merger or sale of the Company. No
agreement involving a sale, merger or other transaction was agreed.
Non-operating legal and professional expenses were incurred both in the review
of these transactions and in connection with legal proceedings relating to the
collection of amounts owed by a former Chairman and Chief Executive Officer of
the Company and legal proceedings involving Austrian investment entities.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Operating profit for the three months ended September 30, 2000, was $1.9
million compared to $1.1 million for the corresponding period of 1999. The
increase was primarily due to higher management fees from managed container
owners of $0.7 million together with higher net lease revenue on owned
containers of $0.7 million and was partly offset by a $0.7 million reduction in
commissions, fees and other income.
Gross lease revenue of $35.1 million in the three months ended September
30, 2000, was $2.8 million, or 8.6% higher, than in the corresponding period of
1999. The increase was due to a larger fleet size and improved utilization and
was partly offset by lower per diem rates.
Commissions, fees and other income were $1.3 million in the three months
ended September 30, 2000, compared to $2.0 million in the corresponding period
in 1999. The decrease was primarily due to a $0.6 million reduction in fee
income earned on the sale of dry freight special and other products.
Gain on sale of investment of $0.5 million in the three months ended
September 30, 2000 represents the receipt of cash and the proceeds from the sale
of shares, both of which were released to the Company from escrow during the
quarter.
Direct operating expenses were $7.1 million during the three months ended
September 30, 2000, a decrease of $0.3 million, or 4%, compared to the
corresponding period in 1999. The decrease was due to lower activity related
costs of $0.1 million and reduced charges for legal expenses and doubtful
accounts of $0.2 million.
Payments to container owners amounted to $18.1 million during the three
months ended September 30, 2000, an increase of $1.7 million, or 10.3%, when
compared to the corresponding period in 1999.
Payments to US Limited Partnerships were $6.6 million in the three months
ended September 30, 2000, an increase of $0.5 million, or 8.1%, when compared to
the corresponding period in 1999. Increased gross lease revenue and reductions
in direct operating expenses, reflecting improved utilization, were partially
offset by the effect of lower per diem rates and a smaller container fleet.
Payments to Other Container Owners were $11.5 million during the three
months ended September 30, 2000, an increase of $1.2 million, or 11.7%, when
compared to the corresponding period of 1999 as the effects of higher
utilization and a larger fleet size more than offset the decline in per diem
rates.
Depreciation and amortization of $3.9 million during the three months ended
September 30, 2000, was essentially unchanged from the corresponding period in
1999.
11
<PAGE> 14
THE CRONOS GROUP
Selling, general and administrative expenses were $4.7 million in the third
quarter of 2000, an increase of $0.5 million, or 12.4%, when compared to the
corresponding period of 1999. Reductions of $0.1 million each in manpower and
information technology expense were more than offset by a $0.7 million increase
in non-operating legal and professional costs.
Interest expense of $2.2 million for the three months ended September 30,
2000, decreased by $0.1 million or 3%, when compared to the corresponding period
in 1999. This decrease was due to a lower debt balance together with a lower
average interest rate reflecting the effect of debt refinancing during 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Operating profit of $5.2 million for the nine months ended September 30,
2000, was $3.1 million higher than for the corresponding period in 1999 due to
an increase of $1.2 million in management fees from managed container owners, a
decline of $1.4 million in interest expense, a reduction of $0.8 million in
allocated selling, general and administrative expenses and a decrease of $0.5
million in depreciation expense which were partly offset by a decline of $0.8
million in commissions, fees and other income.
Gross lease revenue of $103.3 million in the nine months ended September
30, 2000, was $4.2 million, or 4.2%, higher than in the same period of 1999.
This increase can be attributed to the combined effect of increased utilization
and a larger fleet size and was partly offset by lower per diem rates.
Commissions, fees and other income of $4.5 million during the nine months
ended September 30, 2000, were $0.8 million, or 15.5%, lower than for the
corresponding period in 1999. A $0.3 million gain on the disposal of a property
was more than offset by a $0.3 million reduction in acquisition fees, a $0.2
million decrease in finance lease income and a $0.6 million reduction in fee
income earned on the sale of dry freight special and other products.
Gain on sale of investment of $3.6 million in the nine months ended
September 2000 represents the receipt of cash and shares, the majority of which
were received in connection with 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 were $21 million during the nine months ended
September 30, 2000, a decrease of $2.2 million, or 9.6%, compared to the
corresponding period in 1999. A reduction of $1.6 million in inventory related
costs, reflecting a larger on-hire fleet, together with lower activity related
costs of $1.5 million more than offset increased charges for doubtful accounts
and legal expenses of $0.9 million.
Payments to container owners increased to $53.3 million during the nine
months ended September 30, 2000, an increase of $5.1 million, or 10.7%, compared
to the corresponding period in 1999.
Payments to US Limited Partnerships amounted to $19.6 million during the
nine months ended September 30, 2000, an increase of $0.9 million, or 5%, when
compared to the corresponding period in 1999. Increased net lease revenue for
this segment reflected higher utilization which was partly offset by lower per
diem rates and a smaller container fleet.
Payments to Other Container Owners were $33.7 million for the nine months
ended September 30, 2000, an increase of $4.2 million, or 14.2%, when compared
to the corresponding period in 1999, as the combined effect of higher
utilization and a larger average fleet size more than offset the decrease in per
diem rates. The increase in the average fleet size was due to the acquisition of
new container equipment as well as transactions involving the sale of equipment
from both the US Limited Partnerships and Owned segments to the Other Container
Owners segment in the first half of 1999.
Depreciation and amortization decreased by $0.5 million, or 4%, during the
nine months ended September 30, 2000, to $11.9 million due to container sales
from the Owned segment to the Other Container Owners segment during 1999. This
was partly offset by additions to fixed assets during 2000.
12
<PAGE> 15
THE CRONOS GROUP
Selling, general and administrative expenses increased to $13.1 million
during the nine months ended September 30, 2000, from $12.3 million in the
corresponding period of 1999, an increase of $0.8 million or 6.5%. Reductions of
$0.9 million and of $0.3 million, respectively, in manpower and information
technology costs were more than offset by an increase of $1.7 million in
non-operating legal and professional expenses together with an increase of $0.3
million in audit costs, legal fees and other overheads.
Interest expense of $7 million for the nine months ended September 30,
2000, was $1.4 million, or 17.1% lower, when compared to the corresponding
period of 1999. This decrease was due to a lower debt balance together with a
lower average interest rate reflecting the effect of debt refinancing during
1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash from Operating Activities: Net cash provided by operating activities
was $13.6 million and $8.9 million during the first nine months of 2000 and
1999, respectively. The net cash generated in 2000 included earnings from
operations and a $10.3 million increase in amounts due to container
manufacturers. This was partly offset by a $12.2 million increase in new
container equipment for resale and a $1.4 million increase in the amounts due
from lessees. The amounts payable to container manufacturers will be permanently
financed by managed container owners or by the Company using debt and capital
lease funding. The net cash generated in 1999 reflected earnings from operations
together with the release of $5.6 million of deposits which had been held in
escrow, of which $3.2 million was utilized to make payments to third party
container owners.
Cash from Investing Activities: Net cash provided by investing activities
was $9.7 million and $20.2 million in the first nine months of 2000 and 1999,
respectively. In 2000, the Company generated $10 million in proceeds from the
sale of a building and container equipment and received $1.2 million of funds
that had been held in an escrow account. The net cash provided in 1999 reflected
sales of container equipment to third party container owners.
Cash from Financing Activities: Net cash used in financing activities was
$24.3 million during the first nine months of 2000 compared to $30.2 million in
the corresponding period of 1999. During 2000, debt repayments included $2.7
million of proceeds realized on the conversion of investment securities together
with $8.7 million of property sale proceeds. In 1999, repayments of debt and
capital lease obligations included $20.6 million in short-term debt repayments
that were generated from proceeds of container equipment sales.
CAPITAL RESOURCES
The Company has placed orders with container manufacturers totalling $8.4
million at September 30, 2000. These orders relate to containers to be purchased
for managed container owners or to be financed by the Company using debt and
capital lease funding.
In the nine months ended September 2000, new container additions included
$7.2 million of equipment financed by capital leases and $11.2 million of
equipment financed by an operating lease.
During the second quarter of 2000, the Company completed the sale of the
head office of its container leasing operations 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. The building was sold to an unaffiliated third
party for approximately $9.9 million. After payment of expenses and retirement
of $5.2 million of mortgage debt, the Company realized net proceeds of $3.5
million. Under the terms of a further loan agreement, these proceeds were
utilized to repay debt on the scheduled repayment date in the third quarter of
2000. The Company leased back approximately 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 each. The lease for 7,000 square feet will expire on June 26,
2002, and the lease for 3,342 square feet expired on September 30, 2000.
13
<PAGE> 16
THE CRONOS GROUP
During 1996 the Company entered into agreements (the "Agreements") to
acquire the patent rights relating to the Cellular Palletwide Container ("CPC"),
the Slimwall CPC and the intellectual property of Cargo Unit Containers Limited
from a third party (the "Seller"). Under the terms of the intellectual property
agreement (the "Agreement"), it was agreed that royalties received by the
Company as defined in the Agreement would be shared equally between the Company
and the Seller. In April 2000, the Company entered into a further agreement
which provided that, in consideration for the sum of $1 million, the Company
would fully discharge any liabilities for accrued royalties, acquire any right,
title and interest as the Seller may have to receive royalties in the future and
acquire all residual rights as the Seller had or may have had under the
Agreements. In accordance with the agreed installment payment plan, the Company
paid $0.8 million in the nine months to September 30, 2000 and will make a
further payment of $0.2 million in December 2000. The April 2000 agreement was
not significant to the Company's current period operations or financial position
as approximately $1 million had been accrued as amounts due to the Seller in
previous periods in accordance with the Agreements.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk: Outstanding borrowings are subject to interest rate
risk. Approximately 72% and 70% of total borrowings had floating interest rates
at September 30, 2000, and December 31, 1999, respectively.
Exchange rate risk: Substantially all of the Company's revenues are billed
and paid in US dollars and a significant portion of costs are billed and paid in
US dollars. Of the remaining costs, the majority are individually small,
unpredictable and incurred in various denominations and thus are not suitable
for cost effective hedging. From time to time, Cronos hedges a portion of the
expenses that are predictable and are principally in UK pounds sterling. In
addition, the majority 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 effect its results of
operations and financial condition.
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
DISPUTE WITH THE CONTRIN GROUP
Approximately 2% (measured by TEUs) of the Company's 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 did not receive these
funds and believes that the funds were diverted to an account controlled by Mr.
Palatin, a former Chairman and Chief Executive Officer of the Company, and that
this was known or should have been known by Contrin. The Company also believes
that the bank that received the funds, Barclays Bank PLC ("Barclays"), may be at
fault.
On August 8, 2000, Contrin, through its affiliate, Contrin Worldwide
Container Leasing GmbH, filed an action in the Luxembourg District Court against
the Company, seeking recovery of $2.6 million, together with interest and costs.
The Company intends to contest Contrin's claims, but is unable to predict the
outcome of the dispute.
To preserve its rights of indemnity in the face of Contrin's claims, on
June 1, 2000, the Company filed a protective claim in the High Court of Justice,
London, England, against Mr. Palatin and his wife. By its claim, the Company
seeks to establish that the Palatins are liable to the Company for any liability
which the Company may have to Contrin arising out of the 1994 transfers. The
Palatins, through their counsel, are contesting the jurisdiction of the High
Court of Justice over them. The hearing on the Palatins' motion to dismiss the
proceeding for lack of jurisdiction is scheduled to be heard on November 27,
2000.
14
<PAGE> 17
THE CRONOS GROUP
On July 13, 2000, the Company also filed a protective claim against
Barclays in the High Court of Justice, London, England. By its claim, the
Company seeks a declaration that Barclays is liable to the Company for $2.6
million, plus interest and costs, arising out of Contrin's 1994 transfers to an
account with Barclays in the name of Ms. Palatin. By an agreement entered into
with Barclays, dated June 30, 2000, the Company agreed to stay the prosecution
of its claim against Barclays, and to prosecute the claim only if and when
proceedings relating to the matter are instituted by Contrin against the
Company. Barclays in turn undertook to search for and preserve documents which
appear to be material to the potential claim by Contrin against the Company. Now
that Contrin has initiated its action against the Company, the Company intends
to pursue an examination of documents from Barclays to evaluate whether the
Company can prosecute its claim of indemnity against Barclays.
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, for payment of the remaining balances
due under two promissory notes, both dated July 14, 1997 (the "Palatin Notes"),
by and between a subsidiary of the Company, as payee ("Payee"), and Mr. Palatin,
as payor. The original principal amount of the Palatin Notes was $9.6 million.
Mr. Palatin made no payments under the Palatin Notes, which were due on October
31 and December 31, 1997, respectively. The amounts due under the Palatin Notes
were reduced by $5.3 million as a result of the sale, on or about June 21, 1999,
of 1,463,636 shares of Common Stock of the Company by certain of the Company's
lenders (the indebtedness of the Company to the lenders was reduced by a like
amount). The shares had been acquired by the banks by pledge from the Company to
secure, in part, indebtedness owed by the Company to the banks. As a result of
the sale of the shares, Mr. Palatin owed the Company, at the time the Company
filed its complaint in New York Supreme Court, $6.2 million in principal under
the Palatin Notes.
Mr. Palatin did not respond to the Company's lawsuit, and on February 8,
2000, the Supreme Court of the State of New York entered its default judgment
against Mr. Palatin in the amount 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 (the "Klamath
Shares"). On February 28, 2000, the Payee obtained a preliminary injunction
order from the Superior Court of the Commonwealth of Massachusetts, Norfolk
County, 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 Klamath Shares. On or about June 28, 2000, the Payee filed a second amended
complaint with the court, seeking to add, as a party defendant, Klamath. The
Payee is seeking a preliminary injunction enjoining Klamath, as record owner of
the Klamath Shares, from selling, encumbering, or disposing of such Shares, and
enjoining Klamath from attending meetings of shareholders of the Company or
voting its common shares on matters put to the shareholders of the Company.
The Company has also obtained a preliminary 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 record owner
of the shares of Klamath has resisted responding to the preliminary attachment
order, and a foundation that claims to be independent of Mr. Palatin has
asserted in court that it is the exclusive owner of the outstanding shares of
Klamath. The Company has prevailed in the trial court and in the court of appeal
in its opposition to the foundation's preliminary objection. The Company intends
to proceed to trial in the Swiss Courts in an attempt to obtain a judgment
ordering transfer of common shares of the Company owned by Klamath to the Payee
in satisfaction of the indebtedness owed by Mr. Palatin to the Payee.
15
<PAGE> 18
THE CRONOS GROUP
The objective of the Company is to satisfy the judgment obtained by the
Payee against Mr. Palatin by a transfer of the 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 whether it will succeed in achieving this objective.
PREVIOUS REPORTS
Investors are referred to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 for the Company's report on the SEC's
proceedings against Messrs. Palatin, Weissenberger, and Friedberg, former
directors and (in the case of Mr. Palatin and Mr. Weissenberger), former
officers of the Company.
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 -- OTHER INFORMATION
Not applicable
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
Not applicable.
16
<PAGE> 19
THE CRONOS GROUP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CRONOS GROUP
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By /s/ P. J. YOUNGER Director, Chief Operating November 8, 2000
------------------------------------------------- Officer, Chief Financial
Peter J. Younger Officer and Chief Accounting
Officer (Principal Financial
and Accounting Officer)
</TABLE>
17
<PAGE> 20
THE CRONOS GROUP
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
------ ------- ----
<C> <S> <C>
27 Financial Data Schedule..................................... 20
</TABLE>
